Do Car Dealers Prefer Financing Over Cash Sales?

When it comes to selling a car, many dealers have a preference for financing over cash sales. This article explores the various reasons behind this preference and discusses the advantages and disadvantages of each method for both dealers and buyers.

Profit Margins

Dealers often prefer financing because it allows them to earn higher profits. One of the main reasons for this is the commission and markup that dealers can earn on interest rates offered to buyers who finance through the dealership. This markup can be quite significant and contribute significantly to the dealer's overall profit margin.

Incentives and Bonuses

Manufacturers also offer dealers incentives for financing vehicles through their preferred lenders. These incentives can be substantial and can further increase the dealer's overall profit. The dealers can receive discounts, rebates, or other rewards that help them compete with other sales.

Customer Retention

Financing helps dealers establish a longer-term relationship with customers. This relationship can lead to future sales, service, and referrals. By working with customers over a longer period, dealers can build a loyal customer base that is more likely to return for future purchases.

Upselling Opportunities

Financing also opens the door for additional product sales. Extended warranties, service plans, and other ancillary products can be sold to customers who are financing their vehicles through the dealership. This additional revenue stream can be highly beneficial for dealers, as it allows them to upsell and increase their overall profit.

Disadvantages of Financing

While financing has its advantages, some dealers may prefer cash sales or bank checks for certain reasons. Cash sales can provide certainty and speed, eliminating the complexities involved in financing. They can also help simplify the transaction process, which is particularly beneficial for both dealers and buyers.

The Dealers' Perspective

According to my research and personal experience, dealers often prefer loans because they can source them from preferred banks or credit unions. These sources often come with better interest rates, which can be advantageous not only for the dealer but also for the customer. Additionally, the dealer can receive kickbacks or other incentives for these sales, which can be significant.

For example, consider a scenario where a Toyota dealer can offer up to 60 months of 0% financing with a flat fee of $200. Even though this fee might seem small, it can make a significant difference in the overall profit. When dealers are selling vehicles at or below invoice prices, every dollar counts. Without the incentive from financing a single loan, a dealer may turn away a deal that they otherwise would have gladly accepted.

Furthermore, the paperwork process for financing can be more favorable for the dealer. When a customer is presented with an aftermarket warranty, the total price may seem high, deterring them from purchasing the warranty. On the other hand, a financing payment plan can make the higher total price more manageable for the customer. As a result, the salesman can present a financing option that is more appealing and results in a higher overall sale price.

The Customer's Perspective

For the customer, the choice between financing and cash relies on their specific needs and financial situation. If a customer has the funds to purchase the car outright, a cash sale may be the preferred option as it eliminates the monthly payments and interest charges. However, many customers find financing more convenient and can still benefit from the low interest rates offered by dealerships.

It is essential to understand that dealers strive to ensure that customers leave the dealership happy and satisfied with their purchase. They can often leverage the negotiating power to secure better rates and terms for customers who are financing their vehicles. This can result in lower payments and more attractive overall deals for the customer.

Conclusion

In summary, while some dealers may prefer financing, there are specific circumstances where a cash sale or a bank check may be more beneficial. The final decision should be based on the individual's financial situation and the specific deal being offered. Understanding the pros and cons of each method can help both dealers and customers make informed choices that benefit everyone involved.