Competition to Dealer Direct Financing
THE ADVANTAGES OF PAYING CASH FOR A VEHICLE
Paying cash for a vehicle from savings is not a "choice that most people have. The advantages of paying cash are that your customer has completely paid for assets that (s)he awns outright. There are no monthly payments when paying cash and no financing interest charges. Further, paying cash does not tie up your customer's available credit for other purposes. Cash buyers do not receive a better vehicle price or "deal" than finance customers. Whether a customer pays cash or finances, the dealership still receives the money for the vehicle as soon as the customer takes delivery (when financing, the financial institution purchases the vehicle from the dealership).
It’s important to note that there are also disadvantages to paying cash for a vehicle. Because of these disadvantages, even people that have cash from savings or investments available will often utilize financing through a dealership.
THE DISADVANTAGES OF PAYING CASH FOR A VEHICLE
1) MAY BE PENALTIES FOR CASHING OUT INVESTMENTS (E.G. MUTUAL FUNDS)
Many of our customers that are over fifty years of age will want to cash out an investment to pay for their vehicle. Many mutual funds sold ten or twenty years ago have significant monetary penalties if they are cashed out before their maturity. Often your customer is unaware of this. By informing them they may decide to leave their investment intact and finance instead.
2) LOSS OF EMERGENCY FUNDS
Your customer is depleting a large sum of money from their savings or investments when they pay cash for a vehicle. This money could be needed for emergencies later.
- a major home repair - a loan to a family member needing money - a trip due to a family emergency - a disability where savings are needed to replace income from work - special medical bills, medication and treatments - a funeral
3) LOST OPPORTUNITY FOR INEXPENSIVE LIFE AND DISABILITY LOAN INSURANCE
In the event that your customer becomes disabled and unable to work, they may have little money to draw upon from savings for income if they have paid cash for their vehicle. By financing the vehicle and insuring the loan with credit life and disability insurance, your customer can leave their cash in savings and investments. In the event that they were unable to work, they would have their savings or investments intact and be paying for the vehicle with insurance benefits instead of savings.
Customers over fifty years of age have the added benefit of being able to qualify for very inexpensive credit life and disability insurance premiums. This is due to the fact that the insurance is an "averaged premium", which means that all customers that qualify (generally between the ages of 18 and 65) pay the same premium. Customers over fifty would normally pay much more money for insurance than a younger person.
4) LOSS OF INVESTMENT OPPORTUNITY
Paying cash for a vehicle depletes money from your customers savings. This limits their investment opportunities. At some time in the future if they still have their savings, they could be used for:
- a down payment for a real estate purchase such as an investment property, cottage, or a larger home - home renovations or a pool - Registered Retirement Savings Plan (R.R.S.P1s), Canada Savings Bonds, Guaranteed Investment Certificates (G.I.C1s), mutual funds, stocks
5) LOST OPPORTUNITY TO "PAY DOWN" MORTGAGE
Many people that want to pay cash for their vehicle have a mortgage on their home. Most mortgages allow your customers to pay up to 15% of the principal amount borrowed each year without a penalty. By having your customer pay dawn their mortgage instead of paying cash for their vehicle, this significantly reduces the interest charges and the amortization of the mortgage. The savings more than offsets the cost MORTGAGE INSTEAD OF PAYING CASH a few pages ahead.
6) NO CREDIT RATING ESTABLISHED
If your customer pays cash, there is no establishment of positive credit rating. A positive credit rating is essential for borrowing money from financial institutions for things such as mortgages, lines of credit, home improvement loans, credit cards, etc. Financing through your dealer plan establishes a credit rating for your customer.
DISAVANTAGES OF PAYING FOR A VEHICLE USING A LINE OF CREDIT
1) FLUCTUATING INTEREST RATES
The interest on a credit line is a "variable (floating) rate. This means that when the prime rate changes, so does the interest charged on a credit line. There is no protection from increasing interest rates. The advantage of financing with a "fixed" interest rate from the dealership's dealer plan is that the interest rate is "locked in". In the event that your customer with the dealer plan when interest rates are high, they would have the option of using their credit line to pay out their dealer plan loan if the rates began to dramatically decrease. This is made possible by the fact that your dealer plan loan is an open agreement that can be paid into or paid off at anytime without monetary penalties.
SPECIAL NOTE Many people are attracted to credit lines because of their low interest rates. Rates on an unsecured no collateral) credit line can be as low as one or two points over the prime rate. However, credit fine interest rates can be substantially increased by the branch. If, for example, your customer was slow repaying their monthly credit line obligation for 2 or 3 months (because of some unforeseen difficult circumstances), their credit line interest rate could be more than DOUBLED! Credit line rates can increase even if the prime rate doesn't! FURTHERMORE In many cases, dealer plan "fixed" interest rates will be less than 2 percentage points higher than credit lines. With the "fixed rate" your customer always knows their interest rate haw much their payment will be, and exactly when it will be paid off!
