Car dealerships don’t want cash, they want to give loans
wsj.com
wsj.com
Quite often the same loan company is also financing the dealer's stock so there are also hidden incentives for him to push loans - such as preferential rates for himself.
It's just baked into the negotiated price.
Of course despite the past jokes about "hands are tied" re the sale price of new cars, the manufacturers actually do have relatively rigid controls today on dealers lowering allowable sales price. (But not raising, which has turned into an interesting situation.)
In reality, it just means you need to be trading in something to negotiate against any of that baked in finance cost, since trade-in amount is the one thing manufacturers can't really influence.
Which isn't to say that captive/manufacturer financing isn't often cheaper. It's just that the actual cost of financing isn't as transparent as claiming "no fees".
(You see this in gimmicks like having "no/low cost" financing, but at the expense of foregoing "cash back", which even in today's market is often upwards of $3k-5k.)
Trade-in amount is completely arbitrary and fictional, like every other line item. It may be the government's fiction, the dealer's fiction, or someone else's, but it's fiction.
The minute someone tells you they can't do this about that item, because blah blah blah, you should say "that's fine, I don't care about that item, only about the total".
The more ways you can say that, while being polite and sincere about wanting to make a deal, the closer you are to a good price.
Which is exactly why it gives dealers a huge degree of freedom to work with for "bottom line" discounts, that manufacturers can't (yet) control/ influence.
Dealers now make very little margin on new sales, and rely on income from monthly/quarterly/yearly kickbacks from the manufacturers, which are based on targets that include sticking to manufacturer approved discounts.
Without a trade-in, they don't have a place on the reciept to pass some of that kickback on to you. If they discount the sale price, they lose the margin they had to give you the discount in the first place.
Technically, you're right, in that they can sell for whatever they want, with no trade-in. They're just not likely to do that if it costs them more on the backend.
As a customer it's important to listen and say how I respect them and that they need to make a living, because salespeople think customers are all lying scumbags. It has to be as clear as day that I intend to make a deal as soon as possible.
But whether this car is being sold at a profit or why is irrelevant. I'm not their accountant.
Which is why it's a good idea to have backup financing pre-arranged and approved with a credit union. That gives you leverage to negotiate financing even with a settled cash price.
Either that, or their margin on the vehicle at your negotiated price is big enough that it doesn't make much difference to them.
Regardless, you aren't getting a few lunch. It just means your negotiated price had the margins to absorb whatever financing they ended up offering.
And the manufacturers are directly and indirectly controlling those margins based on complying with their approved discounts, whether advertised or unpublished.
They even have a discount type for sales to immediate family, that applies to any car that doesn't keep dealer plates and dealer insurance.
Moreover, state laws required all costs to be broken out in the contract, there was no legal way to attempt to hide additional costs.
I’ve personally watched many customers do exactly what you were contesting - take a loan, then pay it off early without penalty. Most lender had a 3-6 month wait on that, so they needed to make a few payments before paying it off in a lump sum.
Not cars, but a family member sells high end mowers. They offer 0% financing, knowing that they directly pay the lender $400 per loan to be able to offer that (varies with loan amount, but not much). They just price everything $400 higher when running that deal (their internal minimum recoup sale price, not necessarily the sticker or displayed discount price).
>there was no legal way to attempt to hide additional costs.
It's not hiding an "additional" cost, it just means the sale price or financing rate takes into account the dealers/ lenders cost to finance. It also has to do with whether the rate offered is APY or APR, and how those are used somewhat interchangeably to hide fees as included in the offered APR (so it's truthful, but basically based on a best-case payback scenario, and effectively higher if you prepay, even if there are no "penalties").
>Most lender had a 3-6 month wait on that, so they needed to make a few payments before paying it off in a lump sum.
Yes, this is almost universal now, including provisions that restrict the title transfer for some minimum period (was 6 months in our last car, but they said some are for 12 or even 24 months). Basically they don't have to remove the lien until then, even if you pay off the note.
So if you pay early, you are effectively penalized the annuitized cost between the payback date and when you are actually free to sell the vehicle to recoup that payoff amount.
There was never, at any point, with more than a dozen lenders, any type of fee associated with taking a loan. We did not offer lower prices for customers paying cash, it was the opposite in fact. We never paid a bank for giving a loan either.
None of the things you keep proposing have any semblance to my professional experience.
If the interest rate is below market, which it usually is, that can be converted to a lump sum discount. The math has to be done.
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.
