In the good old days, your best way of negotiating a discount when buying a car was to roll up to the dealership with your cash in hand, ready to do a deal on the spot. These days, most dealers won’t even touch your money, let alone give you a better deal for paying cash rather than financing. What has changed?
Matthew from London asks: “Trying to buy a new VW Golf for the wife, and none of the dealers will give me a sensible discount for cash. They keep pushing me to take their finance instead. Don’t they want my money?”
Matthew’s question is one that many people ask about buying a car. The reality is that there are no special deals for cash at large dealerships, and even the smaller dealerships are becoming less interested in “doing a deal for cash”. So why is this the case?
Cash is no longer king in car sales, whether it’s the actual folding paper kind or the electronic equivalent. In the 21st century it’s all about finance, for a few reasons.
Cash is a security issue
Handling large quantities of cash is not considered safe by car dealers – or their insurers. Not only is there a risk of burglary and theft, but there is also the growing problem of money laundering and counterfeiting. As a result, very few dealers will accept more than about £1000 in cash these days and some won’t even let you pay anything for a car in actual paper money.
Cash is a no longer an easy tax dodge
Back in the day, it was easy to take a lot more cash than you ever declared to HMRC. In the 21st century this is much harder, plus HMRC tends to watch cash businesses like a hawk. If you are a small trader selling low-value cars, then you may be able to fudge a bit here and there, but if you are large franchised dealer then you have virtually no chance of getting away with tax evasion from undeclared cash payments.
What about electronic transfer?
Transferring your money via BACS or CHAPS (or any other method of sending it from your account to the dealer’s) is how you generally buy a car with cash these days. But it still doesn’t guarantee you a cracking deal to have your money ready to send at the click of a button. That’s because it’s much better for the dealer if you finance the car through their ‘preferred’ finance option.
Why is finance better for a car dealer?
1) First and foremost, car dealers sell finance because they make a profit on it. This is something that most customers tend to forget. Negotiating a deal on a car isn’t all about the sticker price – the dealer may well be making more from selling you finance than selling you the actual car. Everything you can buy in a dealership has a profit margin, whether it’s a car, a service, a baseball cap or a finance or insurance product. If it didn’t make them any money, they wouldn’t be selling it.
2) Car dealers are incentivised by the manufacturers and finance companies to sell a certain amount of finance, just as they are with selling cars. If the dealer sells a lot of finance, they get a kickback. If they don’t sell enough to meet their obligations to the manufacturer, there can be significant financial ramifications.
3) It allows people to buy more expensive cars. If you have £10,000 in cash to spend on a car, you can buy a reasonable second-hand car or a very basic new car. Or you could pay up to £10,000 up-front, and then £300 per month for the next three years. and have yourself a much more expensive car. This lures thousands of buyers into more expensive vehicles, which is good news for dealers as more of their customers can afford to buy more of their stock.
4) Most car finance offers are based on a PCP or PCH (lease) agreement, which encourage (PCP) or force (PCH) you to change your car in a few years, rather than keeping it indefinitely. This means that there is a good chance you will be back in the dealership in about 3 years’ time looking for another car. So the dealership is setting themselves up to sell you three or four cars over a period of time, not just the one you’re looking at now.
5) Most PCP or PCH finance agreements require you to service the car with an approved dealership as part of the car’s hand-back value. If you are buying the car with cash, they can’t force you to do that. Therefore, they are guaranteeing work for their own service network for finance customers.
6) The manufacturer and/or finance company often kick in money to provide additional discount or “deposit contribution” on the vehicle. Not every dealer passes this money onto the customer, especially if the customer is not aware that it’s on offer…
So as you can see, there are some very significant reasons why a dealer would much rather sell you a car on finance than simply take your available cash. As such, they will almost certainly be more interested in negotiating a better deal if you are taking finance.
What does this mean for me?
As with any negotiation, knowledge is power. And as with any car purchase, it’s important that you recognise your own limits of affordability and don’t overspend. But there are opportunities to get a better deal by taking advantage of car finance offers, even if you don’t really want to finance the car.
Firstly, any finance agreement has a 14-day cooling-off period. So if there is an additional discount on the table for financing the car, you can take out the finance, pick up your car and then promptly cancel the finance. The finance company will immediately invoice you for the amount financed but there will be no fees or charges or interest. So you save on the purchase price and don’t pay any interest.
Secondly, there are plenty of low-rate finance offers around, even some that are 0% APR (which is genuinely free from both interest and fees). It may be that the total overall cost of purchasing the car on finance is not that much more than paying for it all upfront.
The point of this article is not to try and convince you to finance your next car, as The Car Expert is neither for nor against car finance – it all depends on your circumstances. However, you should always consider all of your options to ensure you are making the best decision. At the end of the day, you want to get the best possible car for the best possible price, so do your sums carefully before committing yourself to anything.