Car Dealership Logic

**disneysteve** · 07-19-2013, 05:45 AM

Originally posted by bjl584 View Post

I'm just wondering how many people believe what they are saying.

Most people believe it because most people are clueless when it comes to finance. "If I can afford the monthly payment, I can afford the purchase." Look how many people say, "If a mortgage payment will be the same as a rent payment, it makes sense to buy a house." They ignore the fact that there is a slew of expenses they'll have as an owner that they don't have as a renter. The same goes for cars. They don't think about insurance, gas, maintenance, repairs. All they see is the monthly payment.

They also don't even think about how long the loan is for. They don't care if it is 3 years or 7 years as long as the monthly payment is right. As a result, folks often end up rolling over old loans into new loans because they don't keep the car as long as the length of the loan. That's why we hear of someone owing $25,000 on a car worth $15,000.

**JoeP** · 07-19-2013, 06:11 AM

Are they are saying this?
"With a 5% car loan, your monthly payment of $M will get you a car costing $Y. With a 0% car loan, the same monthly payment will get you a car costing $Y (where Y>X)."

Looked at another way:
If you buy a car for $25k, your monthly payment will be less with 0%. Don't buy up to your max! You should be saying, "For the car I want, the monthly payment will be LOWER with 0%" but most people don't think that way.

**kork13** · 07-19-2013, 08:36 AM

Sadly, it's just another quasi-deceptive marketing technique used to push up over-consumption and profit margins.

Technically, it's an accurate statement. Assuming a comparison of 8.99% vs. 0%, a buyer can borrow either $25,000 for ~$518/mo at 8.99% for 5 years, or approximately $31,100 for about the same $518/mo at 0% for 5 years. So for someone who wants to buy as much car as they can manage ("afford") for a specific monthly payment, then the 0% loan will get them about $6000 "more car".

Obviously, however, that's a foolish way to go about buying a car. If it were me running the marketing department, I would run the ad like JoeP said: "With this 0% loan, your car payment will be over $100/mo lower!!" ($416/mo for $25k @ 0% for 5 years). It would probably be just as effective (if not more so, by attracting customers with a lower price point and who are likely in the majority), but far more ethical. But then, that's because I have some moral issues with encouraging someone to do something that's detrimental for them.

**JoeP** · 07-19-2013, 08:49 AM

I'd wager that most prospective customers aren't thinking of saving money as much as getting the most car for what they can afford. It is in the dealership's best interest to sell as many higher-end cars as they can, and I would give odds that salespersons will ask how much someone can afford and say, "Good news! This premium model is now within your reach!"

**kork13** · 07-19-2013, 09:11 AM

Originally posted by JoeP View Post

I'd wager that most prospective customers aren't thinking of saving money as much as getting the most car for what they can afford. It is in the dealership's best interest to sell as many higher-end cars as they can, and I would give odds that salespersons will ask how much someone can afford and say, "Good news! This premium model is now within your reach!"

Oh, most definitely. Pretty sure that particular sales tactic is actually the source of where the ad strategy came from. Somebody in marketing saw the sales guys using it, and was like.... "HEY! Great idea!"

Ugh.... so many reasons why I buy cars the way I do... Pre-negotiated price before I walk into the dealership, buy the car for long term use (8-10 years or more), and pay for it with as much cash as I can muster (at least a 50%+ down-payment) then a low-rate loan from my bank for the rest.

**ua_guy** · 07-19-2013, 02:08 PM

I agree that it's technically correct. The same thing is happening in the housing industry. Interest payments are low, so realtors are pushing clients, and mortgage companies are approving clients, for more house than they can probably afford, montly payment aside.

Knowing Volkswagens though, there might actually be REAL truth and financial sense to what they are saying. Consider the 2013 Passat. The bare-bones SE model comes with a gas motor good for about 30mpg. The TDI comes with a turbo-diesel good for about 45mpg or higher. Depending on one's ownership plans and driving habits, it might actually make sense for the buyer to take the 0% option to buy a slightly more expensive vehicle that costs less in fuel. But that break-even point would need to happen on a time scale quicker than "geological", so any potential savings can be realized over the vehicle's useful life. Resale of a TDI would likely be higher, too.

