Paying for cars with CASH?

0497

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Fancy buying a car with cash? Dealers and manufacturers don't like you.

A company like Ford makes more money off financing than actually selling cars. The article states that people buying luxury brands are more likely to pay cash - explains why options can be so expensive.

http://www.nytimes.com/2007/07/28/business/yourmoney/28money.html?ref=automobiles
July 28, 2007
On Paying for Cars With Cash
By MICHELINE MAYNARD

DETROIT, July 27 ? There are two questions that greet every car buyer who walks into a showroom: ?Are you ready to buy today?? and ?How do you plan to pay??

If the answer to the first is yes, there are smiles all around. If the answer to the second is cash, that warm greeting may grow chilly.

To be sure, no dealer will turn away a cash-paying customer, not in the atmosphere that surrounds the automobile industry these days, but all things considered, they are less welcome than buyers who want to lease or finance their cars. ?We actually love all paying customers,? said George Borst, the chief executive of Toyota Financial, ?but we really want people to finance.?

On the other hand, many car dealers are trying to clear out big inventories at the end of the 2007 model year to prepare for fresh models that begin arriving soon.

But buyers who pay cash, whether they write a check or borrow the money elsewhere and bring it to the showroom, provide car dealers with fewer opportunities to make money on a car deal.

That ranges from the cut they get from arranging a lease or loan, to options like extended warranties or antirust coating that buyers are more likely to choose if they can fold it into the amount they borrow. In some cases, those extras account for up to 75 percent of a showroom?s profits.

But, to some dealers? chagrin, cash deals are up in 2007. Some 11.7 percent of buyers paid cash for cars in the first half of this year, versus about 8 percent over the last few years, according to a survey by CNW Marketing Research, which studies car buying habits.

In all, about 26 percent of buyers are bringing cash to the table, whether it is out of their bank accounts or in pre-arranged loans through their credit unions, banks or home lenders, according to the Power Information Network, the research arm of J. D. Power & Associates.

That overall figure is up slightly from last year, but still below the one-third of buyers who paid cash in the 1950s, when customers, many with lingering memories of the Great Depression, came to showrooms with their check books or stacks of bills.

It is in line, however, with the rate during the 1970s and 1980s, before car companies made widespread use of cut-rate loans and discount lease plans.

One big reason for the recent rise in cash-paying buyers is the introduction of small and less-expensive cars into the American market, like the Honda Fit, Toyota Yaris and Nissan Versa, said Art Spinella, the president of CNW Marketing.

Because many consumers purchase small vehicles as second and third cars, and have a car loan for their primary vehicle, a number are choosing instead to pay cash rather than take on another loan, Mr. Spinella said. That is particularly true for women buyers, who account for about 42 percent of cash-paying customers.

Cash-paying buyers, who tend to be wealthier than typical consumers, are often reaping investment profits. This year, 34.8 percent paid for their cars by selling stock, the most common source of cash, compared with 31.8 percent who took money out of their savings, Mr. Spinella?s data showed.

Indeed, at brands like Mercedes-Benz, Volvo, Audi and BMW, as many as one-third of transactions are cash sales.

For these customers, sticker price can be no object. One shopper at Lexus of Ann Arbor, Mich., recently paid $116,000 in cash for the Lexus LS 460 Lh, the hybrid version of Lexus?s ultra luxury sedan, which went on sale in July.

Mark A. Louria, the general sales manager there, said about 25 percent of his customers paid cash for their new cars, keeping them for an average of six to seven years. Mr. Louria said he tried to encourage many customers to lease their cars instead, arguing that it was a better way to take advantage of ever-changing technology.

In the end, ?it?s whatever works best for them,? Mr. Louria said.

Shopping sites like Edmunds.com, Cars.com, Kelly Blue Book (kbb.com) and Autobytel.com are places where consumers can research data like the invoice price, and the amount that manufacturers are giving to dealers in rebates and extra incentives.

Those who plunk down dollar bills often cite a single reason. ?I just don?t like debt,? said Todd Larson of Shorewood, Minn. Mr. Larson and his wife, Linda, paid $33,000 cash for their 2005 Ford Freestyle, as well as a 2001 Jeep Cherokee.

For Matthew Galloghy, 30, who lives in Batavia, Ohio, outside Cincinnati, it is simply saving money. He recently paid about $20,000 for a Honda Accord, and plans to drive it for about 10 years.

Mr. Galloghy takes his thrift to another level. He said he would make a monthly deposit equal to a car payment, or about $300, in a money market account. ?And now I certainly have a cushion for emergencies or anything else that may come up,? Mr. Galloghy said.

