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Car dealerships don’t want cash, they want to give loans
- deleted 5y ago[deleted]
- massysett 5y agoNo big deal - the dealer wanted me to get a loan when I bought a new car six years ago. I figured they must get some incentive from originating a loan. There's no prepayment penalty so just pay it off. However my rate was so low that I had no reason to accelerate the payoff.
- ssharp 5y agoDealers will usually reduce the purchase price if you finance through them since they are getting kickbacks on originating loans. As long as there aren't any fees associated with financing, you can get a better deal than if you were paying cash and can just pay it off right away.
- deleted 5y ago[deleted]
- joelbondurant1 5y ago
- itslennysfault 5y agoDealers tend to assume people are going to finance. Just don't say you're not and then when you get in to the finance guy's office say... ya know what, I think I'm just gonna pay cash. After you already have a price for the car in writing. I have a close friend that doesn't believe in credit and he has done this several times for a better deal.
- beeboop 5y agoI've had a car's price agreed to in writing (which was the full advertised price they had online) and after presenting cash, they refused to honor it. They said if I was paying cash they required me to spend another $3k minimum on a service package. I told the manager, who was forcing this to happen, to fuck off and walked out. Wasted a lot of my time and it was really dishonest. The salesperson later texted me at my personal number to apologize for the manager and said there was a lot of turmoil at the dealership because of those practices. This was a fairly large Toyota dealership outside of Houston TX
- minton 5y agoI experienced the same tactic at Jenkins Acura in Ocala, Florida. Very shady. Funny enough, the sales guy was also apologetic for his manager. I walked out, but what a waste of everyone's time.
- aaaaaaaaata 5y agoGood cop/bad cop is "funny" and enough to scare customers out of the dealership. Sounds like they're going to keep doing this.
- Spivak 5y agoI mean it doesn’t really seem to be working when the two people walked out of the deal.
- zaps 5y agoWhy is everything named “Jenkins” so terrible
- sonotathrowaway 5y agoI’ve seen people try that as well - sometimes they didn’t care, sometimes they did care and weren’t sold the car. In no case was the dealership forced to accept a deal they didn’t agree with, so I wouldn’t put any stock in the “in writing” part.
- jermaustin1 5y agoBut auto loans (like most loans) usually have origination fees and other amounts lumped into the loan. So by taking a loan and paying it off you are immediately paying a premium on the cash value of the loan.
- baldeagle 5y agoRead your Retail Installment Contract - it will call out all the fees and things. Most dealers pay the origination fees, but often make up the difference in something call 'participation', where they charge you a higher APR and share the extra interest charges with the lender
- pc86 5y agoAnd most dealers, especially nicer manufacturers, are completely open and willing to negotiate all these percentages. Especially now with loan rates well below inflation, you can really save a lot of money by negotiating things other than purchase price, even if you end up with a higher purchase price at the end.
- otterley 5y agoWith dealer stocks being low and demand being high, there’s little room for negotiation on any material term right now. That’s the whole point of this article.
- pc86 5y agoYou're completely right, my mistake. I haven't bought a car since 2019 but my partner got one about 6 months ago and it was as you say, basically "this is the price, take it or leave it."
- nradov 5y agoMy most recent auto loan had no origination or other fees. If you finance through the manufacturer's captive lender then they often don't charge any such fees.
- vincnetas 5y agoCould it be that your rate is so low because you overpaid fro car? I heard stories like you go do car dealer and negotiate discount when you pay whole price on spot (EU)
- alistairSH 5y agoIn the US, you can often get a lower price by taking a loan with the dealer/manufacturer's finance partner. They can lower the price because they make money on the loan in addition to the car markup. The rates are often lower than traditional banks or credit unions.
- massysett 5y agoIt was a promotional rate. The automakers offer these so they can sell more cars.
- commandlinefan 5y ago> rate was so low that I had no reason What was the rate though? If it was > 0, you lost money not accelerating the payoff.
- joshuaissac 5y ago> If it was > 0, you lost money not accelerating the payoff. Not if they could put that money somewhere else with higher expected returns than the interest rate.
- refurb 5y agoNot if inflation is >0%
- Workaccount2 5y ago...Unless that money can be used elsewhere if returns > rate.
- SkyPuncher 5y agoEverything is relative to inflation and other investment opportunities. The rate on our loan is something like 1.6% (shortly after it was literally 0%). If I can find an investment for more than 1.6%, I'm technically coming out better. Loan fees make the math fuzzier, but I'm simply demonstrating for this conversation. For example, if I can make 4% on an investment and a loan is 1.6%, that means I can still make 2.4% net interest if take the loan and use the cash to invest. The math gets even more favorable when you consider inflation. $1 in 5 years is actually cheaper to me than $1 right now.
