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Cash, Credit, or Finance – What will get you the best deal?

buying a car in cashMake no mistake, dealers want you to finance or lease a car from them.  They simply won’t make as much profit from cash-only buyers.

But you can still play the system and get a good deal whether you finance or pay cash.  And in one case, you can even use a credit card advantageously.  Let’s take a look.

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Can you get a better deal on a car if you pay in cash?

Despite what you may have heard, the answer is no. Dealers make a profit off car loans, called dealer reserve, so they’d rather you finance.

What is dealer reserve? Dealer reserve is the commission given to the dealer (by the financing company) for generating a car loan.

The dealer either gets a one time payment or receives a portion of the interest collected by the lender each month.  Either way, the dealer will profit off a loan; often times more than the profit from the sale price of the car.

Auto dealerships make their money 3 ways:

  1. Profit from the car you buy (plus dealer add-ons)
  2. Profit from reselling your trade-in
  3. Profit from financing deals (dealer reserve)

If you are a cash buyer and take away one of their profit centers, do you think that will help your negotiating position?  Nope, it actually reduces your leverage!

So should you tell the dealer you’re paying in cash?

Don’t tell the dealer this up front or you will weaken your negotiating position. Instead, let the dealer know you would consider financing but you want to settle on the price of the car first.

What if a cash incentive is dependent on dealer financing?

Sometimes cash incentives require you to get a loan through the dealership to qualify.  If this is the case but you still want to pay cash, consider getting a loan and pay it off as soon as you get home (assuming no pre-payment penalties).

Can I use a credit card to buy a car?

You are very unlikely to find a car dealer that will allow you to put the whole cost of a car on a credit card.  Merchants pay 2-4% in fees to the credit card companies for accepting payments.  For most retailers, this is a cost of doing business, but for car dealers it could completely wipe out their profit margin.

However….

 …many dealers will let you put your down payment on a credit card.  As long as you have the money to pay it off immediately, I always do this to get the points!

Financing will get you the best deal

Because dealers profit off car loans, they may be willing to give you a better deal on the price of the car if they think you are financing through them.  But that doesn’t mean you have to accept whatever loan terms they offer.  Financing is negotiable!

How to negotiate financing

If you will be financing, compare the dealer’s financing to online financing deals or your local bank or credit union.  Bring a copy of a loan offer with you to the dealership.  Ask the Finance Office if they can beat or match your loan terms and they will often comply.

Final Thoughts

There are many other factors to consider when deciding between financing and paying cash.   Do you have enough cash available? Do you have good credit? Can you make more money investing than you would pay in finance charges? Consider these questions first, but keep in mind that financing is an option that may help you get a lower purchase price.

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