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No 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'

No 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 ago
Dealers 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 ago
  Dealers 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 ago
    I'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 ago
      I 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 ago
        Good 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 ago
        I mean it doesn’t really seem to be working when the two people walked out of the deal.
      - zaps 5y ago
        Why is everything named “Jenkins” so terrible
  - sonotathrowaway 5y ago
    I’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 ago
But 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 ago
  Read 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 ago
    And 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 ago
      With 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 ago
        You'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 ago
  My 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 ago
Could 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 ago
  In 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 ago
  It 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 ago
  Not if inflation is >0%
- Workaccount2 5y ago
  ...Unless that money can be used elsewhere if returns > rate.
- SkyPuncher 5y ago
  Everything 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 ago
    This 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 ago
An 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 ago
  You'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 ago
  I 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 ago
    Dealerships 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 ago
until they pull your credit 200 times and ruin your score without telling you
seanmcdirmid 5y ago
Did 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).

ssharp 5y ago

Dealers 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 ago
Dealers 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 ago
  I'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 ago
    I 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 ago
      Good 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 ago
        I mean it doesn’t really seem to be working when the two people walked out of the deal.
    - zaps 5y ago
      Why is everything named “Jenkins” so terrible
- sonotathrowaway 5y ago
  I’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 ago

But 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 ago
Read 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 ago
  And 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 ago
    With 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 ago
      You'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 ago
My 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 ago

Could 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 ago
In 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 ago
It 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 ago
Not if inflation is >0%
Workaccount2 5y ago
...Unless that money can be used elsewhere if returns > rate.
SkyPuncher 5y ago
Everything 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 ago
  This 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 ago

An 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 ago
You'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 ago
I 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 ago
  Dealerships 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 ago

until they pull your credit 200 times and ruin your score without telling you

seanmcdirmid 5y ago

Did 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).