- ryathal 5y agoThis only works if ALL things happen. -You have the cash to buy outright. -You have an investment that you can reliably withdraw the funds from. -There isn't risk to losing principal with the investment. -The investment outpaces inflation + interest. If inflation is 3% in your example you just lost .6%. 99% of the time these things aren't true for the 5-7 years of a loan.
- kazinator 5y agoAn auto loan is a financial product: something that you effectively buy. The dealer not only sells cars, but financial products. They make more money if they sell you a car and one or more financial products, than if they just sell you a car. Also, auto loans give them steady income averaged over time, which smooths out their cash flow. If they only sold cars for cash, they would have more pronounced boom and bust cycles in their revenue. If the rate of their loans is low, it's because the car is overpriced to make up for it. Do the reverse math. Call your bank and ask them what the interest would be for a line of credit equivalent to the loan amount for that car, over the same period. Use the bank's interest part of their loan to deduce what the cash value of the car must be. E.g. say the bank offers you $30,000 over five years at 3%. You're going to pay about $2300 in interest which is 7.6% of the principal amount. OK, so if the car dealer were to offer you close to 0% interest for five years, it means they inflated the car's price by 7.6% (if not more) so that they make at least the same money on the loan as the bank would. You should therefore pay 7.6% less for the car in cash, than what they are asking for under the too-good-to-be-true loan.
- josephcsible 5y agoYou're not a risk-free borrower, so unsecured loans will always have a higher interest rate than secured loans, all other things equal.
- brianwawok 5y agoI am pretty sure the dealer gets the money up front + a fee. Say take out a 35k loan, paperwork clears, dealer gets a check for $35,500.. the $500 being a "bonus" for originating the loan from the lender.
- sonotathrowaway 5y agoDealerships typically get points on the loan - the approving bank will give an approval for x amount, not to exceed y after taxes/fees/warranties. The amount paid to the dealer will vary, but typically = y * points on the loan
- toddmatthews 5y ago
- whoomp12342 5y agountil they pull your credit 200 times and ruin your score without telling you
- seanmcdirmid 5y agoDid you make sure there was no huge fee for getting the loan in the first place? That was my plan also, but...a huge $1k fee for the loan made it into my closing paper work somehow (I didn't read it close enough).
- deleted 5y ago[deleted]
- jleyank 5y agoActually, I tried buying one by charge card as it was within the limit (rather than cash). Whole lotta points. Dealer just said no. Took a certified check as I didn’t want to use a Brinks truck. Also wanted to see if it extended the warranty by a year. And the buyer protection plan.
- jwr 5y agoAs a European, I find this highly amusing — I had the same problem when in the US. "What do you mean I can't just wire-transfer the money?"
- jleyank 5y agoAsk them about chip and pin. Unless things changed during covid, I recall chip and signature.
- refurb 5y agoIt’s just chip now boss.
- jleyank 5y agoGood for them. Haven’t been to the us in years…
- itslennysfault 5y ago
- nradov 5y agoRegular car dealers just aren't set up to receive wire transfers. They wouldn't know what to do with it.
- drcoopster 5y ago
- tough 5y agoI worked for a motorcycle dealership. The loan partner invited my boss to CES in Las Vegas, from Europe. You can figure out how much of a hefty fee they get from each loan they originate.
- francisofascii 5y agoA dealer recently told me that leasing, not buying, was the future, at least for his dealership. He said 80% of the business was leasing. With prices today, I can see why. So they also want to "loan" you a vehicle.
- zaphod12 5y agoI'm not even sure this is the future - the new hotness is car subscriptions. (though some of these are cool in that you can swap out a sedan for an SUV or convertible).
- SkyPuncher 5y agoMy wife and I have found the tickle down of this is extremely nice. Most of these lease vehicles are 2 year, low-mile leases that are basically brand-new still. Many of them even extend warranties to the point you're basically getting a new car.
- brianwawok 5y agoVery much depends on car price. The % of 100k cars leased is very high. The % of 20k basic Toyota / Hondas leased is very low.
- commandlinefan 5y agoMy daughter just turned 16, and we had saved up to buy her a car for her birthday. One dealership we talked to tried to add a $2000 charge as a "penalty" for paying cash instead of taking a loan.
- ProAm 5y agoHopefully you walked away?
- commandlinefan 5y agoYes, I did.
