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When I bought a Honda many years ago, they were offering 1% financing. At the same time, Toyota was doing 0% financing. I don't know how they make a profit on i
by nvarsj 9y ago
When I bought a Honda many years ago, they were offering 1% financing. At the same time, Toyota was doing 0% financing. I don't know how they make a profit on it, but why wouldn't you get a 0% finance deal over paying in full?
I think the main benefit of paying upfront is to buy a used car.
- blibble 9y agoit's just another form of competition right? all car firms offer lower and lower loans rates to try to get you to buy their product, and eventually the rate reaches 0%
- thearn4 9y agoYep, my 2012 Civic was bought on 1% financing. Paid off now, still runs great, and I kept the would-be total payment in cash in retirement accounts. Probably could have done better on a used car, but for once I wanted to be the one to run something into the ground. Still waiting on that.
- alexhutcheson 9y agoYou'll be waiting a very long time on that one.
- Spooky23 9y agoI have a 2003 Pilot with 250k miles. It will die someday, but it's lasted about 5 years longer than I expected it so far!
- rootsudo 9y agoThey make money in the markup of the car. A car MSRP or what it's sold far is far more then what it's cost to manufacture. Some dealerships like GM, used to also have a bank. GMAC. Ford w/ FMC. A car that's sold for 12-14K, has a general margin of 10-15%. Some as low as 5%, but still. The 0/1% is also hard to obtain, needing to have good credit and possibly sizable downpayment, but don't worry they have options if you sign at the dotted line. The fact that you think they make no money on 0/1%, is you falling for the marketing.
- taeric 9y agoActually, they were making money by selling the loan. Bundle up plenty of these small loans that are relatively safe with a few that are not, and you have a financial package that can be worth a lot of money. Edit:. I meant to have an "also" in my first sentence.
- tanderson92 9y agoNot if the auto loan is say 5 years and they're offering 1.5% financing. The 5 year treasury rate is currently 1.76%. So they're losing 26bp of yield for taking on (the albeit limited levels of and partially diversified away) the credit risk?
- taeric 9y agoAgain, they bundled it with other loans. Now, it probably isn't as bad as it initially sounds. But, it is more complicated.
- tanderson92 9y agoAgain, yes that partially diversifies away credit risk. But you're still losing money if you compare to the risk free rate, which is the 5 year treasury on a 5 year loan. Let me just repeat that such a loan is being offered below the risk free rate! It's impossible for bundling to add yield, only decrease credit risk.
- someSven 9y agoCar companies often have a bancing licence on their own. So they pay some interest but can create more money with these deposits. So it's cheap money for them. https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking
- eru 9y agoThat's not how fractional reserve banking works..
- someSven 9y agoBank are paying for deposits, and create money wjile the deposits are the security. Simplified.
- jldugger 9y agoVirtually every car dealer partners with real banks to handle loans. They certify your car as collateral, and essentially apply on your behalf, and you walk out the door with a loan from JP Morgan, Chase, or whereevs.
- someSven 9y agoMy experince in Europe was different. I actually looked into Wikipedia for a Honda bank, and it exists. I also know Volkswagen bank.
- deleted 9y ago[deleted]
- repiret 9y agoSpeaking specifically to Toyota's 0% deals, I bought a Toyota a couple years ago, and at that time there was a cash back incentive that was mutually exclusive with 0% financing. This car was pricey enough that 0% was still a better deal, but for most of what Toyota sells it's a worse deal.
- tcoppi 9y agoMost automakers do something similar now. Regular financing is so cheap now it almost always makes sense to get the cash back deals from the manufacturer rather than get the 0% financing.
- ajross 9y agoThose below-prime numbers are being subsidized by the price of the car. The calculus isn't any different for a car dealership than it is for a consumer: if it made more sense to invest that money than loan it out with a car for collateral, the dealership/bank would have done the same thing. They give you low rates because they want you to buy the car at the price they ask. In principle, you can pull out a checkbook and bargain back the hit you know they're willing to take on financing.
- mxfh 9y agoThis type of consumer credit's also seems to exist to lure enough people other to other products of the cooperating bank. It doesn't need to be priced in into the product and could actually be paid for by the bank as lead generation. Gullible people might fall for the types of "Keep your monthly payment rate and afford a vacation" while they are predatorily increase the actual interest rate.
- Spooky23 9y agoThose incentives are there to keep the cash flow going. The car market is seasonally cyclical, but manufacturing is most efficient in a steady state. Those deals are there to keep the pipeline full.
- yoodenvranx 9y ago> why wouldn't you get a 0% finance deal over paying in full? Less stress? You pay money, the car is yours, problem solved. One thing less to worry about.
- takeda 9y agoI bought 0% Apr from Toyota. It's not really 0% though, because (at least in my case if I would pay cash, I would get $1,000 off). So this is equivalent of paying $1,000 of interest up front, just masked to look like there is no interest.
- Retric 9y agoIt's a little worse than that as you pay generally pay some form of sales tax on the purchase price not your interest payments.
- legolas2412 9y agoPlus the 1000 if invested would probably be say 1150 after five years.
- skookumchuck 9y agoThose 0% loans often have costly penalties if you're late on a single payment. They're banking on the odds that you'll screw up and be late somewhere along the line.
- raquo 9y agoThe financing rate is 0% because the MSRP of the car is slightly inflated. If you pay with cash, you get a cash incentive (e.g. $2000 off), if you pay by financing, you get a similar discount but in the form of a lower nominal interest rate. Jurisdictions with good legislation require dealers to also show the effective APR, which takes the cash discount into account and is almost always a more reasonable rate. --- Apart from that there could be lots of special circumstances (making a quota, etc.) that could explain the discount if the offer was made to you personally as opposed to being advertised to the public.
- thenewwazoo 9y agoMy experience hasn't matched what you've posited here. I bought a car a couple of years ago, and found that multiple dealers consistently quoted me the highest price for cash and 0% financing deals, and would only structure discounts into the price if I paid interest. A discount for cash was right out. Perhaps cash purchases may have gotten you a discount at some point in the past, but dealers appear lately to be completely uninterested in them.
- raquo 9y agoWell the discounts I'm mentioning, both the finance rate and the cash discount, are coming from the manufacturer, not the dealers. For example, here's a Forester at 0.5% rate OR $2K cash discount (might need to choose BC as region): https://www.subaru.ca/WebPage.aspx?WebSiteID=282&WebPageID=20740&Range=Forester&ModelYear=2017&CarID=951 https://www.subaru.ca/WebPage.aspx?WebSiteID=282&WebPageID=2... Not every manufacturer does this, and not on every model.
- JauntTrooper 9y agoWhat is stopping you from agreeing to a loan and then paying it off in full a week later?
- meeker 9y agoMany of the 0% financing also have a "or $750 cash-back" offer as part of it. I turned down a 0% offer and took the cash. I then went to a Credit Union and got a loan at 2%. The interest paid over the life of the loan totaled less than the $750 upfront. The finance person at the dealership wasn't too happy once he realized I can do math.
- sokoloff 9y ago> why wouldn't you get a 0% finance deal over paying in full? I have a 0%, 60 month loan on my LEAF. Having such a loan requires me to carry collision insurance, so I treat the insurance company's profit on my insurance as the financing charge that I'm paying every month. (I otherwise wouldn't carry collision, but of course collision insurance is worth something, so I am only "really" paying the spread between that value and its cost.) About halfway through the loan (when the imputed financing charge interest goes up because the loan balance went down), I'll probably pay it off and drop collision.