Tag Archives: car financing
Make 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.
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:
- Profit from the car you buy (plus dealer add-ons)
- Profit from reselling your trade-in
- 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.
…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!
How should you pay to get the best deal?
Financing will get you the best deal when buying a car. 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.
You can get loan offers from any of the online lenders below and compare rates.
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.
Many people, when they have credit cards that offer rewards, want to put everything on their cards. This way, they reason, they can rack up the reward points faster. After all, $200 to $500 every month on your credit card starts to add up significantly over time. However, just because you can put your car payment on a credit card doesn’t mean you should.
First Things First: Will The Finance Company Even Let You?
Before you get excited about putting your car payment on a credit card, you will need to make sure the car finance company will let you. Some finance companies don’t have a problem with you using your credit card to make payments; as long as they get their money, they are happy.
Other companies, though, are not so sanguine. Some lenders view it as too much of a risk. What if you reach your credit limit and the attempt to collect the money is denied? Call your auto lender and find out what the policy is, and then find out the process. You may need to pay an extra fee, or jump through some hoops in order to pay your car loan with a credit card. Take these items into consideration as you make your final decision.
Using Your Credit Card to Pay On Your Car Loan
If you are allowed to use a credit card to make your car payment, you need to make sure that the transition happens smoothly. You may need to cancel an automatic debit from your checking account, and set up the new payment plan. Be sure that you have at least two weeks before your next payment is due to make these arrangements. To be safe, you can start the process as soon as your latest payment clears.
When you do make car payment with your credit card, it is important to avoid carrying a balance. The rewards you get for using your card for payments will be overset by high interest charges. Plus, if you carry a balance, you are getting hit with interest twice. You pay interest on your car loan, and you will pay a second (higher) interest fee when you carry the payment from month to month on your credit card.
You will also have to incorporate the fact that you are adding a car payment to your credit card. If you use your credit card for other spending in order to get the rewards, make sure you have plenty of room on your card for the car payment. If you don’t you might find a mess as the transaction is denied – and be charged a fee. Or, you could end up with a hefty over the limit fee from the credit card issuer if the transaction does go through.
In the end, you might find that making your car payment with a credit card is more trouble than it’s worth. However, if you are disciplined, and have a solid plan, it can actually be a way to boost your rewards.