Cash purchases had all but died out in 1998, when buyers were snapping up cheap lease deals that allowed them to take home more expensive models, especially sport utility vehicles, for little down and minimal monthly payments.

After a rebound, they plummeted again in the months after the September 2001 attacks, when auto companies led by General Motors rolled out zero percent financing plans in an effort to spur auto sales.

Lately, these plans have been far more limited than they were earlier this decade, said Jesse Toprak, an analyst with Edmunds.com, a Web site that offers car-buying advice. Many automakers, who made zero percent financing available to virtually any customer six years ago, now offer it only to those with the best credit, he said.

Auto company finance arms and banks have been burned by oversetting these cars? residual value, or the amount that they estimate the vehicle to be worth when the lease is finished. The higher the residual, the lower the monthly payment, but a too-high residual means the finance company takes a loss on the car after it is turned in.

These lenders also have been hurt by their practice of encouraging five and six-year car loans, which can lead to lower payments, but can result in a vehicle being worth less than the remaining amount to be paid off, a situation the industry calls ?upside down.?

Zero-percent-financing plans, in which buyers need only pay for taxes, licenses and other documentation, can prove more beneficial to consumers with the best credit.

Likewise, a discounted lease of 36 months or less can allow trend-conscious customers to swap their cars for the next hot model without gambling on the car?s value, even though they will pay interest on the lease, transaction fees, and may need a down payment. No matter what, buyers need to haggle over the price first before discussing the details.

But some buyers simply want to own outright. In that case, these consumers need to do their homework before they begin negotiating, checking out the prices that are being paid in their area for the automobile they want on sites like Edmunds, which provides a tool it calls the ?true market value.?

Buyers enter their ZIP codes, and then choose the options they want, and are provided with the price most frequently paid by purchasers in their area.

Without that knowledge, cash-paying customers risk not just a frosty dealer response, but a concerted effort to get them to change their minds, said Mr. Toprak, who sold cars early in his career.

?When I was at a closing and the customer said, ?this is a cash deal,? I knew I would not make any money for the next hour,? he said.

Mr. Toprak advised cash buyers to get prices from several dealers through their Web sites. If a sales person balks at honoring that figure because a customer wants to pay cash, the buyer can threaten to go elsewhere, he said.

Still, some buyers prefer to stick to their guns.

John Kealing, a St. Louis salesman, paid $34,000 cash for his 2006 Infiniti G35x, the second car this decade for which he has paid cash. Mr. Kealing said he deliberately waited until the last minute to tell the dealer that he was paying cash. ?He found out when he put the loan document in front of me,? Mr. Kealing said.

The dealer ?tried to talk me out of it, actually,? he said. ?He told me he had some great rates, but I didn?t waver.?

Rob Butler, owner of the Butler Automotive Group in Indianapolis, said he doesn?t discourage customers who want to pay cash from doing so.

?If a guy likes to write a check, fine,? Mr. Butler said. ?Cash is still cash.?

Mary M. Chapman contributed reporting.
 

bobo_1314

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From the buyer's point of view, purchasing with cash is probably the most economical; from the seller's point of view, financing or leasing is the best. My dad taught me this principle many many years ago.
 

Donington

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?We actually love all paying customers,? said George Borst, the chief executive of Toyota Financial, ?but we really want people to finance.?
tough!
 

chaos386

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Sorta obvious, like how credit card companies don't like customers who always pay their bill on time (and thus avoid the huge interest fees).
 

Mercury

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Too flippin' bad. I don't do loans. Either I own it, or I don't.
Agreed.
Granted I'm only 24 but I never owed anyone anything and that's the way I wanna keep it. loans are a way to hold you hostage for years.
 

Cobol74

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If you do have to borrow, you should not usually take the dealer's quote as it more than likely won't be competetive against what you could get elsewhere - No. 1 stop, your high street Bank and get some figures from them, then do your internet searching - very carefully check the T & C's tho' of any deals before you sign - fixed rate is good if you are worried about repayments going up.
 

British_Rover

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If you do have to borrow, you should not usually take the dealer's quote as it more than likely won't be competetive against what you could get elsewhere - No. 1 stop, your high street Bank and get some figures from them, then do your internet searching - very carefully check the T & C's tho' of any deals before you sign - fixed rate is good if you are worried about repayments going up.


Actually you have it backwards. You should check on what kind of rates your local bank or credit union can give but a dealer might be able to beat them. Dealers run so many deals through certain banks that those same banks give them better rates then a regular consumer. For example the bank that my dealership does most of its financing through gives is numerous discounts on rates. If you went to this particular bank on your own and tried to get a loan they most likely would charge you some where around 6.5 to 7 percent interest assuming perfect credit. Depending on the total amount you were borrowing and how much you were putting down my dealership might be able to get you down around 5.25 to 5.5 percent.

