Do car dealerships prefer cash or financing?
Do Car Dealers Prefer Cash or Financing?
When you buy a car you have the option to either pay with cash or seek financing in the form of an auto loan. When you finance you must pay interest and continue to send money for the car every month. If you have the luxury of choosing to pay with cash or getting a loan, you might wonder which method the car dealer would prefer. Knowing this could give you some bargaining advantages when it comes to the car deal.
Which Is Preferred?
You may assume that a car dealer will prefer a buyer who comes in prepared to buy the car with cash or a cashier’s check. The transaction is simple and straightforward — you make your payment and drive off the lot just like any other retail transaction. But in some cases the car dealership may benefit financially if you get a loan instead. Dealerships often act as brokers for car loans or have associated financing units. When a customer comes in to buy a car and uses the dealer’s financing company, the dealership receives a commission for closing the loan as well as the profit from the vehicle sale.
Bargaining
Since in some cases the dealer may benefit from a car loan, try to negotiate with the car salesman on the cost of the car. Place an offer for the car based on taking the dealer’s financing. Explain that you can purchase the car with cash, but ask if the dealer can offer incentives if you decide to buy with a loan instead. You may find that the salesman will work with you on the price or offer a rebate of some type.
Decide Which Is Best For You
It’s important to focus on which payment method benefits you most when buying your car. Weigh the total cost versus the total benefit of both choices before you make a final decision at the dealership. If you have the cash to buy the car but choose to finance because the dealer offers you an irresistible deal, keep in mind that you can probably just pay off the loan soon after closing instead of making monthly payments that include interest costs.
Additional Costs
Whether you choose to finance or pay cash don’t forget to include additional fees in your final amount due. The car dealer may charge you to issue your temporary tags, register the vehicle, cover your state sales tax cost for the car and even for advertising costs in some cases. When paying cash, make sure you have the money on hand for these additional costs as well. If you finance, you may also have to pay document preparation and loan origination fees in addition to the price of the vehicle.
- Cars.com: Getting the Best Deal Financing & Insurance
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Louise Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.
What NOT to tell a car dealer
(AOL Autos) — Apprehensive about shopping for a new car? Afraid you’ll say the wrong thing to a car dealer that will give him the upper hand in the price battle?
Doing your research beforehand will better prepare you to read between the lines of what a car dealer is saying.
Shopping for a new car, or even a used one, doesn’t have to be that kind of nerve-jangling roll of the dice that it was many years ago.
For starters, the advent of the Internet allows car shoppers to go into battle armed with more information today than ever.
It’s quite easy to get basic information that includes MSRP, features, options and reviews on any car you might have your eye on before you visit a car dealer, rather than having to trust the dealer to educate you.
With more car dealers out there now than ever before, consumers also now have more leverage. It’s a common consumer tactic to play two car dealers off each other, or in auto dealer parlance, «cross-shopping,» to see which one can give you the best deal.
But it still helps to know what to say and what not to say as you and the car dealer play the game of haggling the price, because, you could still say the wrong thing to give the car dealer a leg up on the negotiations.
We spoke to an AAA car-buying expert and an auto dealer to find out what NOT to say once you’re on a car dealer’s turf and what TO say.
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- AOL Autos: Car dealer tactics: Ask the salesman
- AOL Autos: Used car buying tips
Don’t talk about monthly payments
«Under no circumstances should you start talking about monthly payments,» says John Nielson, Director of Auto Repair and Buying for AAA. «You should just focus on negotiating the purchase price. Once you start talking about monthly payments, everything gets confusing, because suddenly you don’t know if that’s the payment for 24 months, or 36 months, or how much of that would include interest charges if you’re financing the purchase through the dealer.»
Nielson’s advice on this matter is supported by a sales representative at a Virginia car dealership, who agreed to speak to us on the condition of anonymity. «After all, I don’t want to shoot myself in the foot,» he says. So we’ll call him Bill.
«Dealers will absolutely try to get you to negotiate monthly payments instead of purchase price, because we make more money if we do it that way,» says Bill. «We’ll say something like, ‘I can get you into this car for $300 a month,’ but we won’t say how many months that’s for. If we can get you to commit to a longer payment structure and we’re doing the financing, we’re making more money off you in interest payments.»
Don’t tell a car dealer about your trade-in
Fundamentally, says Bill, «dealerships like to move money around. So it probably also is not in the buyer’s best interest to mention right up front that he or she has a car they want to trade in. Because once we know that, we know you’re looking to get as much money as you can out of the trade-in.»
