Cash vs. Financing?

[tcho]

I had an interesting conversation with a Ford salesman the other day. I was asking him if they had any better deals if I paid cash vs. financing the purchase through Ford. He claimed that this sort of situation no longer applied in the car buying/selling world. He said that it didn't matter to a dealership where they got the money from - you or their financing company.

I'd always thought that it gave the dealer more power in negotiations since they were supplying you the car AND the money to purchase it.

Any comments on the truth of what this guy was saying?

[Jucius Maximus]

Typical stealership... if they are selling you a car AND money, then they are making more profit. I've heard that in many cases, they actually make more money from selling off the financing contract than they do from the sale of the car itself.

I think only Hyundai at this point is offering "true" 0% financing where there is no discount for cash payment. Take that as you will. Either they are taking a hit for giving you money at no cost, or they've built the cost of financing into the MSRP of the car, and are refusing to let you know it.

Do not get tricked into financing, you will pay more in the end.

[HP_John]

When you finance, the dealer is still paid the full amount upfront, but by the financing company (let's say Honda Canada for example). The only times you get a better deal for paying cash is because the manufacturer (eg Honda Canada) is giving buyers a cash deal credit, not because the dealer necessarily prefers cash deals.

[HP_John]

Typical stealership... if they are selling you a car AND money, then they are making more profit. I've heard that in many cases, they actually make more money from selling off the financing contract than they do from the sale of the car itself.

I think only Hyundai at this point is offering "true" 0% financing where there is no discount for cash payment. Take that as you will. Either they are taking a hit for giving you money at no cost, or they've built the cost of financing into the MSRP of the car, and are refusing to let you know it.

Do not get tricked into financing, you will pay more in the end.

As far as sales staff are concerned, they don't know anything about making more profit via financing. They are not told that the dealer will make more $ if someone finances, as far as they know, profit via financing goes to the manufacturer's finance company (eg Honda Canada). So as far as sales staff are concerned, it doesn't make a difference to them if it's cash or finance.

[Jucius Maximus]

When you finance, the dealer is still paid the full amount upfront, but by the financing company (let's say Honda Canada for example). The only times you get a better deal for paying cash is because the manufacturer (eg Honda Canada) is giving buyers a cash deal credit, not because the dealer necessarily prefers cash deals.

As far as sales staff are concerned, they don't know anything about making more profit via financing. They are not told that the dealer will make more $ if someone finances, as far as they know, profit via financing goes to the manufacturer's finance company (eg Honda Canada). So as far as sales staff are concerned, it doesn't make a difference to them if it's cash or finance.

I think what you're not accounting for is that money has a cost in terms of interest. Car manufacturers know that most people purchase cars on financing and are receptive to "low interest" or "0% interest" offers, so the manufacturer just includes the price of the interest in the MSRP of the car to give the illusion that the interest is low or free. When the manufacturer gives a "cash deal credit" for purchases, it is because there's no need for financing and therefore no interest cost on those purchases, so that portion of the purchase price is refunded.

[VivienM]

I think what you're not accounting for is that money has a cost in terms of interest. Car manufacturers know that most people purchase cars on financing and are receptive to "low interest" or "0% interest" offers, so the manufacturer just includes the price of the interest in the MSRP of the car to give the illusion that the interest is low or free. When the manufacturer gives a "cash deal credit" for purchases, it is because there's no need for financing and therefore no interest cost on those purchases, so that portion of the purchase price is refunded.

Except that nowadays, the cash rebate is much smaller than the value of the low-interest financing in most cases.

Which makes sense, because 0% financing is a big trap. Let's say you have a 0% 5 year loan, and in 3 years, you need to sell the car... which means you have to pay off the loan. In effect, you'll be paying them back the equivalent of 2 years' interest.

That's what they're hoping for - that you pay off your 0% loan early and give them part of their money back...

If you take the cash discount, the manufacturer has ZERO chance of ever getting that money back.

[downeasteralexa]

It depends on the dealership and who is providing the financing. Here's a "buyer beware" scam story for you guys to know about when someone is pushing financing on you.

Recently, a high-volume used car dealer in Halifax tried to strong-arm us into agreeing to financing even though we repeatedly told them that we had our own and there was no way they could beat the percentage. The sales guy claimed that cash wasn't as good as financing these days and that the dealership "only" got a $200-300 referral from the financier and they passed that savings along to their customers. He kept trying to push us into taking the financing for the tiny cost savings, then turning around and using our money to pay it back in full after X # of days (31, I think it was). We knew that there had to be something else going on given the amount of pressure for something that was, supposedly, a small amount of money.

