Buying a new car is often an exciting and stressful process. You want to buy something that will be a joy to own and drive, and you want to do it while saving as much money as you can. There are two main ways to purchase a car. You can finance your purchase over a set loan term and monthly payments, or you can buy the car upfront with cash funds. But which of these two options do car dealerships prefer?
Car dealerships often prefer that you purchase a vehicle through a financed loan. They may receive bonuses and other incentives in referring you to a financial institution that provides the credit. The dealership will receive their commission from the sale regardless, so it generally does not matter to them that you're prepared to pay in cash.
As with most topics related to negotiating with car dealerships, there is a lot of information out there on best practices. Read on to learn more about the differences between buying in cash or financing, and what that means for your car buying negotiations.
How Does The Dealer Benefit From Financing?
You may think that the car dealer will prefer a buyer who comes in ready to buy a car with cash. It would seem more like a regular transaction where you make your payment and then leave with your purchase. But in some cases, the car dealership will benefit financially if you get a loan instead.
If the dealer is associated with a financial institution, then there is an immediate benefit in the form of interest. When you purchase a car through financing, the loan you are granted has an interest rate. This rate is a percentage of the total cost of the loan that is added to the amount paid over the loan period. The rate is based on your credit score and other financial factors.
For example, the current average interest rate is between 4.61% and 5.11%. Using the rate of 4.61% on a $25,000 car purchase, the interest added to the loan amount is $1,152. This is money that the financing company is making only because they are the ones giving you a loan for their vehicle. They often then share some of this profit back to their associated dealer. But what if the dealer is not directly associated with a financing institution?
Even if the car dealership is not the same company offering the loan, loan providers still offer bonuses and incentives to dealerships that send business their way. If they were to sell you a car paid in cash, they would receive a base commission for the sale price. By financing, the dealership can receive additional benefits from the sale.
Is It Better For Me To Finance Or Pay Cash For a Car?
Car dealerships can often extend some of the financing benefits they receive onto you. Many loan providers offer rebates that decrease the total price of the car or other financial incentives. It is important to note, however, that these rebates might still be less than what you pay in interest and, therefore, not be better than buying the car in cash outright. When you finance a vehicle purchase, your monthly payments will be reported on to the credit bureaus - this can be a great tool to establish or build credit.
There are some benefits to paying in cash. The biggest of them is that you do not have to take out a loan and make payments for several years. You also don't need to worry about paying more in the form of interest. There is also the chance that, at some point during the loan term, you may have difficulty making the monthly payment. This could reflect poorly on your credit score and affect your future buying power. Though saving up the cash funds you need to buy a car outright may be difficult, it provides you with peace of mind.
You should also keep in mind that car sales employees may try to persuade you into financing because it would increase their commission. It is essential to do the math and figure out what works best for your financial situation.
Is Financing Through a Dealership a Bad Idea?
Some dealerships offer in-house financing on car purchases. Many of these are focused on individuals will little or no credit. Because of this, in-house financing is often the more costly option and reserved for when you need to purchase a vehicle and are having a hard time financing through a bank or credit union. The cons of financing through an individual dealership include higher down payments, higher interest rates, and the inconvenience of making payments at the dealership.
It is often better to get a pre-approval from a bank or through a dealer associated financial institution and take this information into the car buying process. This guarantees your loan amount and your interest rate beforehand so you can stay within budget more efficiently. The interest rates are generally more stable, and the down payments are more manageable and fair based on your credit. Sometimes, however, in-house financing is the only way to purchase a car based on your financial situation and is your best option.
Can You Use a Personal Check To Buy a Car?
Yes, dealerships will usually accept personal checks for both down payments or the full purchase price. Car dealerships also often reject personal checks if they are from someone who is not of the party purchasing the car. You can also pay in a combination of a personal check and actual cash payments.
Can You Use a Cashier's Check To Buy a Car?
The bank guarantees a cashier's check because the funds have already been cleared. This may seem more powerful than a personal check when it comes to car buying negotiations, but most dealers do not treat it differently. If you are paying in full for the car and the amount of the purchase is high, the dealer may ask you for a cashier's check.
Can You Use a Credit Card To Buy a Car?
Credit card fraud is universal, and because of that, dealers are often much more careful with credit card purchases. A dealership may take down-payments on a credit card, but they will not put the entire purchase price of a car on a credit card. Car buyers could then reach out to their credit card companies and dispute the charges or try to commit fraud, and dealerships do not want to take these risks.
It is a good rule of thumb to call your preferred car dealerships ahead of your trip to find out what forms of payment they accept.
Decide What's Best For Your Situation.
Car buying is a complex process with many choices to make and problems to avoid. It is still an exciting event though to buy a new car. There are benefits to both financing and cash purchases. Take note of your financial situation and use some of the information from this post to decide what's best for you.