I think “Groundhog Day” month is the perfect opportunity to revisit or share some “truths” about the price of financing “convenience” at the dealership. Many vehicle purchasers find it enjoyable to walk into a dealership without a vehicle and drive away with a new one (e.g., even if it’s pre-owned, it’s new to you). However, deeply embedded in this process are “hidden costs” that could potentially end up costing you thousands of extra dollars if you are unaware of the process. In observance of Groundhog Day month, I thought it would be beneficial to peek “behind the curtain” as to the practices that many financial institutions and dealerships follow to provide you with purchase “convenience”.
First is the common misbelief that “when financial institutions compete for your loan, you always win.” In my experience, that practice is not always true. Most dealerships require financial institutions to pay them a “fee” for bringing potential loans to their institution. Since the fee being paid is frequently negotiated between the dealership and each financial institution, there are occasions where the loan ultimately goes to the financial institution that pays the dealership the most, not the one that offers the borrower the lowest interest rate, resulting in paying more for the convenience of dealership-facilitated financing. At InTouch Credit Union, we stopped participating in these practices a few years ago and began offering to pay members a fee directly instead of paying it to dealerships. In response, a few members shared that their specific dealerships refused to sell them the vehicle with ITCU-approved financing as opposed to funding the loan through an existing dealership financing relationship, unaware of that hidden cost of convenience.
Next, financial institutions are not charities. If banks and credit unions are paying a dealership several hundreds of dollars to finance your loan, not only is it probable that the interest on the loan is higher to recoup the cost paid to the dealership, but some of these institutional relationships allow the dealership to increase the loan’s rate by as much as 3% to help increase the financial institution’s profit for underwriting the loan. Unaware members could end up with monthly payments larger than required as a consequence of convenience or an “impulse” buy.
The last area of note covers the “benefit products” dealership finance divisions sell to potentially mitigate future repair bills or expenses due to unforeseen events such as accidents or repairs not covered by the manufacturer’s warranty. Most of these products do have financial value and could alleviate the financial pressure of unexpected vehicle problems, but at what cost? When they are purchased, members should know the conditions for coverage and if any deductibles are required to determine if the product is worth the cost. Most of the products offered by dealerships can be purchased through ITCU-affiliated partners at roughly 40%-60% less than the price offered by many dealerships. That extra cost likely represents nearly a 100% profit to the dealership, potentially produces more dealership revenue than earned on the sale of the vehicle itself, and makes your monthly payments higher than necessary while slowing the speed of any declining loan balance. Again, that is a high price to pay for the convenience of buying, funding, and closing the loan at the dealership.
All the items mentioned above are financially tragic on their own, but their combined effect can cause negative equity to incur on your loan faster than expected. What is negative equity? It is the difference between a vehicle’s trade-in value and the current amount owed on the associated loan. Adding negative equity to a new purchase usually accompanies a higher interest rate and makes it more difficult to get out of debt.
When purchasing vehicles, knowing where the “hidden costs” lie can not only save you money, but it can make future purchase decisions easier with more options at your disposal.
Hopefully, knowing this information will also eliminate more than six weeks of wintry weather for your pocketbook. 😊