Unfortunately for the sales guy, he not only lost the sale because he wouldn't stop pressuring us about the financing, but then his GM got an earful because my husband works for the bank they obtain their financing through, so he was able to find out a lot from the dealer finance folks. The scam was that the dealership gets a minimum referral of $1000 for every client they get to accept financing, not $200-$300. As long as you don't pay it back before X-day, the dealership does not have to return that $1000, which is why the salesguy was saying it would be cool to pay it back after that point.

Another good lesson that I learned from my last car-buying experience in 2000 was to not base your agreement on a monthly payment instead of a total amount, as it gives them a lot more flexibility in playing with the numbers. Get financed elsewhere, know exactly what you are willing to pay, and cut them off at the knees if they try to push financing on you.

[Jucius Maximus]

Except that nowadays, the cash rebate is much smaller than the value of the low-interest financing in most cases.

Which makes sense, because 0% financing is a big trap. Let's say you have a 0% 5 year loan, and in 3 years, you need to sell the car... which means you have to pay off the loan. In effect, you'll be paying them back the equivalent of 2 years' interest.

That's what they're hoping for - that you pay off your 0% loan early and give them part of their money back...

If you take the cash discount, the manufacturer has ZERO chance of ever getting that money back.

Very good point...

Which is exactly why I believe cars should never be financed! Pay cash, people!

[Jucius Maximus]

Unfortunately for the sales guy, he not only lost the sale because he wouldn't stop pressuring us about the financing, but then his GM got an earful because my husband works for the bank they obtain their financing through, so he was able to find out a lot from the dealer finance folks. The scam was that the dealership gets a minimum referral of $1000 for every client they get to accept financing, not $200-$300. As long as you don't pay it back before X-day, the dealership does not have to return that $1000, which is why the salesguy was saying it would be cool to pay it back after that point.


Sadly not an uncommon story... (http://consumerist.com/5162727/jeep-incapable-of-selling-to-man-with-24000-in-cash)

The big automakers don't deserve a bail out. :mad:

[Pete_Coach]

Typical stealership... if they are selling you a car AND money, then they are making more profit. I've heard that in many cases, they actually make more money from selling off the financing contract than they do from the sale of the car itself.
I think only Hyundai at this point is offering "true" 0% financing where there is no discount for cash payment. Take that as you will. Either they are taking a hit for giving you money at no cost, or they've built the cost of financing into the MSRP of the car, and are refusing to let you know it.
Do not get tricked into financing, you will pay more in the end.
I don't get it? If the dealership is offering 0% financing, why are they stealing? Secondly, most OEM's have sold off their financing arms of the buisness. Yes, dealerships will arrange financing for you but that will cost you and it will often bring a kickback to the dealer but, that is due to the laziness of the customer in not finding their own financing.
You are really a half empty kind of guy, there are all sorts of businesses and because they make a profit (or try to) does not make them the enemy, it is one of the reasons you have a job (if you work). They can only hire you if they make money.
I think what you're not accounting for is that money has a cost in terms of interest. Car manufacturers know that most people purchase cars on financing and are receptive to "low interest" or "0% interest" offers, so the manufacturer just includes the price of the interest in the MSRP of the car to give the illusion that the interest is low or free. When the manufacturer gives a "cash deal credit" for purchases, it is because there's no need for financing and therefore no interest cost on those purchases, so that portion of the purchase price is refunded.
Yes, low interest attracts customers. Everybody likes to save a penny now and then. Cash discounts have been around forever but, they do not always equal 60 months of no interest. So, you need to determine what is best for you. 0% interest is a good thing, why use your money or give a substantial amount to the retailer all at once if you don't have to? Is it in the price? That depends and in some cases it is not, you need to know your prices.

[Jucius Maximus]

I don't get it? If the dealership is offering 0% financing, why are they stealing?
They aren't really stealing anything in the criminal sense, I was just being sarcastic by using a sarcastic term. It is exactly as you described it; They are taking advantage of people's ignorance and/or laziness to get more money from people. But then trying to get more money out of people, particularly due to ignorance or laziness, is what the whole "stealership" concept is about.

