Cash buyers pay more at car dealerships. Sounds counter-intuitive right? Whether buying a new car, used car, or leasing, buying a car in cash never has to cost more if you know exactly what to say.
In this video and post I explain why cash buyers pay more than buyers who finance. Then I explain exactly what to say to save money as a cash buyer. In the last segment of this video I provide insight into how a cash buyer can leverage their cash today to get the best deal possible, especially during this period of economic uncertainty. Cash is not king at the dealerships right now but cash is king in part of the auto industry.
Why Cash Buyers Pay More Than Buyers Who Finance
Car buying and negotiation in general is all about alternatives and your willingness to walk away from the deal.
Car buyers have the ability to walk away and buy a car from a different dealer or not buy a car all together. I cover this approach to car negotiation in my video about how to negotiate the best price for a used car. But on the other side of that negotiation, a car dealer has the ability to walk away from a buyer and wait for another buyer to come along to purchase the same vehicle.
Over the last 5 years the auto industry has been booming, and dealers haven’t had to wait long for another buyer to come purchase their cars, trucks, and motorcycles. Dealers have been willing to walk away from cash customers more easily because more and more buyers who finance follow. The number of auto loans and total loan balance since 2003 is depicted in the graph below. You can see influx in buyers who borrow has increased significantly over the last 5 years.
Car dealers prefer buyers who borrow for two reasons:
- Car dealers get a cut of the total amount financed by the buyer (A dealer may net $500-$1,000 from the lender for example on a deal where the buyer is borrowing $30,000)
- Car dealers often have the option to shop a buyer to multiple lenders who may be willing to provide additional cash incentives for selling higher interest rates. For example a lender may approve a buyer for 4% interest, but the lender may be willing to pay the dealer an extra $500 if they can close the buyer at 5% interest. The lender will be willing to pay even more in this example if the dealer can close the buyer at 6%.
Financial institutions have been more willing to lend to subprime borrowers (car buyers with a credit score below 620).This has only increased the pool of under qualified buyers. The graph below shows that 90+ day delinquencies on auto loans is at 2008, 2009, 2010 levels.
As a cash buyer this is who you’re competing against. Until the market shifts to the point where under qualified buyers are no longer able to finance the amounts they want for a car purchase, they will have the edge over cash buyers, simply because the dealer can make more in another way.
In the context of a sale we’re talking about a $500-$1,000 edge that a financed buyer might typically have in a negotiation over a cash buyer. This is just the portion of additional money a dealership may be willing to concede on the price of the car to make more money on the back end through financing.
What to Say to Save Money as a Cash Buyer
The way to maximize a discount as a cash buyer is to remain open to financing until absolute last second. Never reject financing.
Early on during your visit to the dealership the sales person you’re working with will ask if you plan to finance. If you state that you are open to financing as I recommend, the follow up question will be to ask you to run your credit to check your qualifying rates. The sales person needs your credit information for a couple reasons:
- They need to assume an interest rate in order to quote you a monthly payment.
- They know customers limit the number of times they do a hard credit pull which means this dealership instantly has better odds to earn your business. As a buyer you’re essentially giving up leverage.
Never allow the dealer to run your credit until you’ve agreed to the final price of the vehicle. This applies to cash buyers and those who finance.
Instead, you can respond in a few ways:
- State your most recent credit score (you can check your credit score for free these days from financial services including most credit card companies). Ask them to use an estimated interest rate for their monthly payment based on your verbal credit score.
- If they won’t listen to your verbal score tell them to assume a specific rate (4%, 6%, 8%, 10% ultimately the rate doesn’t matter).
- If they don’t accept either of these answers tell them to assume whatever rate they’re comfortable assuming. If they’re unwilling to assume any rate without a hard credit pull you need to walk away from this dealership because you will surely run into many other tricks car dealers pull during the sales process.
Once you’ve settled on an interest rate move on with the sales process and continue your negotiation. Once you’ve agreed to the elephant in the room (the final sale price of the vehicle), state that you’ve decided to pay cash.
Most likely the salesperson or their manager will push back and say their price was based on the assumption you were financing. Don’t fold though. Hold this price. And be willing to walk away. This is their last chance to try to get as much money out of the deal as possible. You now have a written offer you can shop to other dealership and most likely either the dealer you’re working with or someone else will be willing to give you that price, even though you’re paying cash.
In a separate video I cover how to negotiate car price by email (new car, used car, or lease). This email script will tell you exactly what to say to shop a deal to multiple dealerships at once, which makes online car buying even easier.
Where Cash Is Still King in the Car Business
Cash is still king of the private market places like Facebook Marketplace, Craigslist, and For Sale By Owner. Usually these sellers lack any relevant automotive or sales experience. They are more likely to let go of a car for more than its worth to a cash buyer simply because they don’t have the experience to know how long they will have to wait to get the price they are asking for their vehicle.
I know a guy for example who exclusively flips Jeep Wranglers for a profit simply by making low cash offers to private sellers because he knows what that Jeep will eventually self for to the prevailing market. He does little to know work on the Wrangles outside of cleaning up the Jeep for show.
One of my best friends actually made several thousand dollars buying a Honda Civic on Facebook market place and then selling the car months later after he was done using it because the seller significantly underestimated the value of the vehicle.
In generally the bottom line for private sellers typically won’t be below what they can trade in their car for at a dealership.
If for example, a car is listed for sale by owner at $15,000, an initial offer of $10,000 won’t make sense if the private seller can trade in the car for $11,000 down the street at the local dealership.
During these uncertain times some dealerships have furloughed salespeople and managers, while some smaller dealerships have shut down entirely due to the decreased demand. With less showrooms open for business, private sellers have lost alternatives. This puts cash buyers in an even stronger position to close a deal on a low ball offer.
In a separate video I cover how to make an initial offer in a used car negotiation as well as a how to make an initial offer in a new car negotiation. Use these videos to help you better negotiate in the private market as a cash buyer.
How to Best Negotiate at the Dealership
I’ve helped thousands of YouTubers save money and time on their next vehicle purchase with the Car Buying Tips, Personal Finance, and Investment advice on my YouTube channel and here on notwaitingtolive.com/car-blog.
This is one of the best online car buying sites around because I make negotiating the best results simple for people of all walks of life.
Use these tips to have the confidence to represent yourself in a car negotiation. Don’t let car dealers rip you off with their tricks of the trade. These are some the videos car buyers find most helpful:
How to best negotiate used car price: https://youtu.be/zgT_4khybEw
How to best negotiate a lease: https://youtu.be/ImT61XQf3VQ
How to best negotiate new car price: https://youtu.be/BHgwd6YKWlU
What to look for when buying a used car: https://youtu.be/OoigZf6fFuI
How to negotiate a car deal by email: https://youtu.be/pJxjHpcPQdM
How to make lowest initial offer on a used car: https://youtu.be/ozkOrmz_8lw