I don’t quite agree with everything you said. Certainly 0.0 financing is optimal. But sometimes the dealer will come down on the final sales price if you finance at a higher rate.
When you’re in the finance office and the finance manager is pushing garbage such as optional warranties and gap insurance and junk like that it’s hard to keep your head. But sometimes it’s better to take that 1.9% financing if the dealer is willing to knock an extra couple of thousand off the best price.
And then if they’ll come down another $5000 based on a 5% interest rate, take it. And then as you say refinance the balance right away with the credit union. Or just pay it off if you have the cash.
In the beginning of my very long I.T. career, I wrote software for car dealerships that did everything from manage the lot inventory, cost of the lot inventory including insurance, advertising cost, keeping the lot inventory clean, etc.., ran the service department and calculated the deal for each car sold, including running a credit check on a buyer and printing the contract and all related paperwork.
I cannot think of a scenario where the finance reserve (the amount of money a dealer gets from a bank for financing a deal with them) is greater than a $5,000 reduction in the price of the car.
1.9% financing is different typically because that's manufacturer financing which cost the dealer effectively nothing and they get a small percentage of that 1.9% finance reserve back from the manufacturer.
When manufacturers offer 1.9% financing there is very little negotiation on the price of the car. The manufacturer is carrying the burden of financing the vehicle at a very low rate while having to wait for their money over time.
Dealers make their money on the following:
- Accessories sold;
- Add-ons such as extended warranties, "paint protection", undercoating (which is worthless);
- Credit life/Accidental death "insurance" that pays off the vehicle in the event the buyer dies (this is ALWAYS a rip-off!);
- Holdback - the amount of money given to the dealer by the manufacturer for selling the car;
- Finance Reserve - the money the dealer gets for financing a deal through a bank or through manufacturer financing
Dealers absolutely HATE cash buyers because they don't get "free" money such as finance reserve, cash buyers seldom take out extended warranties, get "paint protector" or "fabric protector" applications, nor undercoating or have any reason to buy ridiculously priced short-term life insurance known as "credit life insurance" to pay off their car if they die.
One last thing:
Whenever a car salesman asks you "how much can you afford a month" ... don't answer. If you do, you've screwed yourself. That salesman and the dealer then become highly motivated to sell you the least amount of car for the maximum amount of money to "fit" your payment. They'll load that deal up with every add-on they can charge for too and typically not disclose what's included in the final sale price until the contract is signed.
Any time a dealer asks "how much can you afford" walk off the lot because they think you're stupid. That dealer's a shyster.