[VivienM]

Yes, low interest attracts customers. Everybody likes to save a penny now and then. Cash discounts have been around forever but, they do not always equal 60 months of no interest. So, you need to determine what is best for you. 0% interest is a good thing, why use your money or give a substantial amount to the retailer all at once if you don't have to? Is it in the price? That depends and in some cases it is not, you need to know your prices.

0% interest is a good thing... if you're sure that you'll take 5 years to pay off the loan.

If you want/have to pay it off early, whooops, your discount goes up in smoke. Right back into the lender's pocket.

For the same monthly payment, low borrowed amount + high interest is ALWAYS better (lower risk) than high borrowed amount + low interest. Sadly, the trend, both in cars and real estate, is towards the latter.

[VivienM]

Very good point...

Which is exactly why I believe cars should never be financed! Pay cash, people!

The problem is that paying cash is ONLY feasible if you paid cash for your previous car, basically.

If you pay cash for a car today, and start saving, in 5 or however many years, you'll have enough cash for your next car.

But if you don't have cash today, your money is going towards your car payment, not your savings, so you won't be able to save enough cash for the next car in 5 or however many years. Well, okay, if you finance a really cheap car and have a fairly high income, maybe it's doable...

[Jucius Maximus]

The problem is that paying cash is ONLY feasible if you paid cash for your previous car, basically.

If you pay cash for a car today, and start saving, in 5 or however many years, you'll have enough cash for your next car.

But if you don't have cash today, your money is going towards your car payment, not your savings, so you won't be able to save enough cash for the next car in 5 or however many years. Well, okay, if you finance a really cheap car and have a fairly high income, maybe it's doable...

And this is what the banks and finance companies want, and they have done an excellent job of embeddeding debt as a way of life into our culture. It's why they go so aggressively after the college / university crowd for credit cards, because leads to brand affinity and a lifetime of loan usage for car loans, mortgage, HELOC, etc. (I could rant about this for hours, but I'll spare you.)

My view is that if you are already in the debt cycle, the way out is to sell the car and drive a crapmobile for a while until you have the cash for a nicer car. You suffer some short term pain, but in the long term you have bought yourself some freedom because you are not going to risk losing your car if you lost your job and can't make the payment.

When I bought my last car, I did not know this, so I financed it. But then I realised what was going on, and also got a nice raise at work. So I paid like $1100 per month for almost a year and killed the debt. Never again for me.

[downeasteralexa]

Sadly not an uncommon story... (http://consumerist.com/5162727/jeep-incapable-of-selling-to-man-with-24000-in-cash)

The big automakers don't deserve a bail out. :mad:

That was a great article, and we found ourselves wondering why our money wasn't good enough, especially since they still haven't moved the vehicle off of the lot.

Something that I forgot to mention in my previous post was that the person who referred me to the dealership--a relative of the finance manager--followed up with him regarding what happened. The finance manager said "We don't do cash deals". My co-worker said it didn't make any sense to her either, and she would no longer be referring anyone to him.

I just don't understand treating customers who are motivated to buy and have cash in hand like garbage.

[tcho]

I didn't really mean to open a debate on the MERITS of paying cash for a car vs. financing (though that is an interesting debate, I think it ultimately comes down to personal proclivities).

I was wondering more whether or not you could get a better deal/had more negotiating power going to a dealer with cash.

Ironically, it seems as though you can have a more difficult time in negotiations if you want to pay cash.

[Jucius Maximus]

I was wondering more whether or not you could get a better deal/had more negotiating power going to a dealer with cash.

Ironically, it seems as though you can have a more difficult time in negotiations if you want to pay cash.

With cash I think more power is on your side because there's fewer variables for the dealer's salesperson to play with. You can get guys who trick you into negotiating on payment amounts only, when they are quietly playing around with both the interest rate and the term of the loan in the background. Financing has more variables and room that you have to account for. And since the salesman does this dance many times a day, he is better at it than you. And if he's dishonest, chances are good you will be scammed.

If you want the good deal, it is really just about knowledge, patience and maintaining walk-away power. This can get you a good deal with both financing and cash payments. There's nothing much else to it.

[VivienM]

I was wondering more whether or not you could get a better deal/had more negotiating power going to a dealer with cash.

Ironically, it seems as though you can have a more difficult time in negotiations if you want to pay cash.

For new cars, I don't think it matters at all.

I could be wrong, but I don't think new car dealers get kickbacks for cars financed through manufacturer financing divisions.

