Do Car Dealers Prefer Cash or Financing for Car Purchases?

Car dealers often prefer financing over cash for car purchases, but why is that? According to a study, 71% of dealerships prefer financing because it allows them to earn more profit through interest rates.

Dealerships can earn an average of $1,000 to $2,000 in profit from financing a car, compared to a flat fee for a cash sale. This is because financing agreements come with interest rates that can range from 5% to 20% or more.

In contrast, cash sales typically don't offer dealerships the same level of profit. However, some dealerships may still prefer cash sales if they're looking to move inventory quickly or if they're dealing with a high-volume sale.

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Car dealers prefer financing because they can earn a commission from the lender, making an extra profit on the loan. This commission is often added to the interest rate as the "finance reserve", which can be as high as 3% of the loan amount.

Dealers want you to finance with them because they have relationships with lenders and can get you loan options. However, the lenders are competing to win the business of the dealership, not to give you the best auto loan rate possible.

The dealer will often add the finance reserve to the interest rate before showing you the contract, keeping the difference as a flat fee from the bank or throughout the life of your loan.

Dealers want you to finance with them because they have relationships with lenders, but these lenders are competing to win the business of the dealership, not to give you the best auto loan rate possible.

Car dealers aren't issuing the financing or giving you the loan, they're just acting as middlemen. The lenders are thinking about the best interest of the dealership when making the loan offer, not you as the buyer.

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The dealer is going to add on something called the "finance reserve" to the interest rate the lender offers, which can be anywhere from 1-3%. This means the dealer keeps the difference, either as a flat fee from the bank or throughout the life of your loan.

This is an easy way for the dealer to make money, and it's the reason they want you to finance through them.

A car dealership can technically force you to finance with them, but it's rare. It's possible because they can choose whatever kinds of payment they want.

However, you have the upper hand. You can keep looking and take your business to a dealer where you have more options. IMCU's Auto Advisor program can offer you a list of dealers that will offer you a set price on the car and hassle-free financing.

Here are some reasons why dealers prefer financing:

It's worth noting that dealers have monthly sales goals, and timing your purchase near the end of the month can give you an advantage. You can take advantage of a dealer who just needs to sell one or two more vehicles to meet their quotas.

Dealers often prefer financing because it gives them more flexibility and control over the negotiation process. Sellers, on the other hand, tend to prefer cash payments for their immediacy and lack of financing complications, which can lead to better deals or discounts.

Financing allows dealers to spread the cost of a vehicle over time, making it easier to manage their finances. This can be a significant advantage, especially for dealers who need to purchase multiple vehicles at once.

Here are some key benefits of financing for dealers:

By financing a vehicle, dealers can avoid the need for a large upfront payment, which can be a significant advantage.

When you pay cash for a new car, you might think you're getting a good deal, but there are some downsides to consider.

Depleting your savings can be a major con, as it impacts your financial cushion.

You'll also miss out on potential investment opportunities where your cash could have earned interest or grown.

Paying cash might limit your flexibility in negotiating the price of the car, as dealers often make more money on financing.

Here are some specific reasons why paying cash might not be the best option:

Paying with cash means you own the vehicle outright and avoid interest costs.

Financing allows you to spread payments over time, making it easier to manage your budget but adding interest.

Using credit involves a similar approach, often with higher interest rates.

Getting pre-approved for financing before visiting a car dealership puts you in a stronger bargaining position.

Being pre-approved for an auto loan means you can let the car salesperson know you're a cash buyer and focus on the price of the car, not the most you can afford to pay.

If the dealership asks about your pre-qualified interest rate, ask them what the lowest interest rate they can get you is.

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Dealers prefer customers who have a clear understanding of their financial situation and can articulate their needs. This allows them to better tailor their financing options and increase the chances of a sale.

A significant majority of car dealers (70%) prefer to work with customers who have a good credit score, as this makes it easier to secure financing. Dealers can also offer more competitive interest rates to customers with good credit.

Some dealers may have a bias towards working with customers who have a cash down payment, but this is not a hard and fast rule. In fact, a survey found that 60% of dealers prefer to work with customers who have a trade-in rather than a cash down payment.

Dealers who work with customers who have a clear understanding of their financial situation and can articulate their needs are more likely to build a long-term relationship. This can lead to repeat business and positive word-of-mouth referrals.

A dealer's ability to offer competitive financing options can be a major differentiator in the sales process. According to a survey, 80% of customers consider financing options when making a purchasing decision.

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