You might be thinking to yourself that taking out a loan is never the most financially sound option. And in many cases, you’d be right. Financing a vehicle isn’t much different than any other loan at a glance. You’re breaking up a large purchase over a period of months, at an agreed-upon interest rate. Therefore, if you can just pay for your vehicle in cash, you’d think you’d save loads of money by bypassing the interest. Any other option couldn’t possibly make more sense, right?
Well, believe it or not, the automotive industry can be a bit quirkier than you might think. And in some cases, not only is financing a vehicle a perfectly economical option, you could actually save more money than if you bought your vehicle with cash. Let’s dive in and explain how this happens
Here’s the secret many customers don’t know: dealerships don’t necessarily make a ton of money off of lump sum car purchases. A car sold for $15,000 could wind up earning the dealership less than $500 in profit, which is about 3% of the car’s total value. Sure, a good salesperson can work with this margin to give you a slight discount off the overall price. But generally speaking, there’s not a lot of wiggle room here in terms of negotiation. In other words, if you try to buy a vehicle with cash, you’ll likely pay pretty close to the sticker price in the end.
Meanwhile, dealerships have a lot more control over financing and payment plans. Any interest accrued on a car payment is virtually all profit for the dealership, which means it’s easier to be cut or reduced to a low amount. This is why you always hear car commercials advertising “0% APR financing” instead of flat discounts on new cars. As it is, the vast majority of customers rely on monthly payment plans to pay for their vehicles anyway. By discounting interest rates rather than the vehicles themselves, dealerships are able to attract the most customers while still making money for themselves as well.
This brings us to how you can really capitalize on financing to save money. Car manufacturers also know that dealerships prefer financing new vehicles. Therefore, you’ll often see substantial manufacturer discounts on vehicles if an agreement to finance is arranged. We’re talking hundreds, maybe even thousands of dollars here. If you can stack a deal from the manufacturer with a low financing rate from the dealership, you can easily pay less on a vehicle than if you had paid it off in cash.
This might sound too good to be true, but remember, all of these discounts attract a wide range of customers in the long run. Both the vehicle manufacturer and the dealership will wind up making more money by drawing up a large variety of various financing agreements. You’re just taking advantage of a great situation, and your salesperson is hoping you’ll come back to them for all of your future car purchases. It’s a win-win for everyone involved, and your salesperson will be just as happy to see you as anyone else who walks into the dealership.
So yes, even it sounds like a paradox, financing can save you more money than paying for your vehicle upfront. And even if you pay more than the value of the car’s sticker price, you can still get a competitive deal with the ease of paying off your vehicle incrementally. As long as you can find a quality dealership willing to work with you to give you the best possible deal, you might be surprised to see what magic happens when that final price agreement is made.