Bill explains how getting more currency for your trade in can be a smokescreen that won’t save you money in the end. «We’ll assess the value of the car, and if it’s worth, say, $15,000, we’ll tell you we’ll give you that amount,» he says. «But once we do that, we’ll be pretty hard to budge on the sale price of the car. So in that instance, you’ll probably end up paying full MSRP for your new car.»
Bill informs us, «These days, with CarMax being so prevalent, consumers might want to consider not trading their car in at all, and just selling it via CarMax. You will almost always get a better price for it if you sell it than what a dealer will give you in trade-in value.»
Nielson of AAA has similar advice on this front, although he comes at it from a slightly different perspective. «It’s OK to mention that you might want to trade your car in, because you don’t want to get caught telling them something that isn’t true. But just tell the sales rep, ‘We’ll talk about that later, let’s just focus on the price of the new car for now’,» says Nielson.
«Anytime you add the trade-in value for your existing car into the negotiation of the price for the new car, the numbers start moving back and forth, and you could end up being confused about how much you’re really paying for the new car,» warns Nielson. «The number one way consumers can go wrong in this scenario is to lose sight of the purchase price of the vehicle, which is the number you are in best position to negotiate.»
Nielson laughs, «You probably also shouldn’t tell them that you recently had a car repossessed, or that you have bad credit. That kind of information probably won’t work in your favor.»
And while it may be unwise to tell a dealer you’re desperate for a car — information that can being out the shark in any sales rep — there’s nothing wrong with telling the car dealer that you’re definitely looking to a buy a car in the next few days.
«Face it, dealers are trying to make a living,» says Nielson. «So if they think you’re just out kicking tires and are six months away from making a purchase, they might think you’re wasting their time, so you won’t get as much attention from them.»
Get your own financing to save on interest rates
Back to the financing question: Bill reveals, «One tactic dealers sometimes take is getting the buyer lost in the numbers, by asking them, ‘Where do you want to be? What’s your budget?’ And then once we know that, we start talking about financing through us, which is a way we make a lot of money on the back end of the deal.
That’s why Nielson advises prospective car buyers, «Do your homework, find out what incentives are out there, and use a payment calculator you can find online so you’re educated on how much car you can get into for the price you want to pay.»
Also, it’s best to get preapproved for a car loan before you even walk into the Thunderdome — er, the dealer showroom. Bill says, «That way, if we know up front you’re pre approved to get your financing elsewhere, we’re not going to try and hit you with a high interest rate. That’s what a lot of dealers will try to do without even knowing what your credit rating is.»
Paying cash may hinder your chances of getting the best deal
One issue to factor in is whether or not you intend to pay cash. (If only all of us should be so lucky to have that kind of coin lying around.) If you do intend to pay cash, Bill tells us that’s something you may not want to say right up front.
«When dealers are negotiating the purchase price, they anticipate making money on the back end, via financing,» Bill explains. «So if you tell them up front you’re paying cash, the dealer knows he has no opportunity to make money off you from financing. So, he might not be as moveable on purchase price if he already knows he isn’t going to make any money off you from financing.»
This likely holds true if you’ve been preapproved for financing. It’s best not to reveal your hand on the outset that you don’t plan to use dealer financing before you negotiate the vehicle price.
It’s not necessarily bad form for the buyer to tell the car dealer up front that he’s strongly considering financing the car through the dealer — and then, later, saying, «I changed my mind,» after negotiating the purchase price.
«The buyer CAN get a better deal if he does that,» concedes Bill, «because all along, in that scenario, the dealer is maybe knocking something off of the top of the purchase price thinking he’s going to get some interest out of you on the financing.»
Finally, confirms Bill, «It’s OK to say you’ve been to other dealers, because cross-shopping between two dealers is always a good idea. From the dealer standpoint, customer service is what separates one dealership from another dealer who sells the same brand. Some customers are willing to pay more money if they were treated right during the purchase process, because that’s a pretty good indicator that you’ll also be treated right later on, when you come back to have your car serviced or repaired.»
Should I Pay Cash or Finance My Next Car?
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Learn when to pay cash for a car or when taking out an auto loan is the better choice.
The car buying experience is exciting. You get to compare different automakers, models, and features. However, it also includes major financial decisions. Beyond setting a budget, you’ll have to decide whether to pay cash for a car or finance it.
