calendar September 29 2016

Car Finance
How good is the smell of a new car?! Or the excitement of driving your new car home for the first time?

I helped a friend buy a new car a few months ago and they are still excited about owning it!

One thing I noticed while car shopping was that some dealers were offering ridiculously low % interest rates on car finance – in the relm of 0% or 1% finance!! What does this mean? How can they offer rates this low?

These low rates are enticing but are they too good to be true?

If it sounds too good to be true, it usually is! So it’s important to understand what is happening behind the scenes with these low rate finance packages.

Have you noticed that one of the first questions a car salesman asks is ‘are you looking to take up finance on the car?’ (or something like this)? Have you noticed that a car dealer is less likely to discount the price of a car being sold under zero or low interest finance? This is because a dealer needs to make a larger margin on a car when signing up these car finance deals.

What is this type of finance called?

These finance offers are known as subvention. Subvention allows the dealer to offer a lower interest rate through their financier to entice a customer to complete the entire purchase process through them. The dealer needs to make a larger margin on the car to be able to pay the subvented amount to the lender and still maintain their normal margin. The interest rate for the finance package is being subsidised by the dealer or manufacturer out of the profit made on the sale of the car.

What does it mean for the car buyer?

Taking up a 0% or low % interest rate through a car dealership usually means:

  • that you are paying more for the vehicle in the first place than you would have had you just negotiated the price of the car without finance
  • that you may have also been up-sold into vehicle extras (sometimes at an inflated price) and insurance
  • that the loan structure (length, terms etc) might not be ideal for your situation
  • that you will be paying higher taxes (the higher the purchase price the more you pay for GST, stamp duty, luxury car tax etc)
  • you may have also been charged a high application fee

So it means that not only have you paid a higher price, you could also find that the terms and conditions of the loan might not be right for you.

Key Takeaway

You are more likely to be able to negotiate a larger discount on the asking price of a car if the purchase was not subject to subvention finance. So we advise that the purchase of a vehicle and the financing of a vehicle should be kept as two totally separate transactions!

Dealer finance is not your only option when looking for a new car. If you are shopping for a car, do your negotiating on the sale price of the vehicle and achieve the best price you can, then organise the finance separately. We are experienced in Vehicle Finance, contact us for a chat.

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