Why You Should Finance A Car When You Purchase From A Dealership

Something has struck me as very odd over the years. I have mostly lived my life with great disdain for car dealers. As someone who was well taught how to shop for used cars from private parties, I never really considered going to the dealership for an overpriced car as an option.

My husband, on the other hand, loves car dealers. Frankly he doesn’t know any better. I remember him dragging me along to some dealers who treated us like dirt because we wanted to pay cash for a $5,000 car. I wasn’t exactly being lured into their deal at the time, and ended up sticking with a private party purchase.

My wrath for car dealers probably compounded when my husband insisting on trying to sell our vehicle to a dealership when it was time to retire it and get a more family friendly automobile. While I was busy selling the car to a private party for $3,000, my husband’s best offer was $500 from a dealership.

When it came to replace his car, he was still intent on his car dealership ways. We had doors slammed in our face at dealership after dealership because we wanted to pay with cash for a less expensive, used car. This lasted until we finally came across a great “1 at this price” deal in the paper and a “new kid on the block” salesman who didn’t try to push us to buy anything else. They didn’t even care that we intended to pay cash. Five years later this is by far the best car we have ever owned. It was with this knowledge that I finally conceded that maybe dealers weren’t all bad. All the same, I would never even bother car shopping at the dealerships again without coming up with a good “1 at this price deal.” I know that otherwise I will come out ahead going private party every other time.

When it came time to upgrade to a minivan for our growing family we decided to do something we had never done: finance a car. I knew nothing about car financing since we had never done it. We had our eye on a “1 at this price” car we had researched well and decided to jump on it. When we went into the dealership I was anxious as to whether things would go smoothly as the last time. However, we were in luck. The second we said we were planning to finance a portion of the car, they rolled out the red carpet for us.

As I said, I was rather naïve about car financing so I had no idea interest rates would be so high or that they would place so many limits on the loan. We had wanted to finance $5,000 for three years simply as to not drain our cash accounts. They said we could put no more than 50% down, we could take no less than a 5-year loan, and my near-perfect credit score had earned me a rate well above 8% since it was a used car.

We were a little taken aback, but they had rolled out the red carpet. We went through with it. Though they promised me I could pay off the car the next day with no penalty, I made sure to read all the fine print. I knew we could secure a better loan elsewhere. In the meantime, since we took their financing they offered to up the trade-in value of my worthless car from $100 to $500. I doubted I could get near that much selling it ourselves and I was rather impressed. As we left the dealership in our new car I told my husband that I think my hatred of car dealerships all these years comes down to the way they treat cash customers. Obviously they do not make much money off of cash customers, but they sure like you when you finance.

As for us, we paid the loan off the following month with no penalty and I received the original $5k loan I had intended at a rate of 3% elsewhere. Then and there we decided we would never buy a car from a dealership again without financing. The experience we had was the difference between night and day. We had had dealers in the past refuse to sell us a car for cash, but try to push us to take on a loan and buy more than we could afford. I guess it all came into focus as to why on this one car buying experience. I am not sure if we ever would have learned this lesson if we had not made a decision on that fateful day to finance a little on a car rather than drain most of our cash.

Perhaps some would see this conclusion as hasty, but I recently came across some interesting statistics on car dealerships. In 1980 the average car dealer earned a 15% profit on the sales price of a car. These days car dealers are lucky to keep 2.5% in profit on the sales price of a new car. On a $30,000 car a dealership will make on average $650. Suddenly it becomes crystal clear to me why when we went to go haggle over a car and pay cash the car dealership would rather run us off the lot than sell to us. I used to think it was because they were intent on getting us to spend more than we could really afford on a fancier car. The fact is if we weren’t going to finance the car, they weren’t going to make any money.

The car dealerships make money off extended warranties, bells and whistles and upgrades, but most notably, they make money on the financing. You can get your financing somewhere else, but you will lose most of your bargaining power.

I had a discussion about this with my father. He said he was thinking of buying a car and told me he was pondering telling the dealership he would finance it as he negotiated a price, and then change his mind at the last minute. I laughed out loud at the idea. From my experience they would say, “fine, no deal.” I told him that I didn’t really imagine they would fall for that. They aren’t going to sell the car at a loss if they can’t get financing. Especially with a long line of eager buyers wanting to take 6-year loans for cars they really can’t afford.

I truly think that if you want the best deal on a car from a dealer, you have to intend to buy a car with financing and tell them up front. You will be able to negotiate a better price on the car this way. Take their financing, whatever it is, and haggle haggle haggle on the price of the car. The one big caveat here is you have to read the fine print carefully. The car dealership will tell you anything to make the sale.

In my case they told me there was no penalty for paying off the car the very next day. I told them up front that I intended to and they clearly did not care. However when I read the fine print I saw there would be some token $50 charge, for paying off within the first few months or so. Since they were giving me $400 extra on the trade-in for taking their financing I figured I would be well ahead anyway. Interestingly when I did pay off the loan right away they didn’t assess the charge. It got overlooked. But I just throw this out because you have to read the fine print and understand it to make sure you don’t get sucked into a prepayment penalty. That is a big caveat with this strategy. If you have to secure financing elsewhere to pay for the car, so be it. The key here is to start with the dealer financing and pay it off fast with a better loan – or with your cash.

Overall that is my advice on how to get the best deal on a car from a dealership. As an experiment, go walk into a few dealers and tell them alternately you want to pay cash or finance a certain car. You will see a difference in how you are treated and how negotiations go down.

