Why Car Dealers Insist on Financing over Cash Payments
When you're shopping for a car, you may have noticed that some dealerships are more enthusiastic about financing your purchase than going through with a cash transaction. But why is that? This article will explore the reasons behind this preference and offer some tips for car buyers to make the most of their options.
The Dealership's Perspective: Profits and Fees
Car dealers are in the business of making money from car sales, and financing can be a more profitable option compared to a cash sale. Here's a closer look at why dealerships often prefer financing:
Dealership Kickbacks and Commissions
When you finance a car through the dealership, they may receive a kickback or commission from the lender. This is in addition to any profit they make from selling the car itself. These kickbacks can significantly increase the dealership's overall profit margin, making financing a more attractive option for them.
Higher Interest Rates and Additional Fees
Financing through a dealership can often come with higher interest rates and additional fees. The dealership may also upsell you on extra products like extended warranties or service plans, which further boosts their profits. This is why dealerships might try to convince you to finance your car even if you have the cash to pay in full.
Tip: Don’t reveal that you plan to pay in cash until you've negotiated the final price with the dealership. Sometimes, knowing that you plan to finance can make the dealership more flexible on the price, as they anticipate making money on the financing.
Financing Can Be Beneficial for Buyers, Too
While financing can be more profitable for dealerships, it can also be a better option for car buyers in certain situations. Here's why:
Spreading Out Monthly Costs
If you don’t have the cash upfront, financing can help you spread out the cost of the car over a longer period. This can be a more manageable option, especially for expensive vehicles. Just make sure to read all the terms and understand the total cost over the life of the loan to avoid hidden fees and unexpected expenses.
Insurance Costs
Certainly, car insurance is a significant expense in the process of car ownership. Insurance Panda, for example, offers policies starting at $25/month. By keeping your overall car expenses in check, you can save money and make the financing process more affordable.
Remember: Financing isn't always bad. It can be a practical choice if you need time to pay for the car. However, it's crucial to understand the terms and the long-term costs associated with the loan.
The Dealership’s Struggle with Cash Sales
Dealerships often view cash transactions with suspicion and skepticism because they don't make additional profit from them. Here are some key reasons why dealerships prefer financing:
No Additional Profits from Cash Transactions
Dealers don't make extra money from cash transactions. They are limited to the OEM (Original Equipment Manufacturer) incentives they receive plus any volume incentives. However, when they help you finance the car, they can add a few percentage points to the loan amount, increasing their profit margin.
Dealership Referral Fees
Dealerships also benefit from referral fees when they direct people to financing institutions. They may hate it when a potential customer is pre-approved or makes a cash purchase. This is why you might not get the best deal if you go into the dealership with a pre-approved offer or with cash.
Tip: If you plan to pay in cash, make sure to negotiate the price aggressively or else they might refuse to sell to you. Remember, they are less inclined to make deals on cash transactions because it doesn’t increase their profit.
In conclusion, while dealerships may prefer financing because it can be more profitable for them, whether you choose to finance or pay in cash depends on your personal financial situation and preferences. Understanding these dynamics can help you make an informed decision and negotiate a better deal.