So, at the end of the day, it comes down to one thing: how little they're willing to make on the car.

Everything else (financing rate, cash incentive, etc) is fixed by the manufacturer.

So, to take an example, if MSRP is $25K, invoice is $22K, then if they're happy selling at $23.5K, it shouldn't matter if it's cash or not. If it's cash, subtract the additional cash incentive from the manufacturer and boom. If it's financed, then the manufacturer's financing division hands them $23.5K, and everything else is between you and the manufacturer.

For used cars, it's different. Lots of crooked financiers out there in used car dealer land...

[HP_John]

I think what you're not accounting for is that money has a cost in terms of interest. Car manufacturers know that most people purchase cars on financing and are receptive to "low interest" or "0% interest" offers, so the manufacturer just includes the price of the interest in the MSRP of the car to give the illusion that the interest is low or free. When the manufacturer gives a "cash deal credit" for purchases, it is because there's no need for financing and therefore no interest cost on those purchases, so that portion of the purchase price is refunded.

The manufacturer sells the car to the dealer, & there is a MSRP. Some cars have high interest rates, & interest rates can change from month to month, yet MSRP remains the same. The 09 Fit has had high interest rates this whole yr, yet next yr when they do start offering lower interest rates on it, the MSRP will still be the same or nearly the same.

[HP_John]

With cash I think more power is on your side because there's fewer variables for the dealer's salesperson to play with. You can get guys who trick you into negotiating on payment amounts only, when they are quietly playing around with both the interest rate and the term of the loan in the background. Financing has more variables and room that you have to account for. And since the salesman does this dance many times a day, he is better at it than you. And if he's dishonest, chances are good you will be scammed.

If you want the good deal, it is really just about knowledge, patience and maintaining walk-away power. This can get you a good deal with both financing and cash payments. There's nothing much else to it.

At the 2 dealers I worked at, sales staff have 0 control over interest rate, whatever Honda Canada says the rate is, that is the rate. The only time Honda Canada's advertised rates didn't apply is if they didn't qualify for the loan, in which case we did not proceed any further. We would ask them if they could go to their bank & see if they could work something out with their own bank, but we'd have no part of it.

[Lord_Pithicus]

I'm confused by some of the comments. Are you saying that if I got the car for $xx over invoice, it's still bad to take 0 percent financing? I don't see how that could be possible.

[Tonyzee]

Except that nowadays, the cash rebate is much smaller than the value of the low-interest financing in most cases.

Which makes sense, because 0% financing is a big trap. Let's say you have a 0% 5 year loan, and in 3 years, you need to sell the car... which means you have to pay off the loan. In effect, you'll be paying them back the equivalent of 2 years' interest.

That's what they're hoping for - that you pay off your 0% loan early and give them part of their money back...

If you take the cash discount, the manufacturer has ZERO chance of ever getting that money back.

Is it just me or when ever someone tries to explain the concept of 0% financing, they make absolutely no sense? The first guy says "...if they are selling you the car and money". I lol'd

And now this. WHAT MONEY BACK?

I think people are purposely screwing with me just to make me feel bad for not knowing much about car buying. :D

[Pete_Coach]

Is it just me or when ever someone tries to explain the concept of 0% financing, they make absolutely no sense? The first guy says "...if they are selling you the car and money". I lol'd

And now this. WHAT MONEY BACK?

I think people are purposely screwing with me just to make me feel bad for not knowing much about car buying. :D
Bottom line Tonyzee is, 0% financing means you don't pay any interest. There is no money back. You owe them the final price on your invoice divided by the amount of months you chose to pay off the loan.
There will be all sorts of conspiracy theories out there but it really is that simple. Just your paid off car at the end of the term (XX months).

[Jucius Maximus]

At the 2 dealers I worked at, sales staff have 0 control over interest rate, whatever Honda Canada says the rate is, that is the rate. The only time Honda Canada's advertised rates didn't apply is if they didn't qualify for the loan, in which case we did not proceed any further. We would ask them if they could go to their bank & see if they could work something out with their own bank, but we'd have no part of it.

Yeah I was automatically thinking in "used car" mode because I don't think new cars are a good value. In that situation, anything goes.

[VivienM]

Bottom line Tonyzee is, 0% financing means you don't pay any interest. There is no money back. You owe them the final price on your invoice divided by the amount of months you chose to pay off the loan.
There will be all sorts of conspiracy theories out there but it really is that simple. Just your paid off car at the end of the term (XX months).

