Paying Cash Or Financing — Which Will Get You A Better Deal On A Car?

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.

If I sauntered up to you and said, “I'd like to give 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.