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.)
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and indirectly controlling those margins based on complying with their approved discounts, whether advertised or unpublished.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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Not if they could put that money somewhere else with higher expected returns than the interest rate.
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.