Three days to swap car loans?

Red car on calculator

CarMax is the nation’s leading retailer in used-vehicle sales, and it offers a substantially better buying experience than you’ll get at many new-car dealerships.

But you shouldn’t assume CarMax’s 100 stores offer the best auto loans.

Like other auto dealers, CarMax makes money from financing the cars and trucks it sells.

In its January quarterly report, CarMax stated that its auto-financing division financed about 38% of the company’s retail vehicle sales in the third quarter of its current fiscal year.

If you choose to use CarMax financing, CarMax will tell you that you have the option to replace it with your own car loan within three business days, penalty-free.

The idea behind this offer is to give consumers the option to shop around for financing.

CarMax says it works with “a variety of finance companies to provide the best possible financing” and that it’s “so confident in the financing we’re able to offer, we give customers three business days to change financing, penalty-free.”

This “Three-Day Payoff” is part of CarMax’s branding strategy of making car buying “fun and easy by providing exceptional customer service.”

The official Three-Day Payoff handout from CarMax states, “For many consumers, CarMax offers the most competitive financing available. Those who are able to find a lower Annual Percentage Rate (APR) may find a small monthly savings. Here’s an illustration of the impact this might have on you.”

The illustration shows that the payments on $17,500 financed for 60 months at 10%, 9.75% and 9.5% are $372, $370 and $368, respectively. The handout goes on to say, “A shorter term may improve your APR, but the monthly payment might increase, making your purchase less affordable.”

It also says, “Other institutions may have different or stricter documentation requirements, limits on the amount you can finance, and restrict the inclusion of extended service plans or GAP coverage.”

Now, nothing on this flyer is inaccurate, but it doesn’t present all the information consumers should know, either.

Here’s what you need to know.

While differences in monthly payments may be small at different interest rates, differences in total finance charges can be significant.

The total interest you’ll pay in the three payment scenarios CarMax gives is $4,809, $4,680 and $4,552. Knocking just 0.25% off your interest rate would save you $129; 0.50% would save you $257, and 1% would save you $513 over the life of the loan.

Thus, even a small change in interest rate will save you hundreds of dollars over the term of your loan. These differences seem small when you’re spending thousands of dollars on a car, but they’re truly significant. If someone offered you $500 in free groceries, or even $129, you’d jump on it, right?

What’s more, you might be able to get your interest rate down by several percentage points — not a mere 0.25% or 0.50% — by going with another lender. That difference could save you thousands.

Auto loan rates vary substantially from lender to lender.

Shopping around for a car loan, using the same credit score, income, debt and vehicle, will turn up a surprisingly wide range of rates. (Take a quick spin through our auto loan rate tables, and you’ll see what I mean.)

Dealers often don’t offer the best financing, no matter what they tell you. You may be able to get a dramatically lower interest rate from another source, such as Pentagon Federal Credit Union, which offers 1.99% financing.

“When buying a car, you should know what your credit score is before you apply for a loan,” says Ronald Montoya, consumer advice editor at “This way, you’ll know what credit tier you are in and whether you can qualify for the better rates.”

Montoya suggests getting preapproved for car loans at your own bank or credit union so you can compare this rate to what the dealer is offering.

Dealers can make quite a bit of money by charging more for a loan than you deserve based on your credit report. If you’re not ready, you could be hit with what’s called a “finance charge markup.” (Check out some of the other 8 tricks up your auto dealer’s sleeve.)

“Once people picture themselves driving the car, it is hard to walk away, so they will accept a rate that may not be in their best interest,” says Katie O’Toole Smith of Diamond Auto Lease and Sales in Warrensville Heights, Ohio.

The Three-Day Payoff doesn’t mean that consumers only have three days to change their financing.

You can change your financing at any time with no penalty.

Indeed, CarMax’s own flyer states: “You may pay off your account at any time. Our sources don’t charge a prepayment penalty. If you choose this option after three business days, you are responsible for any finance charges and applicable fees accrued from the date of sale.”

Translation? There’s nothing wrong with finding new financing after five days, one month or two years. You’ll just have to pay interest on the loan you arranged through CarMax until you replace that financing with new financing.

So don’t think that you only have three days to change your financing or that after three days you’re stuck.

It’s understandable that CarMax wants to convince you to use its financing, and it might prove to be your best option. But as a consumer, you need to know the whole story so you can choose the best auto financing option for you.

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