All good things must come to an end. Today we complete our Used Car Buyer’s Series with our 11th and final entry.
In case you’ve been out of the loop, here is what we’ve discussed, debated, and shared on social media so far:
- #1 Inspections & Reconditioning
- #2 Get a CarProof Report
- #3 Consider the Remaining Warranty
- #4 How to Do a Test Drive
- #5 The Art of the Walk-Around Inspection
- #6 How Much to Budget for Monthly Payments
- #7 Make a List of Preferred Cars
- #8 The Truth About Admin Fees
- #9 How to Rethink Resale Value
- #10 The Difference between Car Enthusiasts and Everyone Else
Advice You Can Take to the Bank…Or Should You?
Slowly disappearing are the days when a car buyer arrives at a dealership with a clipping of the vehicle they want in one hand and a big sac of cash with a dollar sign on it in the other.
These days, most people rely on financing for at least a portion of their payment.
So where do you get that missing money? Once you rule out the mafia and the whimsical riverboat gambler, two options typically remain to loan you the credit you need for purchase:
- Finance through the bank
- Finance through the dealership
Both options are pretty common. So which is the best?
6 Realities about Financing
1. Comparing financing rates takes time
If you wanted to make sure you got the absolute best deal around on the vehicle you want, you would have to visit about a dozen banks and perhaps a few dealers, as well. That can eat up an entire weekend. Not only are you driving around from place to place, you are waiting in line, re-explaining your situation to every finance manager, and in the end you may still not get the information you need in a timely manner. If you had your eyes on a particular used car, it may be sold by the time you find the best loan package. (Especially if it was a vehicle worthy enough to win your affection—any fan of The Bachelor knows that nothing creates desire and irrational decision making like the presence of multiple suitors.)
Ultimately, the best rates are seldom the ideal rates. The best rates may not save you much money over the loan period when compared to the second best option, or the third. Is it really worth risking that hot item you’ve been pursuing to save ten dollars a year?
We recommend visiting two lenders before you purchase. (More on that in a bit…)
2. Car Dealers Need to Make Money, Too
With many loans, dealerships act as middlemen. We take your information, shop it around to lenders for you, come back to you with the best options, and mark up that loan a tiny bit more for our cut. This markup is the cost of convenience—the price of one-stop shopping and skipping the bank lines. It’s also what keeps us in business, so we care about that aspect, too.
But some dealerships have a big enough collection of capital to offer in-house financing. This means that the dealer evaluates the individual risks of each lender and offers the loans directly to the car buyers. This means we can cut out the markup fee, offering lower financing rates, but it also puts us on the hook for delinquent loan recipients and non-payments.
If the worst happens and you fail to make your payments, many people prefer to owe to their bank, with whom they already have an existing relationship.
3. Car Dealers Need to Sell Cars
And that’s good for you! When we need to move out some slow-selling models, one of the best ways to entice buyers is to offer lower financing rates. This frees us up to bring in new models and stay appealing to the public.
Sometimes the manufacturer steps in to help us out, too. The Driving Change Automotive Group dealerships are often able to offer 0% financing with the help from Ford Motors of Canada. Let’s say, for instance, that Ford wanted the new aluminum-bodied 2015 F-150 to retain the title as Canada’s best-selling pickup truck (that’s a pretty valuable tagline for any marketing materials, eh?); Ford might decide to offer special low financing rates on this model in order to ensure their market dominance for another year, just as television networks add special guest stars and plot buildups around sweeps periods to say they are the Number 1 network and entice advertisers.
Banks, however, don’t benefit much from dropping interest rates in order to boast about having the best-selling loan packages; in fact, that often erodes the investor confidence banks need to stay in business.
4. Used Car Interest Rates are Higher
It’s true, the financing rates are lower for new cars than used cars. Why is that, you wonder?
Think of it from the lender’s perspective: They can’t predict with perfect accuracy how any one approved loan will turn out. With enough volume, though, they can get a pretty good idea of how many borrowers will default on their loans. They use their special research and market data along with their own risk tolerance to determine interest rates.
