Paying Cash or Financing—Which Will Get You A Better Deal On A Car?
Posted: Thursday, March 30, 2006
by Amy Latah
Solvenza LTD
It's funny the false sense of security that green
money holds. It's not resistant to water, fire, or
wind. It rips easily and is easy to lose in a crowd. If
you don't keep both eyes on it, it will disappear. If
you stack it up very far it will tip over and land in a
messy pile at your feet. It smells funny.
Yet those with lots of it feel they hold the magic
wand.
you this crispy new $50 dollar bill for the sweater
you're wearing,¡± you'd look at me funny. You'd
definitely think about it, because you know you just
bought it last week for $35 and can go right back to
that same store tomorrow and get another one if
you sold me yours.
But, if my brother walked up next to me and said,
¡°I'd like to give you $50 right now, and then $1 per
day for the next 7 days,¡± you'd look at him, you'd
look at me¡.and you'd hand him your sweater.
The same holds true with people who think that
paying cash for a car will get them a better price
from the auto dealership.
You walk in with $10,000 cash and make an offer to
hand over your sack of money for that car over
there, which lists for $13,595. Sounds like a good
deal to you. The dealership gets paid their full
amount right now, today, and that's that.
Meanwhile, another person walks in with an offer to
pay the exact same amount for the exact same car.
And they sell him the car, not you. How the heck did
that happen?
Let's compare the two of you. That guy had perfect
credit. So do you. That guy had a $10,000 offer, so
did you. That guy needed financing. You didn't.
Does that really matter? You bet your daisies it
does.
Here's how:
That guy wanted to pay $10,000 for the car. That is
the price they listed on the contract. His credit
qualified him for the best interest rate available. For
example purposes, let's say 6.5%. But, this guy
didn't know what rates he qualified for, so he
agreed to pay 8.9%. He also didn't know the exact
math on what his payments would work out to be,
but he had budgeted about $250 for his car
payment. They shook hands at $246.
Back in the finance office, they were able to give him
an extended warranty, GAP and Life & Disability
Insurances which only raised his payments $3. He
left, ecstatic with his
new car warranty and with payments of
$249 a month.
So, why did this guy get the car for $10,000 and you
didn't? Let's do the math:
¡¤ Financing $10,000 at 6.5% for 60 months is a
payment of $195.66.
¡¤ Financing $10,000 at 8.9% for 60 months is a
payment of $207.10, a difference of $11.44 per
month.
¡¤ Over the 60 month contract, that is $686.40
that goes right into the dealership's pocket.
But he didn't have payments of $207.10, he left
happily at $249. Well, that extra $41.90 times 60
months equates to $2514 in products and profit that
the finance manager was able to sell him when he
signed his paperwork. That is why he was able to
get so many ¡°extras¡± for such a little change in
payment.
Let's just say, for math purposes, that the products
that the F&I guy sold him had a hard cost of $1500.
That left $1014 in profit, PLUS the $686.40 of profit
from the extra interest rate they charged him. On a
$10,000 car, on financing ALONE, the dealership
made $1700 profit. And we didn't even go into how
much they owned that car for to begin with.
So, the next time you think that paying cash speaks
louder than payments, think again. The dealership
is watching out for their bottom line, and they know
all the tricks to getting the most out of every
customer. There's no magic wand that can protect
you from that, no matter how hard you wave it in
front of them. Without knowledge and a little due
diligence, you can assure yourself the same destiny
as that fragile pile of green paper lying there in front
of you.
Click here to learn the top 3 secrets from Amy that you must know before new car warranty.
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