You're missing the point.

The point is this: let's say you buy a car for $30000 at 0% financing. That works out to $500/month for 5 years.

Now, let's say a market interest rate was 5%. At 5%, the car would have to cost $26500 for you to pay $500/month for 5 years.

In BOTH scenarios, if you keep the loan for 5 years, you're paying the same thing. $500 * 60 = $30 000.

So, in effect, what they've done is given you a $3500 discount on your $30000 car.

But here's the thing. Let's say that in 3 years, you need to pay off the loan to sell the car because you need a bigger car for your growing family.

With the 0% loan, you owe $12000.

With the 5% loan on the smaller amount, you owe $11,400.

So, in effect, when you pay off the 0% loan early, you're "giving them back" $600 of your $3500 discount.

What I'm saying is this: if you had a fair choice between 0% and $3500 less and a market interest rate, you should ALWAYS pick the latter. If it takes you 5 years to pay off the car, you're in the same position, but if you have to pay it off early, you're better off.

[tcho]

You're missing the point.

The point is this: let's say you buy a car for $30000 at 0% financing. That works out to $500/month for 5 years.

Now, let's say a market interest rate was 5%. At 5%, the car would have to cost $26500 for you to pay $500/month for 5 years.

In BOTH scenarios, if you keep the loan for 5 years, you're paying the same thing. $500 * 60 = $30 000.

So, in effect, what they've done is given you a $3500 discount on your $30000 car.

But here's the thing. Let's say that in 3 years, you need to pay off the loan to sell the car because you need a bigger car for your growing family.

With the 0% loan, you owe $12000.

With the 5% loan on the smaller amount, you owe $11,400.

So, in effect, when you pay off the 0% loan early, you're "giving them back" $600 of your $3500 discount.

What I'm saying is this: if you had a fair choice between 0% and $3500 less and a market interest rate, you should ALWAYS pick the latter. If it takes you 5 years to pay off the car, you're in the same position, but if you have to pay it off early, you're better off.

VivienM - I understand. Thank you. I guess it's really predicated on whether you can get the discount UP FRONT to reflect the fact that you're paying cash vs. financing at 0% at the full price. If both prices truly are the same, and there is no discount for cash, then the 0% is clearly the better option.

[Pete_Coach]

You're missing the point.

The point is this: let's say you buy a car for $30000 at 0% financing. That works out to $500/month for 5 years.

Now, let's say a market interest rate was 5%. At 5%, the car would have to cost $26500 for you to pay $500/month for 5 years.

In BOTH scenarios, if you keep the loan for 5 years, you're paying the same thing. $500 * 60 = $30 000.

So, in effect, what they've done is given you a $3500 discount on your $30000 car.

But here's the thing. Let's say that in 3 years, you need to pay off the loan to sell the car because you need a bigger car for your growing family.

With the 0% loan, you owe $12000.

With the 5% loan on the smaller amount, you owe $11,400.

So, in effect, when you pay off the 0% loan early, you're "giving them back" $600 of your $3500 discount.

What I'm saying is this: if you had a fair choice between 0% and $3500 less and a market interest rate, you should ALWAYS pick the latter. If it takes you 5 years to pay off the car, you're in the same position, but if you have to pay it off early, you're better off.
I did not miss the point. If your scenario is correct and you have the cash, OK but, if you don't have the cash and you need to go find financing, you will be worse off. Also, they are not giving $3500 discount anymore so, you are still worse off.

[VivienM]

I did not miss the point. If your scenario is correct and you have the cash, OK but, if you don't have the cash and you need to go find financing, you will be worse off. Also, they are not giving $3500 discount anymore so, you are still worse off.

I think they've stopped giving roughly equivalent discounts for this very reason. If they give you the equivalent discount, and you find financing elsewhere (HELOC, car loan from bank, whatever), then they'll never see a penny of that discount back.

If they give you a 0% loan, then with SOME LUCK, some people will pay it back early, and they manufacturers will get some of their money back.

Some manufacturers go somewhere in between. e.g. Audi gives you an extra $1500 off for paying "cash", or 2.9% financing for up to 72 months. I haven't done the math, but depending on what your other financing costs, I'd assume their 2.9% financing usually works out cheaper... (but not if you have a prime HELOC and hope that rates won't go up soon...)