Low-interest finance – the great dealership myth
1% Finance. Sounds great doesn’t it? Makes you think, ‘Of course I can afford that expensive car because I’m paying practically zero interest – let’s do it!’
But, if Australia has access to a 1.5% reserve rate, perhaps you should be asking the question, ‘Why on earth am I being offered this?’
Unfortunately, the car companies aren’t simply being extra-lovely to you today. You are in fact a target of what is, in my opinion, the greatest marketing ploy in the auto industry in the last 10 years.
The mechanics behind such low-interest offers are called subvention. The monies normally made from the interest component of an in-house car finance option are covered through an inflated car sale price. Here’s a recent (real numbers) transaction example:
The Client received from the dealership:
• 1% finance!
- $51,999 vehicle, negotiated down to $49,500
- Finance offer: 4 years with $10,000 deposit and $0 residual, with a $795 dealer establishment fee – $856 per month
The Client did not wish to put in $10k deposit and instead requested a more reasonable finance term and was offered a 6.9% effective rate on the buy price.
For argument’s sake, this is a loan at 1% effective rate on the same deal of $49,500 plus the dealer establishment fee: 4 years with a 25% residual – $816 per month
At this point, I went to one of my ‘preferred’ dealership groups. They agreed to sell the same car, same specifications, with an additional servicing plan all for the lower price of $45,300. I put in place a finance option through one of my top-tier underwriters at approximately 5% effective rate: 4 years with a 25% residual – $809 per month.
My team and I are often asked “How can you beat a 1% finance offer?”… and that’s how!
In conclusion, these ‘magical’ offers are very rarely the most beneficial option for funding a car. Funds are cheap in their own right at present and the lure of low % finance should be steered well clear of when purchasing a vehicle.