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Car dealer loans can be a bad deal for the buyer. Most of the time if the dealer helps arrange the loan the bank involved has a short fuse for late fees and a higher interest rate. That is why they can give such quick approval. Their potential reward is great. Sometimes these banks have an arrangement with the dealer regarding repossession and resale.

If you default, the dealer goes and gets your car. He can resell and make commissions again. The bank gets their money continuing to roll in. The interest rates are high enough that even if they don't get a payment for a few months, they will still make money.

If this can happen two or three times on the same vehicle, both the bank and dealer have recouped all of their costs and investments. This means everything from here on is gravy. They don't mind a shaky risk because it increases the odds that they will make more money in the long run.

If the dealer is doing the financing personally, the cycle works the same except the dealer makes off of both ends and the financial losses are minimal and the rewards are doubled. The buyer is not expected to be able to make more than the first 6 or so payments.

Often with the down payment, this is enough to pay for the cost of the car. The car can usually be repossessed if collision insurance is not kept in force. So, your insurance company helps the dealer track you and your compliance because of the lien on the vehicle.

Learn more about this author, Allen Teal.
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