More than just home loans
Three years ago one of my oldest clients - lets call him John - now resident interstate - urgently needed a small cheap replacement run around vehicle ($18,000 + GST) for his business. The car was needed within 24 hours, and the dealership finance guru advises "that's not a problem" - he could arrange the finance "on the spot at a cheaper rate than his current lender & broker could offer - we'll make the repayments similar to what you were paying on the other car and rather than pay the $5,000 owing on the trade in from your cash at bank - we'll just include that in the deal - and you can have the car in the morning - a win -win"
Three years on - John's business needs have changed - the car he bought in 2015 is no longer required. It has very low mileage, is almost in showroom condition - but at best its worth $10,000.
Over the last 3 years he's paid approximately $20,000 to the financier...but the payout on the current loan at at 14 Feb 2018 is $19,820.96
Clients who arrange their vehicle finance through car dealerships often fall victim to questionable marketing practices that are really designed to increase the profit margin for the dealer, not necessarily benefit the car buyer. - See below
BMW Australia Finance, has been required to enter into an enforceable undertaking to repay $72 million to more than 15,000 clients after being found to have breached responsible lending provisions. It's believed to be Australia's largest ever consumer pay-back scheme..The affected customers have car loans for a wide range of cars and brands, new and secondhand. (More information here).
The papers and TV are full of ads from car dealers offering finance at rates as low as 0% - there's and old saying that if something sounds too good to be true it probably is.....
The majority of finance for car dealerships is provided by two major banks - who aren't known for giving away money at less than it costs them to borrow the funds from investors. The fine print at the bottom of the advertisement details the terms of the finance offer.What it doesnt say is that there is no negotiation in the asking price of the vehicle, that you're paying the full list price or very close to it. Furthermore the finance term is limited - usually to 36 months.
So how are car dealers able to offer finance at rates like 1.9% and 0% per annum? Its an old marketing trick known as subvention - which literally means that a gift is being given...
Its simple - the car dealers fiancier is using the difference between the list price and the price that you could negotiate to subsidise the finance rate.
Who loses?................. you guessed .........the purchaser!
The moral of the story - arrange your finance before you talk to the dealer and bargain as a "cash" buyer.
Some of the biggest mistakes most car buyers make when financing a vehicle are to:
These problems are more common with buyers of 'luxury" cars - who often want to stretch the budget to buy a name brand vehicle. A few dollars saved per month can cost $000s when the finance balloon comes due.
Do you home work - use on line research eg redbook. com.au to find out the lowest trade in value of similar vehicle after 3, 4 or 5 years - Remember you're also selling a vehicle with no warranty.
Example values of "luxury vehicles" after 5 years - from Redbook
The competition isn't just other second hand vehicles. As luxury brands seek greater market share - they're not holding value as well as in the past. In relative terms many of the "newer" brands are on par with, or superior to the older established "name" brands as far as technology and build quality - they just dont have the name - yet.
A Guaranteed Future Value (GFV) for your new car after 4 years? - Sounds like a great idea. But is it?
In the last few months GFV has become a selling point for several car manufacturers, mainly prestige or upmarket vehicles that depreciate rapidly (ie, dont hold their value well) and are sold on finance with a higher residual value / balloon at the end of the loan term than is likely to be achieved in the marketplace.
Again its "smoke & mirrors" marketing paid for by unwitting clients.
If your vehicle finance facility is structured correctly with a balloon value at the end of the term that's conservative and able to be achieved in the marketplace in 3 - 4 or 5 years - you shouldn't have a problem.
It used to be said that dealers made their money out of servicing cars - not selling them. This was based on the belief that unless you took your vehicle back to the dealer for servicing your warranty was void. This is not the case and warranty servicing can be done by most workshops - as long as they use genuine parts and follow the log book service requirements and procedures.
After market options such as window tinting, extended warranty, paint protection etc etc finance and insurance are major income sources for the dealership. The profit margin on non original accessories such as parking sensors is in most cases substantially more than 50% of the price charged.