Originally Posted by
742Dash
There was a WSJ piece a few months ago about this. The bottom line is that the dealerships make more money on the financing than on the actual sale, which is often only a few hundred dollars. And they don't just make it on their internal financing, apparently kickbacks from local banks and credit unions are common.
I have worked with a local VW dealership for years. Small, no advertising, relies on repeat customers. Anyway, the GM told me upfront that he could take another $500 off if we financed it. So we did, and paid it off 2 months later.
It is even worse if you try to shop the higher end cars. BMW/Auid/Volvo do not seem to want cash customers at all. Cash buyers do not support the lease/CPO system where they sell the same car twice, get the financing incentives and have the buyers tied to the dealership.
I spent years in the car business when I was young including working for a subprime auto lender. I had the chance to wear all the hats and know the business intimately. I got out right after 9/11 when interest rates went to zero and the used car market folded. The wife got a new Toyota last December. It was amusing to chat with the sales and finance manager while nodding my head to their BS. Things have changed but a lot of the tactics are the same.
The dealers don't make a whole lot of money on the financing anymore because the laws have changed. If it's an incentivized rate they might make a couple hundred bucks in commissions from the bank (Toyota Motor Credit). We were going to pay cash for my wife's car but I found an extra grand rebate if we financed at a "non incentivized" rate. The rate they gave me was terrible compared to the incentivized rate but I didn't plan on keeping the loan very long anyway. The finance manager told me I had to "make 3 payments" or they would take the rebate back (complete BS). The reason he said that was the lender would recapture their commission if I paid it off too soon. I called Toyota motor credit a few days later and paid the car off in 6 days which cost me $36 in interest.
The reason why dealers prefer leases (aside from repeat customers) is because there are frankly more ways to screw the buyer. Paying cash is cut and dry and easy to shop against other dealers. Lease buyers are generally payment sensitive and there are more ways to hide profit in money factor mark ups and other "fees" which may or may not be legit. The more variables you introduce (financing, lease, trade in, etc) the more ways I could make your head spin before you come "out of the ether".
I don't even know how small mom and pop dealers survive anymore. Most dealers are now large corporations (Auto Nation, etc). They actually lose money on each car, pay their salesman nothing and make it up with factory-to-dealer incentives based on sales volume.