When you buy a car with cash, there are no future payment obligations. On the other hand, if you want to spend less cash as a down payment on a car purchase, you can finance the rest with an auto loan. But how’re you supposed to decide which route is best?
If you’re on the fence, don’t worry — we’ve outlined when it makes sense to pay all cash and when it’s wiser to take out a loan.
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The Advantages of Financing a Car
Even if you have the funds to purchase a car outright, it’s still worth assessing your financing options. That’s because an auto loan could be the financially responsible decision, depending on a few conditions. Here are some advantages to financing a car.
Buy something you couldn’t otherwise afford
Debt typically carries a negative connotation, but this is the beauty of borrowing money. Loans enable you to purchase things that you couldn’t afford all at once. You’re essentially borrowing against your future income. So long as your monthly payments don’t prevent you from covering necessities and typical lifestyle expenses, using a loan to buy a car can be a viable option.
Secure low interest rates
When you take out a car loan, you’ll make regular payments to your lender. These payments consist of principal and interest, the latter of which represents the added cost of borrowing money versus paying in cash. If you’re able to secure a low interest rate, you can lower the overall cost of financing your car purchase.
Your interest rate will depend on several factors. For starters, your personal finances impact your rates, including your credit score, credit history, and income. Rates also vary by lender and lender type too. For instance, traditional financial institutions like banks and credit unions may offer lower interest rates compared to dealership financing programs.
However, depending on your credit, you may qualify for a dealership’s promotional offer, such as 0% financing for a certain number of months. In that case, you could space out your car payments interest-free.
Build credit
To build credit, you must have credit in the first place. By taking out an auto loan and making regular, timely payments, you can build your credit history and improve your scores.
This can be helpful when you apply for other types of debt in the future, such as credit cards or a mortgage. A history of timely payments can help you not only get approved for financing but also get the best terms.
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The Disadvantages of Financing a Car
There’s no such thing as a free, no-strings-attached loan. Debt helps facilitate major purchases, but it’s still an obligation that carries risks. Let’s walk through a few disadvantages of financing a car.
Pay more in the long run
Perhaps the biggest disadvantage of financing a car versus paying with cash is the total cost. Loans aren’t free — in addition to principal repayments, you’ll also pay interest. Exactly how much you’ll pay depends on your loan amount, interest rate, and loan term.
For example, a 60-month, $15,000 car loan with a 5% interest rate will have $1,984 of total interest payments over the life of the loan. On the other hand, paying off a car immediately avoids this cost altogether. And if you’re not in a stellar financial situation (maybe due to bad credit), then your terms — and total cost — could be even worse.
Fortunately, refinancing is an option down the road. So, you aren’t locked into a high monthly payment for the entire duration of your loan. If you manage to increase your income or boost your credit, you might be able to refinance and get a lower interest rate. Last year, borrowers who refinanced saved almost $1,000 a year on average.
Less money to cover wants and needs
Financing a car is less of a financial hit at the time of your purchase. So, your liquidity remains intact. However, your car payments — which don’t even account for car insurance — could be a drain on your monthly income.
That means less money for other necessities like rent, utilities, and food. Less money set aside in a savings account. And less money available for general wants.
Potential to default on your loan
When you borrow money, there’s always the risk of not being able to repay your obligation. Loan defaults can significantly harm your credit score and remain on your credit reports for years. That may hurt your chances of qualifying for other loans later on.
It could even influence your ability to get a job or an apartment. Employers can’t see your score, but they can assess your credit history for financial distress. And landlords might look unfavorably at missed payments and loan defaults when evaluating your apartment application.
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The Advantages of Paying Cash for a Car
They say cash is king. In terms of using cash to buy a car, that’s often true. Here are three advantages of avoiding debt and, instead, paying cash for your next car.
Save money
When you pay cash, you’re immediately off the hook. No loan necessary, no interest to pay. So, depending on your loan offers, you could save a lot of money by sidestepping a car loan.
Using our earlier example, you’d avoid a monthly car payment of $283 by paying for your car with cash. You could set some or all of this money aside for other life goals, such as investing for retirement or buying a house.
On top of that, some dealerships prefer all-cash transactions since they receive a lump sum upfront — they may even offer you rebates or discounts on the price of the car as an incentive.
Avoid going into debt
While debt isn’t inherently bad, steering clear of it could have a positive impact on your bank account and your psyche. Making monthly payments to an auto loan lender can take a toll on your income and could even become a source of stress if your finances are ever tight.
For instance, if you happen to lose your job or are unable to work, you won’t have to worry about repaying your obligations.
