Finances question

[Danestress]

I am looking at buying a new car. We've actually been looking for a while. We have the money saved by buy a car, so that's fine. I don't like the idea of borrowing money for a car. But right now, the car manufacturer (Honda) is offering .9% financing.

 

We don't really need that financing, but we would qualify (I would imagine).

 

Why do they do this? I mean, obviously it's one way to lure buyers in. But assuming that everyone is purchasing the cars for the same rough price, financing or not, how are they making money on making loans with such a low interest rate?

 

My money market funds pay more than .9% arp. It seems like everyone buying a car would just finance it because over the long term, their money is probably making more money where it is. Even a one year CD is paying more interest than that.

 

Is Honda planning to make money off of this because people pay late and pay finance charges? Or what?

Edited September 1, 2011 by Danestress

[Mynyel]

I am not sure, I know in the past car dealers have offered 0% financing (to qualified buyers). Both of my sisters have had 0% financing at some point.

[MamaBearMO]

It sells a car... to a buyer who may not have been looking at a Honda ut now will because of the attractive interest rate; a buyer who may not have been in the market for a car as expensive as they'll now finance with a lower interest rate; or a buyer who may have been thinking they'd wait a while, but will buy now since the interest rate is attractive now. Basically it sells a car, but more importantly it might also have a new brand-loyal future customer when they need another in the future. The low interest rate is a marketing ploy to not only sell the car today, but also build brand loyalty for tomorrow.

[regentrude]

I would assume that by offering financing they can attract buyers who do NOT have the money sitting in the bank. They are not out to make money on the loan - they make money by selling somebody a Honda!

 

Btw, we did exactly the same thing: had the money saved up, but the loan was cheaper than even the lousy interest rate our money had in the bank... so there it staid, and we took the loan.

[thessa516]

Oh, I just read about this the other day. I wish I could remember where... some study showed that even when it came to 0% car loans through the dealership, buyers who used the loan ended up paying a higher sales price than those who paid with cash. The cash gave more leverage up front in the purchase price of the car. Plus, when it came time for the loan process, extra fees were sometimes tacked on - undercarriage whatever. Those didn't get added with the cash buyers. Furthermore, some dealerships allow for low financing OR a rebate. If you take the low financing, you lose out on the rebate.

[Joanne]

Because most people won't qualify for that rate. But by the time you find that out, they have you *there*, created a need for THAT car, and their chances of getting you into a car at their dealership at a higher profit are increased.

[LizzyBee]

I was looking at interest rates today at one of our banks, and I was amazed at how low interest rates are. A money market account with more than $25k in it will earn 0.35%. If the balance is between $5k and $25k, the interest rate is only 0.30%. To hit 1%, a CD has to have a 4 year term, with the exception of a CD over $50k and a 3 year term. It's just unbelievable.

Edited September 1, 2011 by LizzyBee

[Cera]

A lot of the profit from a car comes from service. If they can get you to buy their brand you are probably going to have it serviced at their dealership.

 

Also, many studies have shown that consumers are more likely to purchase a brand they are familiar with so if you buy their car and like it you are fairly likely to buy another from the same company.

 

eta: I forgot, when we had a 0% car loan there was a clause that reset the interest rate to something ridiculous (7 or 8% I think) if we were even one day late with a payment. We set up autopay through the bank with a payment date that was a few days earlier than the due date to ensure we were never late.

Edited September 1, 2011 by Cera

[gardenmom5]

I am looking at buying a new car. But right now, the car manufacturer (Honda) is offering .9% financing.

?

 

It's not just the interest rate, but how much are you paying for what you're getting? dh used to be in banking and looked at the loan portfolio's for the dealerships. the markups were huge. (costco is NOT a deal on price, the dealers are still making a *very generous* profit on that.)

 

one problem with the automotive market right now is fewer people are buying and the manufacturers want to move the cars.

[RegGuheert]

Why do they do this?

Because the alternative is to lower the price of the car and there are several benefits for the manufacturer to lower the interest rate instead:

- It allows them to continue to negotiate from the sticker price with cash buyers like you.

- It guarantees an income stream over a period of time because no other bank can refinance the loan. Imagine if they sold you the car for a lower price but a higher interest rate: Honda would make less money up front AND if they had gotten a high interest rate, they could lose part of that income later if you refinance.

But assuming that everyone is purchasing the cars for the same rough price, financing or not, how are they making money on making loans with such a low interest rate?

The key is in what gardenmom5 said:

It's not just the interest rate, but how much are you paying for what you're getting? dh used to be in banking and looked at the loan portfolio's for the dealerships. the markups were huge.

I think it is more clear if you think of the payment clause of the loan rather than the principal and interest amounts. So if you imagine a payment of $1000.00 for 36 month, Honda could look at this as selling the car for $36,000.00 @ 0% interest or perhaps they could look at it as selling the car for $30,995.14 @ 5% interest. In the latter case they can probably still show a profit on the sale of the car and be earning a nice interest rate on their money. The bottom line is that the payment stream you are guaranteeing to make has some equivalent present value at today's going interest rates.

Is Honda planning to make money off of this because people pay late and pay finance charges? Or what?

That, too!

 

I recommend that you interpret the zero percent financing offer as an indication that Honda is willing to accept a lower price for the car and negotiate with that in mind. If they won't budge on price then I would consider financing. But keep in mind that it may not be as easy as you think to earn 0.9% on your money these days, as has been previously pointed out.

[Punks in Ontario]

I few years ago, we looked at a 0 per cent car loan. When we negotiated a cash price, the equivalent difference was actually about 7 per cent. That is the cash price was still cheaper than 0 percent.

 

Do your math VERY carefully. I may be a good deal, but be aware it may be a shell game too.