Buying my first car: why financing is cheaper than paying cash here and now?

Question

I'm buying my first car and I'm a bit puzzled. Here you can see price for 2015 Toyota Camry Hybrid XLE (archived). You can see that MSRP is $34,435, but the dealer is making discount of $8,609, so the final price is $25,826, but there is a catch:

Excludes tax, tag, registration and dealer fees. Must finance through Southeast Toyota Finance with approved credit.

So, 3 dealers and 1 manager separately have said me that to get the car for $25,826, i.e. with the $8,609 discount, I have to do financing but if I decide not to do financing and pay the cash right away, I can get the car only for $34,435, i.e. without any discount. All four of them were saying that the financing agency gives them several thousand dollars if the client (i.e. me) decides to finance a car, so they can drop off those several thousand dollars from the car price. I can hardly believe it. They also said that I can pay the entire price of the car but $2,500 and then do the financing with %5.15 interest on those $2,500 for 6 month, which wouldn't return the dealership anywhere near the discount they are giving me ($8,609), which makes me even harder to believe those things.

So, I'm puzzled as to why I get the $8,609 discount only when doing financing, but I have to pay the full MSRP price without the discount when paying in cash right there and now.

Answer 1

The dealership is getting a kickback for having you use a particular bank to finance through. The bank assumes you will take the full term of the loan to pay back, and will hopefully be a repeat customer. This tactic isn't new, and although it maybe doesn't make sense to you, the consumer, in the long run it benefits the bank and the dealership. (They wouldn't do it otherwise. These guys have a lot of smart people running #s for them).

Be sure to read the specifics of the loan contract. There may be a penalty for paying it off early. Most customers won't be able to pay that much in cash, so the bank makes a deal with the dealership to send clients their way. They will lose money on a small percentage of clients, but make more off of the rest of the clients. If there's no penalty for paying it off early, you may just want to take the financing offer and pay it off ASAP. If you truly can only finance $2500 for 6 mos, and get the full discount, then that might work as well. The bank had to set a minimum for the dealership in order to qualify as a loan that earns the discount. Sounds like that's it.

Bonus Info:

Here's a screenshot of Kelley Blue Book for that car. Car dealers get me riled up, always have, always will, so I like doing this kind of research for people to make sure they get the right price. Fair price range is $27,578 - $28,551. First time car buyers are a dealers dream come true. Don't let them beat you down!

And here's more specific data about the Florida area relating to recent purchases:

Answer 2

The advice given at this site is to get approved for a loan from your bank or credit union before visiting the dealer. That way you have one data point in hand. You know that your bank will loan w dollars at x rate for y months with a monthly payment of Z. You know what level you have to negotiate to in order to get a better deal from the dealer.

The dealership you have visited has said

Excludes tax, tag, registration and dealer fees. Must finance through Southeast Toyota Finance with approved credit.

The first part is true. Most ads you will see exclude tax, tag, registration. Those amounts are set by the state or local government, and will be added by all dealers after the final price has been negotiated. They will be exactly the same if you make a deal with the dealer across the street.

The phrase Must finance through company x is done because they want to make sure the interest and fees for the deal stay in the family. My fear is that the loan will also not be a great deal. They may have a higher rate, or longer term, or hit you with many fee and penalties if you want to pay it off early.

Many dealers want to nudge you into financing with them, but the unwillingness to negotiate on price may mean that there is a short term pressure on the dealership to do more deals through Toyota finance. Of course the risk for them is that potential buyers just take their business a few miles down the road to somebody else.

If they won't budge from the cash price, you probably want to pick another dealer. If the spread between the two was smaller, it is possible that the loan from your bank at the cash price might still save more money compared to the dealer loan at their quoted price. We can't tell exactly because we don't know the interest rates of the two offers.

A couple of notes regarding other dealers. If you are willing to drive a little farther when buying the vehicle, you can still go to the closer dealer for warranty work. If you don't need a new car, you can sometimes find a deal on a car that is only a year or two old at a dealership that sells other types of cars. They got the used car as a trade-in.