Own your car outright
Car loans are usually secured loans, meaning the vehicle serves as collateral. If you ever stop making payments, your lender might repossess the car. In that sense, you don’t really own your vehicle — not until you pay it off.
While you have an outstanding balance, you also could be at risk of going upside-down on your auto loan. This means your loan balance is higher than the value of the car, which isn’t uncommon because depreciation affects most vehicles. Being upside-down can become a problem if you ever need to sell your vehicle or if you’re in a major accident.
That’s why it’s often recommended to put 20% down when you buy a new car and 10% down when you buy a used car.
The Disadvantages of Paying Cash for a Car
Paying off your car right away can feel liberating, but it might not be in your best interests financially. Although you avoid debt this way, there are several drawbacks to using 100% cash.
Jeopardize your stability
The biggest disadvantage of paying cash for a car is the financial hit you take on day one.
That’s because cars aren’t cheap.
Of course, the price you pay depends on the cost of the car and whether it’s a used car or a new car. For instance, the average MSRP of a new vehicle was $45,000 in September. On the other hand, the average used car was $27,569 — an all-time high but still almost 40% cheaper than a new model.
Regardless, dishing out tens of thousands of dollars can drain your liquidity and potentially jeopardize your financial stability. Life is full of unexpected expenses and unfortunate career surprises, such as pay cuts and layoffs. If you don’t have adequate savings to cover the price of the car right now, it’s not worth the risk.
Might not be able to afford a reliable car
Affording a car is not the same as affording a reliable car with plenty of miles left under the hood. In other words, if you have long-term aspirations for your next vehicle, it’s probably better to go the financing route versus buying a clunker that’s on life support just to avoid debt.
Otherwise, you may wind up paying more in car repairs — or even funding a sooner-than-expected replacement.
Doesn’t build credit
When you pay cash for a car, you don’t have to worry about repaying a loan. While your monthly income remains intact, you don’t benefit from a credit perspective. That’s because income and cash purchases don’t show up on your credit report.
Taking out a sizable loan for the sole purpose of building good credit isn’t necessarily advisable, but it’s something to keep in mind if you’re on the fence.
Alternatives to Cash and Traditional Financing
You could decide to pay cash for a car. Or you might explore financing deals through conventional lenders or car dealers. But those aren’t the only two routes you can take. Consider these additional alternatives to ensure you make the right decision.
Leasing
Whether you buy or lease a vehicle, you still get to drive it off the lot. It stays in your driveway or garage. And you can rely on it to get from point A to point B whenever you choose. However, there’s a big difference: leasing is like renting. You only get the car for a set amount of time — and often a limited number of miles each year.
On the flip side, you don’t have to worry about the selling process. No trade-in negotiations with a salesperson. No paying for ads or giving strangers test drives. Once your term ends, you simply hand the keys back over to the dealer.
This isn’t the only factor to evaluate though. For instance, warranty coverage is another key differentiator. Still, it can help you determine if leasing is even of interest in the first place. If you don’t want to drive one specific car for more than a few years, you may want to explore lease agreements.
Peer-to-peer lending
Although peer-to-peer (P2P) lending is still a form of financing, it’s different in the sense that it cuts out financial intermediaries like banks and credit unions. Some P2P lending platforms have lower minimum credit thresholds. So, it can be easier to get approved for a personal loan, which you could use to fund your car purchase.
That said, it’s still important to be wary of fees and interest rates. Compare these platforms’ offerings to those of traditional lenders. That will help you make the most informed decision.
Should I Pay Cash for a Car or Finance It?
Like most financial decisions, choosing to pay cash or finance a vehicle is subjective. If you could narrow this decision to a single factor, it’s financial stability.
On one side, debt shouldn’t make it impossible to live your life or cause financial stress. You should be able to comfortably afford your car payments and auto insurance. Similarly, on the other side, a major cash purchase shouldn’t open the doors to unnecessary risk. You should have enough savings in an emergency fund before paying all cash for a vehicle.
Lastly, it doesn’t have to be a binary decision. You could take a hybrid approach through a sizable down payment. In other words, you could cover a significant percentage of the car’s purchase price upfront and fund the rest through a loan.
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About The Author
Carter Kilmann
Carter Kilmann is a personal finance writer and editor for hire, covering topics like credit cards, mortgages, budgeting, banking, and investing. He’s written for The Points Guy, Investing.com, Thrive Global, Day to Day Finance, Money Mini Blog, and more.
