The old saying that “cash is king” applies to almost all purchases, except if you want to buy a car from a dealership. A recent report from the Wall Street Journal revealed how dealers in this seller’s market are pressuring buyers to get loans because it’s another way for the dealers to make a buck.
Car buyers are finding that getting any kind of “deal” in this market is harder than ever. If you are patient and flexible you can score a “competitive deal.” However, when it comes down to actually paying for your new ride, dealers don’t really want you to show up with a check. They would much rather you get a loan.
From the WSJ -
“Car buyers say they are hearing from dealers that cash and financing from outside the dealership aren’t welcome. Dealers tried to get some of them to finance by quoting higher prices for cash sales or refusing to sell if they couldn’t arrange the financing, according to interviews with buyers.”
Dealers have always preferred you finance versus pay cash, but they have amped up the pressure to take loans and are, in some cases, even refusing a sale if you intend to pay cash. And yes, this is perfectly legal for a dealer to refuse your money. Also, if you are getting a loan from your local bank, credit union or online lender of your choice, you are still considered a “cash buyer.”
As for why dealers don’t really prefer cash buyers the answer is obvious, they make money on the loan. Dealerships can do this by getting a kickback from the lender for signing you up for a loan, but dealers can also “mark up” the rate that they give to you and pocket the difference. For example, let’s say the bank gets you approved for a five percent APR, the dealer can say “Well, the best we can do is seven percent.” If you accept that, they can pocket the two percent difference.
So, what should you do to avoid getting screwed on the financing?
It is still wise to get pre-approvals from other lenders before you apply for financing at the dealership. Most decent dealers will want to compete with the rate you already have and either match or beat the APR. These pre-approvals can be critical for folks with less-than-perfect credit as interest rates can vary dramatically if you aren’t what the lenders consider a Tier 1 borrower (above a 700 FICO score).
If you do end up in a situation where a lower sale price is contingent upon financing with the dealer, know that in most states there are laws against pre-payment penalties. So you could take the better price, finance with the dealer, then immediately pay the loan off using your own funds. The other option is to re-finance the loan from the dealer with a different lender at a lower rate. Auto-loan refinancing is generally easy and usually has little or no cost to do so.
Finally, you should always get an itemized out-the-door price in writing before closing a deal, and ideally before you even step foot into the showroom. You want a complete breakdown of the agreed-upon sale price, taxes, and any additional fees. That way, if you are paying cash you know exactly how much much should be on the check.
Tom McParland is a contributing writer for Jalopnik and runs AutomatchConsulting.com. He takes the hassle out of buying or leasing a car. Got a car buying question? Send it to Tom@AutomatchConsulting.com