Navigating the car dealership can feel like entering a financial maze. As a savvy car buyer, you’re likely armed with research on makes, models, and prices. But have you ever wondered about the best way to pay? Specifically, do car dealers prefer when you pay cash or finance your new vehicle? Understanding this preference can be a crucial piece of knowledge in your negotiation toolkit.
For years, car buying was shrouded in mystery, with dealers holding most of the cards. However, the internet has leveled the playing field, empowering consumers with unprecedented access to information. You can easily research MSRP, features, and reviews before even stepping onto the dealership lot. This knowledge is power, but understanding dealer preferences, especially when it comes to payment methods like cash versus financing, is the next level of car buying expertise.
With numerous dealerships vying for your business, you have leverage. “Cross-shopping,” or pitting dealers against each other, is a common tactic to secure the best deal. Yet, even in this empowered era, knowing what to say and, more importantly, what not to say during price negotiations remains vital. One key area of dealer preference revolves around how you intend to pay. Are you planning to pay cash, or are you looking to finance through the dealership? The answer to “Do Car Dealers Prefer Cash Or Financing?” might surprise you and definitely impacts your negotiation strategy.
To uncover the nuances of dealer preferences and equip you with the knowledge to negotiate effectively, we’ve consulted industry experts, including insights from sources like AAA and experienced car dealership professionals. Let’s dive into the crucial aspects of payment and negotiation to ensure you drive away with the best possible deal.
Why Dealers Might Steer You Away From Cash: The Financing Factor
It might seem counterintuitive, but paying cash, which appears straightforward and appealing, isn’t always the dealer’s favorite scenario. The reason lies in a significant profit center for dealerships: financing. When you finance your car through the dealership, they often earn additional revenue beyond the sale price of the vehicle itself. This comes primarily from interest on the loan and sometimes from commissions on selling financial products like warranties or insurance.
As a Virginia car dealership sales representative, who wished to remain anonymous, explained, “Dealers will absolutely try to get you to negotiate monthly payments instead of purchase price, because we make more money if we do it that way.” This tactic shifts the focus from the total cost of the car to what seems like a manageable monthly expense. However, dealers can manipulate the loan term (the number of months you’ll be paying) and the interest rate to increase their profits over the life of the loan.
This dealer added, “We’ll say something like, ‘I can get you into this car for $300 a month,’ but we won’t say how many months that’s for.” By focusing on the monthly payment, the dealer can extend the loan term, perhaps from 36 months to 48 or even 60 months. While the monthly payment might sound appealing, you’ll end up paying significantly more in interest over the longer loan period. This is a prime example of why dealers sometimes prefer financing – it opens up opportunities for increased earnings through interest and related financial services.
The Downside of Mentioning Cash Too Early
Knowing that financing is a profit center, it becomes clearer why revealing your intention to pay cash upfront might not be the best strategy. According to the dealership representative, “When dealers are negotiating the purchase price, they anticipate making money on the back end, via financing. So if you tell them up front you’re paying cash, the dealer knows he has no opportunity to make money off you from financing. So, he might not be as moveable on purchase price if he already knows he isn’t going to make any money off you from financing.”
Essentially, when a dealer knows you’re paying cash, they lose a significant potential revenue stream. This might make them less inclined to offer deep discounts on the car’s price. They might hold firmer on the MSRP, knowing their profit will solely come from the vehicle sale itself. Therefore, strategically holding back your payment method – whether cash or pre-approved financing – can give you an advantage during the initial price negotiations.
The Strategic Play: Keep Your Payment Method to Yourself (Initially)
The key takeaway is timing. It’s not that paying cash is inherently bad, or that financing through a dealer is always a poor choice. The strategy lies in when you reveal your payment method. Just as experts advise against discussing monthly payments or trade-ins too early, payment method should also be a card you hold close to your chest during the initial negotiation phase.
John Nielson, Director of Auto Repair and Buying for AAA, reinforces this point, advising buyers to “just focus on negotiating the purchase price.” By keeping the conversation centered on the car’s price, you prevent the dealer from shifting the focus to monthly payments or factoring in financing profits prematurely. This allows you to negotiate the lowest possible price for the vehicle itself, separate from any financing considerations.
Once you’ve agreed on a price, then you can bring up your payment method. If you are pre-approved for a loan from your bank or credit union, or if you plan to pay cash, you can reveal this information at this stage. At this point, if the dealer has been negotiating under the assumption they would secure financing profits, they might be more willing to further reduce the purchase price to close the deal, even without the financing revenue.
Navigating Financing: Pre-Approval is Your Power Move
While dealers may prefer you to finance through them, it’s almost always in your best financial interest to explore financing options before you visit the dealership. Getting pre-approved for a car loan from a bank or credit union offers several advantages:
- Knowing Your Budget: Pre-approval gives you a clear understanding of how much you can borrow and at what interest rate. This helps you set a realistic budget and avoid overspending at the dealership.
- Negotiating Power: Walking into a dealership with pre-approved financing demonstrates you are a serious buyer with readily available funds. It also removes the dealer’s leverage in controlling the financing conversation.
- Comparison Shopping: Pre-approved loan terms provide a benchmark against which you can compare any financing offers from the dealership. You can then make an informed decision about which option is truly the best for you.
Bill, the dealership representative, confirms the benefit of pre-approval: “That way, if we know up front you’re pre approved to get your financing elsewhere, we’re not going to try and hit you with a high interest rate.” Dealers are less likely to push for inflated interest rates if they know you have alternative financing lined up.
Cash vs. Financing: The Buyer’s Advantage
So, circling back to the original question: do car dealers prefer cash or financing? While dealers often prefer financing due to the added profit potential, as a buyer, you hold the advantage by keeping your payment method flexible during initial negotiations.
Here’s a recap of the strategic approach:
- Focus on Purchase Price First: Negotiate the lowest possible price for the car, independent of financing or payment method.
- Delay Payment Method Disclosure: Don’t reveal whether you’re paying cash or financing upfront.
- Get Pre-Approved Financing: Secure loan pre-approval from a bank or credit union before visiting dealerships.
- Compare Dealer Financing (Later): After agreeing on a price, consider the dealer’s financing offer and compare it to your pre-approved loan. Sometimes, dealers might offer competitive rates or incentives to win your financing business – especially if they initially thought they wouldn’t get the financing profit from a cash buyer.
- Be Ready to Walk Away: Always be prepared to walk away if you don’t get a deal that meets your needs and budget. This is your ultimate negotiating power.
By understanding the dealer’s perspective on cash versus financing and employing these strategic steps, you can navigate the car buying process with greater confidence and potentially save a significant amount of money. Remember, knowledge is your strongest tool in the car buying arena.