A 0% loan doesn’t necessarily mean you’re paying more, there are often factory incentives and other issues. Basically modern manufacturing is highly capital intensive with low cost of reproduction. By selling more vehicles they amortize the cost the factory across more vehicles. Also many of the cars have already been produced and the factory and dealer are looking at selling that car new vs selling a year old car with no mileage.
That incentivizing costs money, and the car is more expensive because of it.
The buyer who is not incentivized by "0% financing for X period", because they are paying with cash, shouldn't have to pay the cost of those incentivies, and thus expects to pay less.
an unsecured line of credit is going to have a higher interest rate than loan backed by the collateral of the car.
also, people tend not to default on their primary vehicle (they need it to get around) so its a less risky loan, hence the lower interest rate
That depends on who you are and what you have, from the bank's POV. If they are actively bugging you to take out this kind of loan, then they probably don't have an issue regarding collateral.
A car is not particularly good collateral; it depreciates rapidly, subject to being damaged and stolen.
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.
This was a fairly large Toyota dealership outside of Houston TX
Sounds like they're going to keep doing this.
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.
What was the rate though? If it was > 0, you lost money not accelerating the payoff.
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.
-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.
Willing to be wrong on that, just having a hard time understanding.
Inflation means that $1 is fundamentally less valuable in the future than it is right now. If we're making a deal for me to pay $1 in the future, I'd prefer to make that $1 payment as far out as possible.
Not if they could put that money somewhere else with higher expected returns than the interest rate.
2. Pay it off the next day
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
YES. Hell yes. That's better-than-free money, adjusting for inflation. If you haven't maxed out your I-bond purchases yet, you can get 7.12% basically risk-free.
Those are being issued at 0% real. The initial rate is 7.12%, but that figure fluctuates with CPI-U. Betting that American inflation will keep raging at 2.5%+ isn’t a terrific bet.
That said, your broader point is valid. Money at 2.5% should not be paid back. There are good bonds yielding more, to saying nothing of dividend-paying stocks.
1) I can make 5-6% return with my money. So I can pay the interest and still come out ahead.
2) That mortgage interest is tax deductible, so it costs a little bit less than 3%, maybe only 2.5% to me
3) Real estate market crashes and house is worth 200k? Especially in a no-recourse state, you can leave the keys and walk. The bank takes on the downside risk of your house, not you.
Regarding #3 - doesn't that do a number on your credit? And how many states are non Recourse? As I understand it here in Canada those agencies that backed your loan (the bank or the CMHC) will attempt to recoup their losses by taking you to court if they have to.
3) > Home mortgages—though generally recourse—are non-recourse in 12 states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington. If a homeowner defaults in one of these states, the lender can foreclose on the collateralized home but cannot go after the borrower’s other assets.
Generally taking a credit hit for a few 100k is a fine trade off. You can even buy a new house right before you walk away from your old house..
And a number of experts say you shouldn't invest in stocks if you need the money in the next 5 years, so that's another strike against this advise.
So, in reality the car dealership (most dealerships sell various makes if they are successful) makes money on financing/fees and not the actual car itself. However, car sales people make money on the price the vehicle sells for (the price without financing/fees). The parties who care about the price of the "car" is the buyer and sales person but the parties that care about the total cost are the dealership and the buyer.
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.
Also wanted to see if it extended the warranty by a year. And the buyer protection plan.
Some dealers refused outright, no matter the payment method. Even if they waited to have the car until the dealer knew the money was there and stuff. No loan = no car. Obviously, they went somewhere else.
There are lots full of cars under that limit that only sold with financing, and the dealers just simply said that they don't take cash. (the limit used to be 10k, and had not been raised to keep up with inflation, but I don't know if it ever became raised)
Additionally: The reporting requirements weren't so bad. Another couple of dealers didn't have an issue with it. Obviously, they bought the car from one of those folks.
And no dealerships receive "kickbacks" of any kind. There are plenty of hidden and confusing ways that car dealers make money, but kickbacks from lenders or anyone else are not part of it.
- 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
Not sure I want to go through this process again and may just buy new in the future.
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.
I've never had an issue buying used (2-4 years old) cars from dealers. They've always been essentially like new. On top of that I have failed to do routine maintenance as scheduled. I usually do oil changes about every 10k because you really don't need to do it as often as they say.
That said... I've now had 3 cars that I bought around 30,000 miles and put over 100k miles on without any major maintenance. Just tires, brakes filters, and fluids. Maybe some weird one off thing, for example a little plastic gear in my steering system on my 2010 Hyundai recently broke and cost $500 to replace (@ 140,000 miles on the odo).