- tantalor 5y ago1. Take out loan anyway 2. Pay it off the next day
- toomuchtodo 5y agoIf the loan has great terms, keep the loan and invest the cash. That’s a lesson in itself.
- abfan1127 5y agoIts a lesson about risk. Your investments can sour. Put it another way. If you had a paid off car, would you take a loan out on it to invest?
- deleted 5y ago[deleted]
- deleted 5y ago[deleted]
- iamricks 5y agoThere is risk in cash, it is called inflation, if you bought a car last year you lost 7% + depreciation of the car since you bought it. The SP500 is up 11% since last year. This means you would have lost 7% to inflation, 11% to potential upside plus depreciation of your car. Assuming your car did not depreciate because of current car production shortages you lost 18% of your money buying cash vs 3%-4% interest on the loan. Cash is not risk free
- hateful 5y agoWhen I went to get my first car (around 1996), I had some cash from a settlement that happened when I was a kid. I remember my mom saying that I'd get a better deal because I had cash, but it turned out to be quite the opposite, they wanted me to have a loan. So whenever this changed (couldn't read the article), I'd imagine it was prior to the 90s.
- ssharp 5y agoThe dealers are using 3rd-party partners to finance the loans. The only risk the dealers take is if you're rejected and can't buy the car. Besides that, the loan is the same as cash for them, except they also get kickbacks for the financing lead.
- kerneloftruth 5y agoAs soon as I started paying for cars with cash, I noticed a palpable cold, if not subtly hostile, attitude from dealership salesmen. I learned from that to only buy from online wholesalers (I've used cartelligent 3 times, all good). Most dealership profits come from interest on those loans.
- dtagames 5y agoYears ago, I worked in auto sales and then became a finance manager. The two halves of the sales process: selling the car and financing it, are calculated and managed separately on each transaction. Normally, the sales side doesn't know or care what finance does, and vice versa. The sales side of the business makes its money on "top line price," the first number on the contract, less their true cost of the car -- which isn't shown anywhere to the public. It includes many discounts, incentives, and also fees the dealer pays which are not included in the public pricing transaction. However, finance isn't part of this. Finance makes its money on the difference between the "buy" and "sell" rates for financing. It makes no difference to the dealership if you wait 3 years to pay off the car, or if you pay it off the next day. The dealer is paid immediately (often the next day) for the total difference in the buy and sell rate. How does this work in practice? The finance managers job is to sell the cheapest contract that you qualify for. In reality, banks and other auto finance institutions (many are not banks) offer far lower rates than they tell you about -- they just don't offer them to you directly, only at wholesale to a dealer. In fact, there is great competition to get dealers to sell financing to these various companies, which update and publish new rates and programs daily. By carefully understanding the loan packages offered by various lenders and matching them to the correct customer credit profile and vehicle (and these requirements can be quite complex), the finance side of the business, known as the "back of the house," profits from selling you a sales contract as expensively as you are willing to pay and then buying the money to fulfill that contract from a bank as cheaply as they can. If the finance guy can sell you on a 3.5% finance contract when he knows he can "get you bought" at 3%, he makes a 0.5% profit in full and immediately, regardless of what happens after your car "rolls over the line" off of dealership property. It is in that moment that the dealer's sales obligation to you is concluded and the sales contract can be bought or funded by a lender. A good finance manager makes money for his or her store by taking advantage of this customer ignorance. It is always possible for customers to obtain financing outside the store and to do before they go shopping. In fact, you are doing the same thing as the finance manager when you use this approach. By "pre-qualifying" at a finance institution (credit unions are the cheapest), you are making the same kind of arrangement as the finance guy makes with his lenders: an agreement to purchase a sales contract on a specific car type (year range and cost) for a specific buyer (you!). That contract is only fulfilled when and if you drive off the line with a car. On a day-to-day basis, finance managers make a small amount of money from everyday customers who probably don't know what kind of real rates they qualify for. With better financially educated customers and those with greater assets and credit scores, the finance department has little wiggle room and sometimes must sell a contract at cost -- which they despise. If you find your finance manager's attitude has suddenly changed from friendly and chatty to "let's get you out of my office," its because he has determined that he will have to offer you his buy rate. Finance managers make the most money with "special finance" customers, those who have credit disabilities and poor credit scores. Only a few institutions will finance those customers and at high rates with onerous restrictions. Within a dealership, there will be a single person who handles this department, if there is one at all, although they can be highly profitable as customers who have damaged their credit have few choices. It's notable that this does not apply to customers with no credit, who will always be welcomed by auto manufacturer financiers, such as GM or Toyota's financing programs. With a year of a simple gas card or department store card history, anyone with new credit can buy a car that way and establish oneself for the next loan, which should be at a lower rate. Keep repeating that and you'll be able to qualify for those 1% or 0% offers the manufacturers hold out for just such buyers.
