Here is an interesting question: Would you still be driving the same car today if you had been forced to pay cash for it when you bought it? Or did you merely look at the monthly payments and justify it by telling yourself you could afford it because you could make the payments? Did you finance the car because of a low interest rate or even a 0% rate? If you had a bill for $20,000 today what would your mood be when you went to bed? If any of these questions make you feel uncomfortable you need to keep reading. First, let’s discuss the several ways that cars are purchased.
1) Financing: Blame Billy Durant
Billy Durant was the founder of General Motors. When the company began to really grow in the early 1900s he proposed the concept of “installment loans” to finance the purchase of cars for which folks did not have the cash. Mr. Durant created the General Motors Acceptance Corporation (GMAC) which at the time was the largest non-bank source for financing auto loans. His chief rival, Henry Ford, was vehemently opposed to the idea of installment loans and this one decision by Henry Ford cost him the lead in the American automobile industry. So, it could be argued that GM became the world’s largest company in the world partially by allowing customers to buy cars they could not afford! This speaks volumes about America’s obsession with driving cars they cannot afford – even back in 1919 when GMAC was formed. Financing a car is generally done by people who cannot afford to pay for the whole car at once.
2) Leasing:The Sacred Cash Cow of Auto Companies
Many struggling and even profitable auto companies make most or all of their profits from their financing division. Exactly like the story of Sears at one point being a finance company with some goods out front, auto companies are often in the same boat. Below are just brief snippets of recent news stories about the auto industrie’s profits:
“Ford Posts Profit as Finance Unit Offsets Auto Losses”
“DaimlerChrysler said Thursday that fourth-quarter profit rose 84 percent on gains in vehicle financing and sales of Chrysler cars…has counted on earnings growth at Chrysler, commercial-vehicle and financing divisions to more than offset declining profit at Mercedes.”
“Ford Profits Surges On Strength of Financing”
The above headlines demonstrate that these car companies are basically making products that lose money year after year, yet consumers that finance or lease through these company’s in-house leasing divisions contribute to the only profits of the companies. So, it could be argued that certain car companies only make profits from customers who lease. They do not even make money on their chief product: cars! Leasing is not only a rip-off for consumers, but it artificially inflates the profits of companies that otherwise would be going out of business if they exclusively stuck to their core industries.
Another reason that leasing is so popular is that it lets you drive a car you cannot afford. Otherwise, buyers would be stuck getting cars within their means and within their budgets which would likely be older, cheaper and less of a status symbol.
3) Paying Cash: The Epitome of Weird
How many people do you know who pay cash for their cars? I can probably count that number on one hand. Paying cash for a car is just plain weird. But borrowing or financing the car is normal, right? Who wants to be weird? Well, those “weird folks” have learned the truth about car payments. The truth about car payments is this: car dealers, on average, make $1200 on leased cars, $700 on financed cars and $72 on cash-purchased cars. Yes, you read that correctly. $72 profit on customers who pay cash for their cars. So, if you are a car salesman which financial product are you going to push?
If paying cash seems out reach for you, then ask yourself this question: have you ever missed a car payment? Has it ever been a stretch to make the car payment each month? If the answer is no, then why not discipline yourself to make a “virtual car payment” each month (say, $350 per month) even when it does not go to a real car payment. Take that cash of $350 per month, save it for 3 years and you’re at $12,600 which can buy a decent used car. You don’t spend a time on financing interest, you can negotiate better with the dealer and you reach a financial goal you set for yourself. This is something on which a price cannot be put.