Truth. I bought a 2003 Ford Excursion in 2020. Parts are easy to find and are very compatible with F250s etc... It's all about resourcefulness. Not to mention I get to save a boat load of money in a used vehicle, I don't have to worry about damaging it too much. Scratch it a little with a tree branch, no problem, I don't care.
Short of actually being able to look at a vehicle and assess its condition directly there is no free lunch. Any "signal" you can use will also be used by everyone else and the dealers will price it in.
Also, this is why you should buy high end cars (from a reliable brand) from affluent areas, they are devalued because no one wants them there, and they are well maintained because rich people tend to just take it to the dealer, who will religiously follow the service interval.
The nicest car I've ever owned is an Acura. Others include Ford, Hyundai, and Honda, and I've been pretty bad at routine maintenance, but I've never had any mechanical issues as a result.
Are premium car brands really so fragile? If so why would you recommend buying them if they're less durable? Seems like a rip off to me.
Yes, they are very fragile, especially if you use them as the "ultimate driving machine" or are expecting "Being Ahead through Technology", if you drive your kids to soccer and follow the maintenance religiously they should last until your lease is up, or you exceed the mileage limit on your lease.
https://www.kbb.com/car-news/consumer-reports-lexus-makes-th...
BMW should just rebrand to the Ultimate Leasing Machine, as they are very cost effective due to for some reason people wanting used BMW's out of warranty.
Yes, but that is kind of an irrelevant claim.
There's wildly different engineering and service recommendation ethos between Europe and Japan and it shows.
He could have just as easily said Volvo and Nissan and been just as correct but that's not a batting practice pitch over home plate for HN's biases the way <luxury German brand> and <toyota/honda> is.
https://www.kbb.com/car-news/consumer-reports-lexus-makes-th...
You're comparing apples to oranges using a scale derived for grapefruit and acting like it's some big accomplishment that the orange wins.
If Toyota was trying to build better driving machines than Audi, build to the bottom dollar like Chrysler or cram in new tech gimmicks like Kia they would score similarly in those qualities and in reliability because the tradeoffs are necessarily similiar.
All engineers have the same technology and supply chains at their disposal and the same laws of physics to constrain them. The reason Toyota's vehicles are reliable is because they make cars for people who want to pay top dollar for reliable. The reason Audi makes cars that drive great is because they make cars for people who want to pay top dollar for great driving.
At the end of the day it's just going to boil down to you a value judgement about which qualities are important.
If you buy a used Audi you are going to have a lot of problems. That’s what my comment addresses. The driving experience is not that good when the shocks are blown to shit, bearings are spun, or the timing chain inevitably fails and the pistons drive the valves through the head.
Also, my 4Runner will smoke most Audis, it has 385,000 kms on it, and I change the oil once or twice a year.
I bet most Audis the age and mileage of my 4Runner would start spinning bearings during a spirited drive, and my G35 just runs circles around them.
If you’re an idiot buy an Audi, if you’re looking for reliability buy a Toyota if you want a great sports car buy a Corvette. The only reason to buy an Audi is if you’re nostalgic for the Quattro days of rally.
I guess if you want to drive an iPhone they aren’t bad.
Audis are basically fat, slow and unreliable. (Yes they make some decent cars if you want to pay Z06 prices for Mustang performance with 6.0 powerstroke reliability.
Btw I’m German, I have a bit of an idea what the engineering culture is like. It’s basically an engineering circle jerk, anyone can make a big unreliable engine that produces less power in more space than a $300 pushrod LS.
yes and no. german cars tend to have tighter tolerances than your typical economy sedan. they can be very reliable if maintained properly, but they can't take as much neglect as a Corolla. the tradeoff is that, subjectively, they are often more pleasant to drive.
bmw would be an exception, being notorious for using plastic parts designed to last only the duration of the first lease.
Not always true. DCU has to make a profit, so the floor of their auto loan is going to be like 1.5-2%. A car dealer is also making money from the sale of the car, I have gotten APRs like 0.9% from the likes of Honda, which is going to beat DCU.
Basically, shop around and take the better deal.
> Negotiate, even in times like this you can negotiate
Well, some cars you can't. Tesla has a fixed price, take it or walk. It's quite refreshing.
Do you have this same fear of hotel room beds and avoid them for it?
Most dealership profits come from interest on those loans.
The % of 100k cars leased is very high. The % of 20k basic Toyota / Hondas leased is very low.
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.
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.
Of course I agreed and payed it off the same week, but these loans must be targeted toward the uneducated or poor.
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.