Be Wary of the Low Interest Car Finance Con

You can’t miss it these days, every car dealership seems to be offering “low interest” finance deals on “select” models. 

With interest rates as low as 2.5% being offered, it seems like an unbelievable deal..but is it?  Obviously many people think it must be a great deal because the figures are indicating that new cars are just rolling out of the dealerships.  Well sorry to “rain on the parade” but I’m here to tell you that it’s just another marketing strategy from the car industry that is most likely going to cost you a lot of money in the long run.

The first thing to consider is that the companies that are financing these loans are not the finance arms of the big dealers, as many of these no longer exist following the GFC.  It tends to be the Equipment finance divisions of many of our banks.  Now, I can assure you that these businesses are not lending out their funds at interest rates lower than what they paid for them.  Those continued super profits that they post are a testament to that fact.  So how are they charging the low interest rates I hear you ask?  Quite simple really, the car dealership is loading up the sale price of the vehicle and remitting the difference back to the lender to ensure that the effective rate you pay is the advertised rate on the purchase price.  In effect the borrower is paying extra to obtain the so called “low interest” rate…isn’t that called an oxymoron!

With a little research you’ll notice that these “low interest” offers tend to be on either slow selling models or on models where there is a new release scheduled for just around the corner.  So not only is the purchaser paying too much for their vehicle, but they tend to be purchasing a vehicle that has been over supplied, is inferior to it’s competition or is about to be made redundant by it’s younger, more wonderful sibling.  All this means is when they drive that vehicle off the floor, instead of instantly depreciating the vehicle at 20% they are perhaps seeing an immediatel depreciation of 30 – 35%…ouch!

An argument that we often hear from those that have taken up one of these great deals, is that the previous vehicle was under finance at a much higher interest rate.  With vehicle finance interest rates at all time low levels, this is a valid argument.  However, what these purchasers fail to understand is that they are normally at the back end of their contracts and that each payment they make is literally a full principal repayment as the majority of interest on the contract is paid in the first few years.  So when these purchasers trade their vehicle (usually at a major discount to retail price) they exit a contract where they stand to make substantial gains.

For the astute consumer there is an opportunity here to take advantage of what’s happening.  Firstly, if you like the models that have the low interest offers attached or you just have to have a new vehicle, head into the dealership and attempt to negotiate the price on a “cash deal” basis.  Once you settle on the price, ask them for the low interest offer.  I doubt whether it will be forthcoming, but you never know.  The chances are they’ll have a seperate price associated with that offer, if so, obtain that price and the details of the financing and then give us a call and we’ll help you run the numbers to see whether external financing will provide you with a better deal.  I’m confident that it will.

The second opportunity exists in the fact that there is surplus amount of excellent quality used cars sloshing around the second hand market at the moment.  Head to a wholesaler, go online or even head to a second hand car dealer, because you’re going to obtain much better value if you’re ok with a second hand vehicle.  As I mentioned previously, vehicle finance rates are at all time low levels and you’re going to be able to still obtain these rates on a second hand vehicle purchase.  On top of this you will probably be 50% better off than if you purchase new if you consider the immediate depreciation effect of buying a new vehicle.

If you want someone to do the work for you, let us know and we can put you in contact with wholesalers who will hunt down the type of vehicle that you’re seeking, saving you time and money.

As the saying goes …..”If it sounds to good to be true, it’s usually is”

All the best!

Contact Us now if you would like to discuss your car finance options

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ShayneArticle written by Shayne Fergus, Director of Capital Funding Group.

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