Back to the failed loan repayments. What happens when a borrower defaults on their loan contract? The answer: the lender gets to seize assets in order to cover their costs.
These assets usually include the vehicle. The lender will repossess your car or truck and then resell it to pay off the loan principle (or whichever third-party assumes the debt). Used vehicles are less valuable to loan collectors in two key ways:
- The vehicle is more likely to sell for less, due to age, depreciation, and estimated life expectancy
- The vehicle is less likely to sell at all
Due to the greater risk of lending for a used car relative to a new one, lenders compensate by charging higher rates. In the long run, the higher margins will offset the instances in which the lender gets burned by a bad deal.
5. Dealerships Are More Willing to Approve Financing for Used Cars
Since used vehicles have a predictable shelf life, many banks are hesitant to offer loans for used car purchases. They are even more hesitant if the borrower has a less than stellar credit rating.
Dealerships, on the other hand, not only tend to be less risk adverse than banks when it comes to lending, but they will also shop around to other banks and credit agencies to find the best rates around for you. That means that you are still seeing what the banks you normally don’t visit would offer you for terms (albeit at a slight markup), and you get to cherry pick the plan that works best for you and your budget. Dealership financing is your one-stop shopping experience.
Getting a loan approval from a bank can take a few days (that’s even if you can make it over during business hours). At a dealership, you can come, find the right financing, and drive off with the car you want, all within the same afternoon.
6. Personal Factors Enter into Play
Let’s face it—in general, the dealership financing office is a higher pressure environment than the bank manager’s desk. We try to do things differently at our own dealerships, but not everyone reading this blog post is buying in Regina, Winnipeg, or Carman. We can’t vouch for the other guys, though most of them play nice.
Even though it is often overlooked, the human element is as important in deciding on your financing provider as it is in selecting the right golf coach or driving instructor. Buying a new (used) car should be fun! If feeling comfortable is important to you, honour that instinct.
Most people will have a longer, more personal relationship with their bank. They can predict in advance what will take place if they default on a loan. People tend not to be as close to their local dealers, especially if they only see each other once every 3 – 7 years.
Making Sense of It All
That’s a lot of information to take in all at once. Here’s the distilled list:
- Used car financing rates are higher than those for new cars
- Bank lending rates are typically lower than dealer rates because dealerships must add a profit margin to cover costs
- In-house financing makes dealership rates comparable to bank rates
- Dealership have an incentive to sell certain models, which sometimes results in special, lower lending rates
- Dealerships are more likely than a bank to finance a used car
- The business relationship between lender and borrower is a valid concern, but is often overlooked
Taking all of those points into consideration, here’s what you get: there is no answer that applies to every situation. Each used car purchase requires its own decision, its own weighing of the variables.
What you need is a decision making structure.
Fortunately, we’ve got one of those handy…
Bank or Dealer Financing? Our Recommendation
As we’ve seen, the best financing option depends highly on the situation, just like the best food to eat will change depending on what you’re in the mood (or not in the mood) for.
Here is the approach we suggest:
- Once you have a general idea of what kind of a vehicle you want and a rough estimate of how much you will need to borrow, visit your choice bank to discover what interest rate they would be willing to charge you.
- If they turn down your application, get dealer financing.
- If they provide you with a quote, proceed to Step 2.
- Head to the dealership and negotiate the price of the vehicle before you select a financing option.
- Discover what the finance manager at the dealership will offer you for lending terms. These numbers are often negotiable, so it pays to bring up your quote for the bank rate.
- Compare the two offers and decide which one is in your best interest.
- Get the car you want AND the financing terms you prefer!
That’s All, Folks!
Happy graduation! If you’ve stuck with us throughout our Used Car Buyer’s Guide series, then you are now an honest and informed used car buyer. It’s time to go and put some of that theory into practice.
Here is what we currently have in our collective inventory when it comes to:
No matter what you decide to drive, no matter where you decide to buy—stay informed!
Have your say
- Have you regretted making up your mind too soon when choosing a source of financing?
- Are we missing anything about buying used cars that you’d like to read about soon?
- Which article in our series did you find the most helpful?