I keep hearing "they make money on financing" but I don't see how that's possible. I've bought three new cars financed, and every time the finance person puts my info in and gets finance "offers" from 4-5 big banks plus their in-house financing, and just lets me pick the one with the best rate -- usually most of the finance offers are under 5%, with the best one being under 1%. One time I went to one of the offering banks directly and got a worse rate than they offered me through the dealer! Maybe they're making commission on the sale but it can't be much.
Hi! I work in auto finance.
About my company: we finance in the USA and we focus in "sub prime" (aka bad credit), but we are a "full spectrum" lender.
Dealerships TOTALLY make money on the financing. In your example, it might be $1000 - it sounds like you have pretty good credit, and the margins are thin there. You should remember that if someone is leaning YOU money, they just want a reliable investment for their portfolio - they'll make their money on the next guy.
If you are getting <1% offers, that is probably financing from the manufacturer (that is, Toyota Financing is lending money for a Toyota, at a Toyota dealership). These deals are HOT because Toyota Financing's #1 job is to sell Toyota's - making money is #2 or #3.
Also, did you buy a warranty or gap coverage? Cause that is profit for the dealer, too.
You probably think you got the "best rate" because you SAW ALL THE OFFERS. Nope. Dealerships see the rate from the bank and can bump it up. Did Wells Fargo offer you 2%, well, let's show him 3% and I keep the difference.
Also, yup, getting a "direct rate" is difficult. The bank doesn't really know the car you are buying, and they might see that you were already approved at the dealership and give you a WORSE rate DELIBERATLY simply to maintain a relationship with the dealership.
Getting a higher rate directly from the bank does not necessarily mean that the dealer is not making any money on your loan. It is likely that the bank just offers better rates through their dealer partners because: 1. it's less hassle than dealing with retail customers, and 2. the dealer market for loans is more competitive.
I mean yes, I'm sure they're getting something, but the margins are so thin I don't think it's even worth considering. Consider a $50k car, dealer offers you 1% via bank. At best the bank is only taking half of that (0.5% is already ridiculous for a not-really-secured loan, considering new car depreciation), so over a 5yr loan the dealership makes... $1250. That's, what, one week of salary for one of their salesmen? I just don't think it's as much of a factor as we think it is. People talk about the dealerships handing out $10k discounts because "they make their money on financing" but the math just doesn't support that unless you're doing credit-card-interest-level loans.
Usually people cite the financing incentives when people mistakenly use the "cash is king" strategy when trying to negotiate on a car, but it isn't the only way they're making money. Dealers make significant money from manufacturer kick-backs and service too.
Also 1% sounds too low for an independent bank loan, even with the now-cratered loan rates. I am guessing that is probably a subsidized loan through a manufacturer's bank. Manufacturers have long offered artificially low rates through their own banks to help move product.
