Having spent many of my younger years in the motor vehicle industry, I thought that I would add to my blog, an article on the topic of motor vehicle finance. Please note that this post is general in nature and does not constitute as advice, as everybody’s circumstances are different. If you would like to discuss your individual needs or situation, we are happy to chat, and you can get in touch with us here. Castle Mortgages are very experienced in setting up motor vehicle finance and have several lenders on our panel to choose from. Another advantage of using us is that motor vehicle finance is not our main income stream, and while we focus on great service and outcomes, we do not load huge margins on anything to try and make squillions of dollars out of your deal. The result is that you get one of the most competitive deals out there.
Anyway, I digress, what I wanted to do was highlight things you should take note of when financing a car through a dealership, or financier. My first tip would be to organise your finance beforehand. Just like with a home knowing that you can afford the car that you are looking at, it will give you peace of mind as well as confidence should you decide you want to negotiate on the selling price of the car. What many people do is spend weeks looking at different car variants and after the barrage of dealership visits, and test drives will finally sign a contract to purchase their choice motor vehicle, only to be whisked off afterwards into the F&I’s office to be offered the dealership finance. By this time, all the fight is out of you, and you just want your car. There is a reason that the process there is structured that way, to maximise the companies profitability. A home is the most expensive asset most people will buy in their lives, and many go to the ends of the earth to make sure they are getting the best deal financially that they can. They do this because they know that the savings over time are large if done correctly. A motor vehicle is the second most expensive thing that you will buy, so why not do the same. Get boring finance shopping over before you start looking and work out what the best finance is going to be for your situation. Using a finance broker with no bias or allegiance to a dealership finance product is a good start. You can always still compare the dealership finance when you are there, and if it is a better option, then go with that. If that is the case, though, you have then made a much more informed decision.
Dealerships and brokers make their money on your finance deal by either loading an interest margin on top of the rate a lender is offering; on the other hand, they will charge an origination fee. If the lender offers a rate of 5% on the motor vehicle finance and the dealership then puts a further 1% on the deal, you will be signed up at 6%. The dealership then makes that 1% on the financed amount as an upfront. This is why it is good to have done your homework, and perhaps even have pre-approval. You will know what is out there in terms of rate and will know what is a “good deal”. Having pre-approval with someone else may even give you leverage to negotiate a better rate. You should always, in my opinion, ask for a better rate as dealerships will shave that margin down to get your business. An origination fee, as discussed above, is a fee that you are charged for the setting up and processing of the loan. A dealer can also add to this fee from there side, and here is where they can make their money too. As said before, if you have done your homework, you will know whether or not they are totally gouging that fee or not.
Another thing to check when setting up car finance is the fine print when it comes to “break” fees. With regards to a higher purchase or a chattel mortgage, the repayments are normally fixed over the period that you have elected to purchase the motor vehicle over. With cars, circumstances change a lot quicker than houses, and you may decide to pay the motor vehicle out or sell it. Many lenders will not have a “break” fee, and others will have a fixed amount that you will need to pay like, for example, $300.00 for closing or breaking contract. On the more expensive side of town, some lenders will charge you the interest they would have received for the remainder of the contract or a percentage of that, making selling or changing your car very expensive. My next tip is always to ask what the “break fee” is on the loan you are signing up for. Get the consultant to give you an example of what that would look like if you were to close out the contract two years early, let’s say, also get them to highlight it in the fine print so you can find it and go over it in your own time. Having to pay high break costs depending on what your situation is may offset an excellent interest rate deal in the long run, this again is why it pays to have had a look at several lenders before you commit to financing.
Lastly, beware of the 1% or 2% finance deals that dealerships sometimes offer. Normally to get the low finance rate, the requirement is that you have to purchase the new car at the full recommended retail price. As the saying goes, you can’t have your cake and eat it too. Usually, the offer is only available on older model cars that are going to be superseded by a new one shortly. What that usually means is that dealers are discounting them heavily on the car sales website and through negotiations to sell them off. What that means is if you are purchasing the car at full retail even though the interest rate is low, the amount of profit that they made on the car more than offsets the lesser amount they are making on the finance. A client that may have set up their own finance elsewhere at a higher interest rate, but can now negotiate on the cars price, is more often than not in a much better position financially, once the dust has settled than the former.
As I am sure you see by the gist of this article, there are many factors to consider when looking at motor vehicle finance. Every scenario with regards to a client’s specific needs and circumstances are different. As with a home loan, it is always a good idea to consider the bevy of lenders and their products out there so that you can make an informed decision. Castle Mortgages are mortgage brokers in Adelaide that specialise in motor vehicle finance. We have a panel of lenders to choose from and will strive to find the one that will suit your needs. What we tend to find too is that we are usually one of the cheapest options when a comparison is made. If you are considering financing a car, come and have a free chat with us to consider your options. Get in touch with us today.