2) 3% PAYMENTS
If your customer has an outstanding balance of $30 000 on their credit line because they have used it to pay for their vehicle, this means that their monthly payment would be 3% of $30 000, which equals $900 a month! This is much more than what a monthly payment would be over a normal 60 month term on a dealer plan loan (approximately $600 / month).
They may also be given the option of making "interest-only payments, In this case, they are only paying the interest charge for a single month and not paying down the principal amount of the outstanding balance. Although this may seem convenient and affordable, for many people this becomes a TRAP where they become comfortable paying the lower amount each month, yet NEVER PAY DOWN THE BALANCE OWING.
3) USAGE CHARGES
Many credit lines for businesses have fees such as a $15 per month usage fee and a charge to certify cheques (even "secured" credit lines). Even if your customer is able to obtain a very low variable interest rate with their credit line, these extra charges end up costing them more per month than a higher fixed interest rate through the dealership's dealer plan.
4) POOR DISABILITY CREDIT PROTECTION COVERAGE
Disability insurance and a credit line do not usually cover the entire payment; rather it covers the payment on the "average balance over the previous twelve month period. Your customer may be in a situation where they are unable to cover the minimum required payment on their "current" balance even if you have the disability coverage. Unlike dealer plan disability insurance, credit line coverage often requires the completion of a medical questionnaire at time of credit line application to qualify for the coverage. Customers can even be denied coverage based on answers provided to the questionnaire. Further, disability coverage on credit lines is referred to as "elimination” policies. This means that there is normally a "wait period"; a period of time where no benefits are paid. Ninety day wait periods are common with credit lines. Credit line coverage may have other restrictions before benefits are paid. Disability insurance and a dealer plan loan make your customers' loan / lease payments in the event that they are ill or injured and cannot work at their job or chosen profession. There are no medical questionnaires, blood or urine tests or physical examinations required for acceptance into the program and all customers are accepted into the program regardless of occupation and current health. All customers in the insurance group (e.g. ages 18 - 65) also pay the same premiums. There are no limits to the number of claims during the life of the loan / lease agreement, confinement to the home hospital is not required for payment of benefits, the coverage pays in addition to any other insurance benefits or salary continuations being received and there is no income tax payable on the benefits. Customers can even choose various "retroactive plans that pay benefits from the first day of recorded illness or injury.
5) REVOLVING CREDIT
A credit line is like a credit card in that it can be utilized on an on-going basis. This is referred to as "revolving credit". The "trap that many credit line customers fall into is that they never pay off their vehicle or they pay it off very slowly over a long period time. Many also pay off "some" of the balance and then run it up again with other purchases. The interest charges become extremely expensive when they are tacked onto large dollar balances over long periods of time. Dealer plan loans are referred to as "instalment credit". Customers make equal monthly payments based on the initial amount financed over a chosen 'fixed’ term (e.g. 60 months).
6) ANNUAL REVIEWS
There is no guaranteed repayment term attached to a credit line (e.g. like a 48 or 60 month term on a conventional loan). Since the term is not guaranteed by the financial institution, this means that the line can be "called at any time. If the financial institution has concerns about your customer's ability to repay the balance owing on their line (because of an economic recession, a downturn in their career field, job loss, etc.) they can demand full repayment of the balance owing a thirty days notice. The financial institution may also become nervous about your customers ability to repay when their credit line is constantly at its maximum and they are making interest-only payments. In some cases the financial institutions may force your customer to close their credit line and refinance the balance on a high interest consolidation loan. In this situation, not only does your customer suffer the high interest rate, but their credit rating is damaged as well. The credit line is reviewed each year by the financial institution to decide whether or not to allow it to continue.
7) POOR UTILIZATION OF A CREDIT LINE
Credit lines are offered to people that have established an excellent credit rating, a good relationship with their bank, career stability, residence stability and success. Credit lines are a "privilege; the unmonitored use of the bank's money for your customer's own purposes Personal credit lines were truly designed for things such as:
Home additions, improvements or remodelling Home landscaping or a pool, home theatre, a child's university tuition, a child's wedding, Debt consolidation, Cash for an investment opportunity
The question for your customer is; "why waste the privilege of your credit line on a vehicle, when low, fixer rate interest financing is so easily available through our dealership”. Have your new vehicle financed by a dealer plan loan and still have your credit line untouched and completely available for whatever you want!"