Car Finance – why the interest rate may not actually be as great as it seems
So many advertisements tell you that you can get car finance at the dealer for 2% or even less. It sounds like such a great rate. You start comparing rates from different types of loans, and you come to the conclusion that it’s pretty good, especially for a new car. But what you don’t realise is that there are hidden costs associated with that super low rate. This fantastic rate might not be as good as it seems.
There’s a lot of emotional investment when purchasing a car and the sales people play on this emotion to sell you the best car for your needs. They appeal to your lifestyle – you’re young and successful so you need a luxury car, or you’re a family that needs 7 seats so that you can take the kids and their friends to their sporting events.
The car business is big business. In December 2016 alone, almost 100 000 cars were sold in Australia*. But how many people pay cash for their new car? According to David McCarthy from Mercedes Benz:
“The overwhelming majority of vehicles are financed, whether that’s an operating lease, whether that’s the old hire purchase scheme or something with a guaranteed future value, that’s probably close to 80 per cent,”
With so many using finance to purchase a new car, why is a 1% or lower interest rate a bad thing? Let’s look lift the lid and take a closer look.
First, remember – there’s no such thing as something for nothing. No matter what the rate is you’re offered, you know the dealer is not losing money on the deal. They’re making their money somewhere. When you get finance through the dealer, the rate is usually subsidised by them, or the manufacturer, out of the profit on the vehicle. How? The dealer pays an amount to the Lender to subsidise the low rate. So, what does that mean for you? It means it’s unlikely you can negotiate much on the price of the car.
To see this at work, try visiting a dealership and let them know you’ll be paying cash for the car. When you negotiate with them you can often get the price down by up to 10%. However, if you try the same exercise for the same car, when you need finance you’ll find there’s less wiggle room in the negotiation process. The dealer is not so forthcoming on a discount. Why? Because he has a higher cost margin – the wholesale price plus a finance subsidy.
So what are my tips?
- If you’re not paying cash for the car, arrange your finance independently.
- Don’t get caught up in the emotion of the deal. It’s a vehicle, not a family member.
- It’s always a good idea to walk away
Take some time to consider the deal, so that you don’t get caught up in the emotion. If you miss this one, unless you’re buying a collectable, there’ll always be another car.
- If you’re buying a new car.
Look to buy close to the end of the month and consider buying one that’s available now instead of ordering one. The longer the dealer has a car in stock, the more it is costing him, so he’s likely to be negotiable on the price.
Consider using a car locating service. These services locate the car, negotiate a great price (more often than not far cheaper than you can get) and can, if you need it, also arrange competitive finance. iFind Finance has a Car Buying Buddy partner that offer a free service. All you need to do is tell our expert consultants what you’re looking for. With their years of experience in the car industry and vehicle sales they know all the tricks that dealers use and can beat them at their own game. They’ll find the car for you and manage the whole buying process – hassle free!
- DON’T APPLY FOR FINANCE ONLINE!
It may seem simpler and more convenient, but I’ve heard too many horror stories about enormous interest rates. You begin the process thinking you’re getting a good rate but by time you get to the end and click the submit button, you may find that your personal financial circumstances have pumped up the rate substantially.
- Remember your purchase will incur GST, stamp duty and registration fees.
Be sure that these have been included in the final price you’ve negotiated.
- Don’t forget, you’ll need to allow for the cost of insurance.
Do your homework and make sure that the insurance is not going to cost you more than you can afford. And definitely don’t let the Dealer arrange your insurance – he’s probably getting a commission for that too!
- AND, remember that your car will have ongoing costs
In 12 months’ time, registration and insurance will come around again, so budget for those costs right from the start.
For most of us, a car is a necessity. Don’t let this need force you into finance which can end up costing you more than you realise, and more than you can handle. Speak with someone who can help you with your budgeting and sensible finance options.
If you’re thinking about upgrading your car and would like to speak to someone about finance and insurance options, we’re happy to have a chat.
Call on (03) 9755 8831 or email firstname.lastname@example.org
Glenyce Barton | Finance and Budget Mentor | Article ©2017 iFind Finance
*Source: Australian Bureau of Statistics – New Motor Vehicle Sales, December 2016.