That doesn't even take into account special financing for certain new cars and CPO models. Depending on the term you pick I can do 1.9, 2.9, 3.9 or 4.9 percent. Not even a credit union can get you rates below 4.0 percent.
 

Whappeh

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My friend took all of his inheritance from his dad's death the day he got it, put it in a briefcase nice and movie like, and went to the dealer and bought an SRT-10 Truck.
 

Cobol74

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British_Rover Sorry - yep forget the last step - once you got your best quote go back to the dealer and haggle hard. Just recently they have not been able to beat the deals I got elsewhere for the motors I have been looking at.

Also I think that the UK is slightly different in that if a franchise dealer they are obliged to offer the parents finance package. Obviously independents can do more flexible deals.
 

British_Rover

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^^^ Ah yeah UK could be all different then the US.

All of this of course depends on the prime rate set by the national reserve which is of course different in the UK then the US.

One other thing to remember is that if you have X amount in cash that is sitting in a money market account and want to use that to buy a car with cash you should think about your options first. If you are earning say 5 percent in the money market account and you can get 3.9 percent or better rate on the loan then you should go with the loan. Even after taxes you are earning more in the money market account then the loan is costing you. Just set up automatic payment on the loan and have the money taken out of that money market account.
 

Momentum57

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Buy every car with cash. If you can't afford the one you want, then you should be looking at something different. Why people don't just save money is beyond me. Top Gear proved you could buy a car on the cheep. So just get a P.O.S. take your paycheck start paying you first imagine that you have a car payment then in a year or two you have the car you want.
 

bobo_1314

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I guess some people finance/lease their cars, claiming the vehicles are part of their company's assets. That way, people can get a tax break. But generally speaking, if you're using your own money, it's better to pay for the car in full.
 

TC

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It is nice building up a good credit score though. I have better credit then anyone in my family, and I've never had a credit card or a home loan. Just my car.

That, and having a old beater pos that breaks down a few times a year and leaves you stranded and unable to get to work/school/etc is not fun. Having a newer, more reliable car is a very good thing. Unfortunately, we all don't have 20-30 grand burning a hole in our pockets. It would take me the better part of 5 years to save up enough to buy a new car, or I could get a new car right now and have it paid off in 5 years and earn credit in the process.
 

thedguy

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One of the tricks my brother likes to do when buying a car is to give the salesmen the impression he has full intent on financing the car. Because of this they may cut you a good deal and make it all back in financing... but once they've haggled and all that, he goes "Oh I'll be paying with cash."

I personally just prefer to buy 2nd hand, I may miss out on getting the exact options I want, but it's cheaper (most of the time) to deal with the previous owners troubles than to soak up all that depreciation.

It is nice building up a good credit score though. I have better credit then anyone in my family, and I've never had a credit card or a home loan. Just my car.

That, and having a old beater pos that breaks down a few times a year and leaves you stranded and unable to get to work/school/etc is not fun. Having a newer, more reliable car is a very good thing. Unfortunately, we all don't have 20-30 grand burning a hole in our pockets. It would take me the better part of 5 years to save up enough to buy a new car, or I could get a new car right now and have it paid off in 5 years and earn credit in the process.
My 20 year old beater has been far more reliable than plenty of the local domestic cars that are at minimum 10 years newer.
 

TC

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My 20 year old beater has been far more reliable than plenty of the local domestic cars that are at minimum 10 years newer.
Sometimes they are. I know my brothers old Toyota was solid as a rock. But 2 days after selling it, the motor blew. But I've owned a 88 VW Fox that had a ton of problems. The thing is, pretty much every car will have break downs. The older a car gets, the greater the chance of a break down. A reliable car with 25 miles is generally more reliable then the same car with 189,000 miles.
 

UMass

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A friend of mine will not be able to purchase a car unless there is real 0% financing or cash. His wife won't let him. :)

Finanacing brings in good stream of income for OEM's. Just hope you don't get a bunch of deadbeats like Mitsubishi did a few years back. :D

Leasing is another no no for normal folks yet they still do it. :whistle:
 

nomix

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I'd pay in CASH. Actual CASH, notes. Then they'd have to take it down to the bloody bank and pay a fee to the bank to put it in.

Yes, I know it, I am very, very evil.
 

Jay

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A big FYI to Americans: if you pay more than $10,000 in cash, not check, at a car dealership, they are required by law to inform both the IRS and the FBI. this can apply to any large purchase, not just a car.

This sneaky law is intended to keep a tab on organized crime.
 
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