What does low interest rates being offered by dealers really mean?
In today’s new car market, we are seeing low-rate finance deals being offered by an ever-increasing number of car dealers. In recent times rates as low as 1.5 per cent have been available. This is great for consumers wanting to finance a car, but before you rush out and sign on the dotted line, it’s important to understand what is happening behind the scenes with these low-rate finance packages.
Firstly, there is no doubt the interest rate being advertised to finance the vehicle is legitimate. However, these finance offers are typically part of what the industry calls a ‘subvention’ finance program, meaning the interest rate for the finance package is being subsidised by the dealer or manufacturer out of the profit made on the sale of the car.
Let’s look at a simple example to illustrate how subvention works.
Assume you purchase a new $35,000 car which is being sold in conjunction with subvention finance at an interest rate of 1.9 per cent. The loan term is 48 months with a nil residual at the end of the contract.
Depending on the lender providing the finance, the ‘subvented’ amount in this scenario may be anywhere between $2500 and $2900. In other words, once the transaction has been finalised, the car dealer or manufacturer must ‘pay’ the subvented amount to the lender to enable a realistic rate of return to be made on the finance contract.
It is now clear that the dealer needs to make a larger margin on the car in order to pay the subvented amount and maintain their normal margin. You may have otherwise been able to negotiate a larger discount to the asking price if the purchase was not subject to subvention finance.
Remember: the higher the purchase price of the car, the more you will pay for items such as GST, stamp duty and potentially luxury car tax.
SO HOW DO YOU KNOW?
The best way to see if you are getting the best deal for YOU is to negotiate a cash sale first with the car dealer, leaving the low interest rate finance offer out of the equation. Car dealers want you to buy their cars so it is not unrealistic to try and negotiate a better price, which could be 8-10 per cent below the first offered price.
When this is done ask about the financing packages and see what they have to offer – usually you will find that the “cheaper interest rate” is not on offer.
When you have the discounted purchase price of your new car, contact your favoured financial institution and arrange finance through them. You could find that by opting for ‘normal’ market rates you could typically end up paying lower monthly repayments (thus lower total repayments) over the term of the finance contract than they would through obtaining cheaper finance through the dealer.
Another way is to get the dealer to offer you the best car price and financing available to them and then give it to either your financing broker or financial institution. You will find that most brokers are connected with a car/fleet buying service that may offer you a better price on the car you want. This can be combined with the “normal” market rates and you may find yourself well ahead of the dealer’s quote.
Remember, when you are financing a car it is ultimately the monthly payments and any residual/balloon payment that need to be considered to properly compare any competitive offer. Now you’re comparing apples with apples.