Save money with a high interest car loan

[121212]

OK, I know that this questions sounds strange. I made some big money mistakes over the last few years, but I have learned my lesson and I'm taking steps to improve my money management. The car I had been driving died on me and I need to get a new car. That is, a new car for me, not a brand new car. I found a car at a used car dealer that fits my needs and I have enough cash on hand to buy it without taking out a loan.

The dealership is getting some type of promotion through their financing company where I can save $250 if I take out a loan rather than pay cash for the car. It doesn't make a whole lot of sense to me, but the dealer says I can have the car for $250 less if I'm willing to take out a loan.

The problem is that my credit is still bad so the interest on the loan is high. My question is does it make sense to get the car loan to save the $250, then pay it off immediately with the cash I was going to pay for the car? Would this work and are there any dangers in doing this?

[pen]

The dealership likely makes money on the back end with the loans. Ask extra questions to see if there are any extra fees in this loan for you if you pay it off early, or processing fees. If not, it may make sense for you. The paid loan will probably help your credit.

[autoxer]

I've done this a couple times to get a lower purchase price, paying it off after a month or two. Just make sure you have read through the entire loan document, to make sure you understand the contract and that there isn't any prepayment penalties. Calculate how much the interest will truly cost you for the first couple of months.

Read through the entire loan document, don't just take their word for it.

Also, make sure it is being serviced by a reputable bank. One of my car loans was run through a bank with the most terrible customer service. They kept mailing me letters, saying I needed to decrease my insurance deductible, which would of cost me more per month. And I kept trying to call, but could never get a hold of a person. Their extra low interest rate wasn't worth the trouble.

[dczech09]

I really think they are playing games with you. Any dealership makes more money if they can get you to finance rather than pay cash. That is a fact that has been shared by NADA in the past.

Auto dealers do not make all that much on the sale of a car if the buyer pays cash. They want you to finance or lease so that they can sell the contract for extra profit and let the bank take on the risk of you making payments or not.

I would read the contract from the financing company THOROUGHLY and make sure there are not closing costs, hidden fees, or penalties for paying off the loan too early. My guess is there is something there that is not being shared.

Put it this way- if the dealership is going to give you a $250 discount, that means they are getting the money somewhere else (like the bank). Which would mean that the bank is somehow getting that extra money (like you). It is a shell game.

If I were in your shoes, I would have asked for a steep discounts if I pay cash. Think about it: no risk of non-payment, the money is there right away, etc. If they were willing to give me the discounts on financing, they should be willing to offer a steep discount on cash basis. And if they don't, then I will go to their competitor and make sure they know. And when I buy the car from the competitor, I would go show these guys the car and tell them that they missed out on some money because they got greedy and wanted more.

I think they are playing with you. They are playing hard-ball; so throw the ball back at them harder!

[MonkeyMama]

I've done this a couple times to get a lower purchase price, paying it off after a month or two. Just make sure you have read through the entire loan document, to make sure you understand the contract and that there isn't any prepayment penalties. Calculate how much the interest will truly cost you for the first couple of months.

Read through the entire loan document, don't just take their word for it.

Yes, we did this once. My experience has been that car dealerships have absolutely no interest in our cash. They get pissy they can't talk us into buying beyond our means. So I don't know if you have a leg to stand on with cash negotiations. (But it will depend on the car and the dealership, and the economy I am sure. I haven't bought a car since debt major bubble years).

It is because of that, that last time we bought a car we decided to play their game. They rolled out the red carpet when we discussed financing with them. They still didn't want our cash for nothing, but were very happy to give us $500 off if we took dealer financing. I read the contract very thoroughly, and there was an early payoff penalty which didn't amount to much. So we did it, kind of as an experiment. It was GREAT!! (We paid it off in a week or two - immediately when I had the payoff and the account # to pay off). They never charged us one single penny of interest, though the contract said we would pay a few bucks. The catch was they charged us a high interest rate. Which is no catch if you don't pay the interest.

In the future I will always negotiate cash or financing, whatever they will budge on. I don't know if I'd bother for $250. $500 is overall not a lot, but the car was so inexpensive that it was a significant additional discount.

[JoeP]

The best strategy is to say, "We'll talk financing once we agree on the final cost." That way, you can always see what their financing is like, or just pay cash.

I'd be very cautious of getting into a loan with the goal of paying it off early, simply because there are too many variables to have the the same certainty you'd get from paying cash. For me, the "250" I'd save would be a small price I'd willingly pay in order to the the peace of mind that some fine print didn't come up and bite me.

You said your car "died"...is your car repairable?

[121212]

You said your car "died"...is your car repairable?

Sort of. I can get it repaired, but the repair costs would be significant enough that I think getting a new used car is a better way to go. It's been having a lot of issues and although I can repair it cheaper than getting a used car, I think it will continue to drain money with other repairs. Getting a reliable used car, even if it's a bit more now, will save me money in the long run.

I know that $250 isn't a lot for most people, but every penny counts for me at the moment.

[JoeP]

Sort of. I can get it repaired, but the repair costs would be significant enough that I think getting a new used car is a better way to go. It's been having a lot of issues and although I can repair it cheaper than getting a used car, I think it will continue to drain money with other repairs. Getting a reliable used car, even if it's a bit more now, will save me money in the long run.

I know that $250 isn't a lot for most people, but every penny counts for me at the moment.

Just for peace of mind, I'd try splitting the difference. I'll bet if you offered them $125 less, and you started walking after they say no, they'll chase you down before you can make it back to your car.

To make up that $125, take a defensive driving course and get a new insurance quote.

[Permanent Temp]

What kind of cash are we talking here? If its nearer to the 6-10K or more area you could go to reputable dealership and get a used car and they would be more than happy to take cash and might even give you something for the car you have now. Also calling into the dealership usually helps you lock in a lower price. I would be worried about any dealer who you offer cash to and they try to lock you into finance deal anyway.

My husband works at a dealership and the difference between a cash deal and a financing deal for them is something like 30-40 dollars solely because they can file a little less paperwork. That used dealer must be getting some huge kick back for the loan if they can offer you a 250 difference based solely on method of payment. I would either pay cash and eat the 250 or keep shopping somewhere where I wouldn't worry about them trying to lock me into what they want.
Also I think as others have said negotiating the deal first before the mention of cash is a good idea too. Salesmen sometimes are weary of upfront cash customers because they tend to be demanding and ask for things that cannot be done, if you haggle upfront you get the best deal then you can just pay in cash and be done with it.

A deal is a deal cash or financing. If you get a salesman whose not happy about your method that is their problem, its seems to me it would always be better to take cash than to lose a sale all together.

[bjl584]

Take out the loan and pay it off immediately. Just make sure that you can do so without penalty. A lot of these types of "deals" require you to make a certain number of payments before paying off the note.

[121212]

Thank you for all the comments. I spent a lot of time thinking about what would be the best action to take, and I decided to look for a car someplace else. It's a bit frustrating since this would have been a good car for me to buy, but the more I thought about the way that the sales man was talking and trying to get me to take the financing, things just didn't seem right. Call it a gut feeling, but I think I will feel more comfortable getting a car from someone I trust a bit more. I have my fingers crossed that I can get a similar car at a similar price, but I think I made the right decision.