In my case taking a loan for 1 month, and promptly paying it off, bumped up my credit score significantly. Before this experience I would have never considered debt in any way shape or form outside of my mortgage. I now realize that being extreme in a position is not always to my advantage, and have since been more open to how I can utilize debt to save money or make more money. Where once I said I would never finance a car purchase, I now say I will always finance all my car purchases. Even if just for a few days.

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13 Responses to Why You Should Finance A Car When You Purchase From A Dealership

  1. dan says:

    lol. I saw the title of this article and was ready to write a scathing reply how this was totally absurd, but you caught me off guard. I wasn’t expecting that.

  2. kenny says:

    Also go when it’s a rainy or super cold day so there is nobody else in the lot. The worse the weather, the better. They are much more willing to deal when they know there aren’t going to be any other customers coming that day.

  3. Jean says:

    lol. Boy this article sure brought back a memory. I was always one who bought a car for cash from a private source. My opinion is a $500 car that will run for 2 years is a better deal than $320 a month. Basic math is $500 or $7680. When we finally financed a new vehicle the salesman was visibly upset about the bells and whistles we were turning down. To us, they were a waste of money on stuff we will not use.

  4. AFinanceBlog says:

    Car dealership salesmen are willing to negotiate a lower price for the car if you pay by financing (especially on slow days) but if you plan to pay the car with cash, a negotiation deal is out of the question.

  5. Erin says:

    When my husband bought his car, we never told him how we were planning to pay until it came time to actually sit down. By then he’d already spent an hour test-driving it, an hour choosing the color and interior (they didn’t have the one he wanted in a stick-shift, so he had to choose another), and an hour negotiating the deal. He also tried and tried to convince us to finance it and we let him go run the numbers, then said no. By then, there was no way he was going to pull out of the deal after the time he’d invested.

  6. Amber Yount says:

    8%??? My god! My husband had HORRIBLE credit and was still able to get a 6% loan on his first vehicle purchase. Also, I heard car debt doesn’t help your score until you pay on it for 12 months? Perhaps it bumped up your score, because you had $5000 less on it.

  7. Teri says:

    Erin – your strategy may work. But I think it is pretty iffy. I have sat in negotiations all day and been turned down when we refused to pay anything other than cash. I am sure by the same token sometimes it works. But it goes both ways. A lot of the time the dealer figures you are the one who has invested that time and would never walk away. IT probably depends on the car, the place, the day!

    Amber – was that a new car? The thing is I did not realized used cars have in general such horrible rates compared to new cars. But I shopped around after the fact and at the time 8% was low as it got for used cars.

    Rates are much lower right now…

    I am not sure on the credit score but it was my experience. I am certainly no FICO expert and there really are a myriad of factors – very case by case. I hesitate to get too much into that, but I found it very interesting since I hadn’t really thought my score would improve as a result, but being so anti-debt overall it did help to take on a consumer loan and pay it off. If I think about it further the affects were rather temporary. But what do I know, I do everything “wrong” when it comes to FICO but have been in the 700s/800s ever since we have had our mortgage. The only thing I do “right” is have a mortgage and pay it on time. LOL. I don’t pay attention to most of the rest of the rules…

  8. Engineer says:

    I didn’t have much trouble buying my last two vehicles from a dealer paying cash. I refused to discuss financing during the negotiation, saying I wanted to establish the price, but gave the impression I might consider their financing. In one case, when I went the close, the paperwork person said that it would be “easier” to finance the vehicle. Huh? Filling out a finance application and writing and mailing a series of checks would be easier than writing just one check? Give me a break!!!!

  9. Philip says:

    Based on an isolated experience, you now not only have a rule about buying cars, but you write an article about it knowing you’ll influence people who don’t know better? That’s crazy.

    My last car purchase was very smooth. I test drove the car and sat down to negotiate. I politely told the salesman “No” when he countered my offer with his. He took three trips to his ‘manager’s office’, and even told me they don’t have that much room on cars because they’re a volume dealer. I wasn’t rude, and he never mentioned financing until we agreed on a price. I told him I had financing in place through my own source, and that was it.

    Not every dealer is rude to their customers (though some are), and not every customer is uneducated and thinks their experience at one dealer means they have to repeat that process for their entire life.

    If you can’t manage to negotiate while paying cash (or having your own financing), you need to either be more assertive or find a more buyer friendly dealer.

  10. anonymous says:

    I’ve never had any problems paying for a car in cash. I call dealers, find out what they have in stock and make a cash offer over the phone.

    More often than not, the salesmen will jump at the opportunity to sell a car with zero effort, and without having to worry that the deal will fall through because a customer won’t qualify for financing.

    This is for new cars (I enjoy new car warranties, and I can afford them) and I never trade-in a car. I educate myself prior to the purchase and make a fair offer that gives the dealer a couple hundred bucks profit for their time.

  11. Eric says:

    I tried to buy an “AD” car last Saturday. I applied through Toyota finacing and did not like the numbers because I could save over 1% with my Credit Union. When I ask to use their internal system to apply with my credit union they said it was STORE POLICY that ad cars had to be purchased by dealer financing. He also declined to give me the time window to get my own financing. We walked away.

    Why bother selling cars at a loss if they will stop you from buying it!

    Wasted hours of our Saturday.

  12. Duane Penaflor says:

    This is a very interesting story. It’s very informative and it shows some ins and outs of automobile purchasing. Thanks to the author.

  13. kerry says:

    @ Kenny

    The bad weather thing is great! Especially if it’s bad weather a couple of days before month (or better – year) end!

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