Who Gets Best Mileage in Car Finance Deals?
It’s fire-sale time in the new-car business. Manufacturers are practically giving away some 1985 models, advertising loans at 8.8%, 7.7%, even 7.5% interest, when banks and credit unions charge 12% to 13%. This seems a good deal, although people who’ve dealt with car dealers suspect any savings might just be added on elsewhere; even the manufacturers advertise that “Dealer contribution may affect final price.”
Explanation of that little codicil is hard to get and very complicated and sometimes not really interesting, but it offers another glimpse of the industry’s gnarly sales structure.
Moreover, 60% of car buyers finance their cars, 42% of them through manufacturers, according to J. D. Power & Associates, an automotive market-research firm, and these are real and indisputably good rates. They’re also costly for manufacturers: The biggest can borrow money through their huge financing arms at favorable rates, but rarely as favorable as 7.5%.
Others may have to “buy down” even higher rates, turning to a bank to lend consumers the money and paying the bank the difference between the promotional rate and the bank’s usual 13% or so for consumers. In either case, the difference is taken from the manufacturer’s marketing budget, like all promotions and advertising.
The Dealer’s Edge
As the ads imply, such programs may cost dealers something as well--not usually out-of-pocket money, but loss of what they would have earned on conventional loans. Normally, auto dealers offer some financing alternatives to what consumers could get themselves at banks or credit unions. The dealer’s source may be a bank or manufacturer’s subsidiary, but in either case, “we put it out at a given figure,” says John Gilker, Ford Motor Credit Co.’s marketing manager, “and the dealer finances it at maybe 1% higher.” The difference is the dealer’s commission.
Thus, someone buying a $12,000 car with $2,000 down might borrow $10,000 at 14%. Over four years, he’d pay $273.26 monthly, or $13,116.48 in all--$3,116.48 in interest. If the dealer “sells the loan” to his lender at 12.5%, he gets to keep the difference--$358.08.
(It’s a little more complicated: The dealer doesn’t actually have to carry that difference, nor does he get all four years’ interest. He gets his share up front, but only about 70% because, says Spencer Fullerton, vice president of Security Pacific Credit Corp., “most loans don’t go to maturity.”)
When rates are temporarily 8.8% or 7.7%, it’s not really a loss for dealers, but it certainly means less commission. With such promotional financing, what the manufacturer offers, the consumer gets, with no extra points for the dealer. But dealers don’t work for free, so manufacturers often give them part of what they’d have normally earned.
“We go back to what they earned the last month in which there was no program,” says General Motors Acceptance Corp. spokesman John Andrews, “or to their average income on every deal for the prior few months, and give him 30%.” Or, as it’s more often put, dealers “forgo” 70% of their usual commissions to participate.
If current models linger past the introduction of next year’s models, arrangements become even more complicated, and auto manufacturers--for reasons interesting only to the industry--do even a little more giving and taking. A dealer who thereafter sells an old model may get a “carry-over” rebate of up to 5% of wholesale to help make up for the low price he probably has to charge. At the same time, if the sale involves a promotional loan, the dealer’s carry-over rebate may be cut in half as his “contribution” to the loan program.
‘Dealer Contributions’
These are the “dealer contributions” that may affect final car prices--monies “forgone” here and there that dealers may want to “pass on” to consumers. Similarly, dealers may take the stance, says Andrews, that “they’re giving you such a great rate, they’re not going to let you bargain.”
This is why the consumer is often advised to separate price negotiations and loan discussion. He should also separate his own considerations, says Lou Friedman, owner of Hacienda Chrysler-Plymouth in the City of Industry: “If you see what seems a good deal on its other merits, fine-- then take advantage of this special financing.”
Even more subtle liabilities may lurk in any advantage. The industry worries that its cut-rate financing may just steal customers from next year’s sales. Similarly, consumers must realize that buying so late in a model year means their new car is already depreciated a year. “Blue Book” value, for example, of a two-door Chrysler LeBaron convertible listed at $13,036 last October ranges now from $9,550 wholesale to $11,550 retail.
“The prime question,” says Friedman, “is how long they’ll keep the car. Cars depreciate fastest in the first year or two, so if they don’t keep it at least five or six years, much of their saving could be lost at trade-in.”