**marvholly** · 07-20-2013, 12:28 AM

There is another thing they do NOT tell you:

It is VERY hard to qualify for the 0% loans. Five years ago I was replacing my car w/ a GM vehicle wih the 0% financcing advertising. I have/had a FICO >700 and did NOT quaify.

**kork13** · 07-20-2013, 01:52 AM

Originally posted by marvholly View Post

There is another thing they do NOT tell you:

It is VERY hard to qualify for the 0% loans. Five years ago I was replacing my car w/ a GM vehicle wih the 0% financcing advertising. I have/had a FICO >700 and did NOT quaify.

True. You generally will need a top-tier score, like 750+ to qualify.

I'm curious, though, if anybody knows.... does the amount you're going to finance impact if you'll be approved for the best financing options? Like if you're buying a $30k car, and planning to finance only $10k, would that make you more (or less?) likely to get the 0% financing than if you were going to finance $28k?

**snafu** · 07-20-2013, 02:27 PM

It's sad really, we're the most educated generation but the average Joe is readily taken in by basic marketing 101. It doesn't matter if they *need* a new car when they hear/read/see the ad. It doesn't matter if they ultimately discover they don't qualify for 0% financing. The salesman has already sold them on the idea of a new, bigger, better das auto. As said, they will roll over the balance owned on their current vehicle and extend the loan as long as possible to keep the monthly payments at the level they can pay...if nothing goes wrong.

They'll worry about the extra costs later. Of course they'll buy the most *tricked-out* vehicle on the lot.

**moneysma** · 08-07-2013, 04:42 PM

Originally posted by disneysteve View Post

Most people believe it because most people are clueless when it comes to finance. "If I can afford the monthly payment, I can afford the purchase." Look how many people say, "If a mortgage payment will be the same as a rent payment, it makes sense to buy a house." They ignore the fact that there is a slew of expenses they'll have as an owner that they don't have as a renter. The same goes for cars. They don't think about insurance, gas, maintenance, repairs. All they see is the monthly payment.

They also don't even think about how long the loan is for. They don't care if it is 3 years or 7 years as long as the monthly payment is right. As a result, folks often end up rolling over old loans into new loans because they don't keep the car as long as the length of the loan. That's why we hear of someone owing $25,000 on a car worth $15,000.

Agree 100%. That's why when you walk in the door they ask you how much you can afford to pay each month. They can play with the length of the loan all day long to get you into a more expensive car. More car and longer term means more interest.

It's really sad how little people understand about finance. Just another reason why it needs to be taught in school.

**disneysteve** · 08-07-2013, 04:59 PM

Originally posted by moneysma View Post

They can play with the length of the loan all day long to get you into a more expensive car. More car and longer term means more interest.

Interestingly, when we bought a car in June, the interest rate was the same no matter how long of a loan we took. It didn't matter if it was 3, 4, 5, or 6 years. The rate was the same. So just for the heck of it, I took the longest option. I have absolutely no intent of taking 6 years to repay the loan but why lock into a higher payment if you don't have to. Of course we bought a car last June also and I'll be making the final payment this month so I only kept that loan for 13 months. We might keep this loan a bit longer as college expenses will start in a year and I may need to keep expenses down a bit.

**greenskeeper** · 08-08-2013, 06:13 AM

interest rates being equal the longer the loan the more interest you will pay and a larger part of the monthly payment goes towards that interest.

**disneysteve** · 08-08-2013, 07:09 AM

Originally posted by greenskeeper View Post

interest rates being equal the longer the loan the more interest you will pay and a larger part of the monthly payment goes towards that interest.

True, but if I pay it off in a year either way it doesn't really matter.

Car Dealership Logic