The Truth About Car Financing
Obviously, when purchasing a vehicle, price is important but there are many other ways to be skinned by a car dealership during a vehicle purchase.
It’s no secret that the finance office of a car dealership adds to the dealership’s profitability. As a business, one of our goals is to earn a profit but what must come first is fair and ethical treatment of you, the customer.
The best price which you skillfully negotiated with your sales consultant can be wasted if you don’t receive proper care while your paperwork is being done.
A car dealership will sell you a vehicle for less (than what every other dealer has quoted you), if they are confident that they can make up the short fall in the finance office by overcharging you for extended warranty or paint protection or undercoating, etc. They will set up your financing with a source that pays the dealership the largest commission for doing so which usually constitutes the buyer paying a higher interest rate. Happens every day!
How can this happen?
Ford Credit and the other banks we deal with pay us a commission for each completed finance contract we send them.
Ford Credit pays us the least commission per contract. In most cases, they pay us a token amount, a flat fee, regardless of the amount financed. However, we choose to use Ford Credit almost exclusively when selling you a new vehicle because they offer you the lowest interest rates. Other banks will pay us a greater commission because they charge higher interest rates. While it would be more profitable for us to have our customers finance their purchases through a non-Ford Credit source, it would simply not be what is best for the customer.
Occasionally, we must use banks other than Ford Credit for reasons which may include the strength of a customer’s credit rating, the amount to be financed, the term required or the amount of the customer’s down payment. There are occasions when a non-Ford Credit bank will offer a lower interest rate or better terms. Our job is to recommend the financing option that is best for you and your budget.
When you think you have seen it all….
A friend of mine wished to purchase a vehicle at a different dealership in a big city. The dealership would only honor the quoted price if my friend was to finance the vehicle through bank “XYZ”. If my friend insisted on paying in any other way, the price would be $1,500 higher. This type of practice is unscrupulous and non-compliant with any Fair Trade Act or Consumer Protection Rules but it enabled the dealer to quote a lower price than other honorable car dealers.
Other things to watch for…..
- a repayment of the outstanding principal sum made at the end of a loan period, interest only having been paid hitherto.
Just recently, a customer came to us wanting to trade his existing vehicle on a new model. The customer had 10 payments remaining at $350 each so the payout on the loan for his current vehicle was estimated to be $3500 or less. However, the payout proved to be over $10,000 because the customer signed a contract which included a balloon payment at the end of the term. The customer was convinced that he had not been told of the balloon payment at the time of purchase. Certainly, the obligation for the balloon payment was on the original finance contract but the question that needs to be answered is — did the original selling dealer purposely not disclose balloon payment in order to more easily complete the transaction?
Balloon payment contracts are used to lower the monthly payment enough that the customer will be able to afford the payment. This is often the result of the customer buying a vehicle that is too expensive for their budget or the dealer attempting to make the payment affordable for the buyer.
Balloon payment contracts themselves are perfectly legitimate but it is important that the customer knows what he or she is signing. Personally, I don’t like them; they typically reduce the buyer’s chance of ever having any equity in their vehicle.
The 3 absolutes: It is the selling dealer’s absolute responsibility to ensure that the buyer absolutely understands, absolutely everything about what they are signing.
Extended term contracts
Years ago, a 60 month finance contract was considered the maximum length. Today, we often see 96 month contracts. Terms have been stretched out because banks and car dealers are hungry for business and buyers are trading vehicles that have much more money owing on them than they are worth. To make the payments affordable and to sell another vehicle, dealers are often encouraging customers to sign 84 and 96 month contracts.
Before you sign an extended term contract, carefully consider what may happen if you decide to trade that vehicle before it is fully paid for.
Long term contracts can be fine if you plan on driving that vehicle for the full loan term but if you plan on trading sooner than say 60% of the term, you should consider a shorter term contract or be putting some significant cash down.
In a nut shell: A lower price does not always indicate the best deal. All aspects of any transaction must be analyzed.
What should you do?
Before you sign anything, talk to Tori King, our Financial Services Consultant. She’ll be happy to give you proper advice and direction. Tori has a 20 year track record of doing what is best for our customers. Ask any of our customers how their experience was in Tori’s office. Her customer satisfaction score for 2018 was 96% “Completely Satisfied”. She won’t let you make a bad choice and make sure you absolutely understand all aspects of the finance contract.
All of us at Vegreville Ford are here for the long haul. We want customers-for-life and we want these customers to send their friends and family to us. We know you have many car dealers from which to choose. We want your choice to be Vegreville Ford so we are always going to do what is best for you!
Brian Baron, President