- iamricks 5y agoThe basic principles for buying a car: - Don't buy new, on avg the first 2-3 years you take the biggest depreciation risk - Don't finance with the dealership, go to a credit union like DCU - Negotiate, even in times like this you can negotiate - If you can't get outside financing and you have to get dealer financing for whatever reason, they make money from the financing, negotiate even further down because of this - Depending on your state some fees are illegal, check your laws, negotiate the fees off
- ilrwbwrkhv 5y agoI have never bought a used car. I have this unnatural fear of what people might have done on the seats. Also a new car warranty is great and maintenance is negligible. Also buy the full thing in cash.
- theandrewbailey 5y ago> I have this unnatural fear of what people might have done on the seats. Do you have this same fear of hotel room beds and avoid them for it?
- ilrwbwrkhv 5y agoHaha indeed. At least they do change the sheets and so on but I try and avoid Airbnbs for that reason since they aren't really monitored.
- _huayra_ 5y agoThe hardest part of buying used is that it's so hard to find people who have taken care of their cars. If someone has gone 20-30% over the recommended oil change interval, you'll end up paying for that a lot on the tail end. This isn't to mention the many, many people I know who barely put any miles on their car, but change the oil based on mileage (instead of time), putting a ton of hard miles of short trips on the car. If they sell them, it looks like a great low-mileage car! Some people have all the documentation of correct interval service for the car, but it's becoming rarer these days as cars just tend to work until they fail catastrophically, instead of years ago when they would sputter and fault in a gradual way before dying by the side of the road.
- Justsignedup 5y agopaywall, even 12ft.io isn't working :P
- neonate 5y agohttps://archive.is/R1GJC https://archive.is/R1GJC
- rdtwo 5y agoI offered to take a loan when I bought my car knowing there was a kick back but ultimately they wouldn’t offer me any incentive to do it so I didn’t. It really depends on how the compensation model works for the dealer salesman. If he gets no extra money he won’t bother to push it
- fmakunbound 5y agoThe large Toyota dealership I was last at offered a simple interest loan. I thought this must have been an unfortunate misuse of the word “simple” in a loan context, but I pressed him further and he definitely meant “simple interest” as in the one high school maths teachers warn you against. Of course I agreed and payed it off the same week, but these loans must be targeted toward the uneducated or poor.
- ryathal 5y agoMost loans are simple interest, or "compounded" monthly with a payment greater than the interest so there is no compounding. This is generally good for the consumer, you don't want interest compounding against you. Is it possible you meant interest only loan?
- Kon-Peki 5y agoI bought a new car late last year as well. The experience with Honda and Toyota dealers was extremely unpleasant, so I kept putting off the purchase. I ended up going to the Audi dealership in town on a Saturday evening because I saw them post a used car on their website that was overpriced but such a unicorn I had to see it in person. I was too late for that car, but TL;DR - I bought a new car in their inventory for cash and it was a great experience. There was a Costco discount that put it below MSRP, they didn't care at all about cash vs finance, they kept the dealership open a few minutes past closing to finish off the state paperwork so I drove away with the permanent license plates, etc. They didn't even deposit the check until a week later, LOL.
- bigjimmyk3 5y agoHappily I haven't had to buy a car since 2020, but I had good luck using cargurus to spot cars that had sat on smaller dealer lots for awhile. I understand that some dealers take out loans of their own to cover the vehicle while it's on the lot (a "floor loan") so as the vehicle sits, their incentive to unload it increases. Obviously that's not relevant in the current low-supply environment, but it worked once and it will hopefully work again once supply returns. One very important component to this: having the car inspected by an independent third party. In all (non-local) cases I was able to locate an independent repair place that would look at the car and send me a report. Levels of detail varied, some shops were set up for this and sent me a novel, others were lighter on fine details. I usually paid $50-200 for the service and I wouldn't buy a car without such an inspection.
- azth 5y agoOf course they do, why not make money in immoral and parasitic ways when it's so easy? /s
- mgarfias 5y agoWife bought a new sprinter van two months ago, it was like pulling teeth to get the dealer to let us deal with our credit union vs originating the loan themselves. Luckily we were up against the end of the year, so they were willing to deal with us in order to have the deal done to count for 2021 sales vs 2022