Car Dealerships Drive to Boost Profits by Refusing Cash

Supply-chain snarls have created a seller’s market in the auto industry. Many car dealerships are looking to boost profits by requiring clients to accept dealer-offered financing. This allows the dealer to get a cut of the interest rate or fee on the loan provided by an outside financial institution. It also facilitates other lucrative add-ons, such as insurance.

Dealerships appear to be succeeding with this strategy. The number of loans provided by auto lenders last year was the highest since 2004, according to the Federal Reserve Bank of New York. Edmunds, which offers a car shopping guide, indicates that more than half of car buyers used dealer-financed loans last year.

Consumers Have Limited Options

Car buyers who decline the seller financing option may end up paying a higher price, even above the manufacturer’s suggested retail price. Refusal to play the game may also kill the deal altogether. The customer may find the desired car out of reach due to thin supply.

Dealership strong-arming, charging higher than the listed price, and pricing cars based on method of payment has resulted in a rash of consumer complaints to agencies such as the National Consumer Law Center and the Federal Trade Commission. Some states have made it illegal for dealerships to have a higher price for a cash purchase or one based on outside financing.

A Work-Around

Some car buyers have found a way to give the auto dealerships what they want, while neutralizing the hit to their wallets. In the case where there is no prepayment penalty, consumers can accept the dealer-financed loan, and shortly after the initial transaction, refinance the loan and pay off the original in full.

Some buyers may appreciate this as a work-around, given the car can be acquired at a reasonable price, and the interest expense can be shut off earlier. The consumer wins by taking an indirect route. With new vehicles in short supply and even used cars selling for record prices, consumers will have to get creative, as dealerships seem to be holding all the cards at present.

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