What happens to dealer financing profit if you pay off car early?

[Tom NJ]

When I bought my 2019 Altima SL new from a dealer, I wanted to pay cash (check) in spite of their 0% 60 month loan offer, simply because I had no debt and didn't want any. The dealer offered a $500 discount if I took the loan, and volunteered that I could pay it off the next month. After confirming that there were no pay-off restrictions, I agreed, took the discount, and promptly paid off the loan in full. I have no idea if they benefitted from this loan transaction, but it was the dealer who suggested I pay it off in a month, so presumably they got something for the signing.

 

[Just Dropped In]

Haven't financed at a dealership since the 1990s. Could kick myself for the many times I fell for that ruse in my younger days.

 

[Quantico]

I was in florida looking to buy a porsche 911 and had a handful of my bank checks that totaled 125 K plus. Nobody wanted to sell me a car.. what a sad buisness

 

[Exhaustgases]

Simple use a cashiers check. And who gives a rip if they can't make any $ on interest.

Oh and if they say you have to finance it, then say no problemo, I'm using my bank or credit union for that.

 

[javacontour]

In the past a good way to upset a dealer was pretend to get financing with them. At final transaction pull rug out and show them the local credit union offer with lower rate they can match or write deal over .

Yes, just be up front. I tell them I have financing from XYZ at x.y% I don't tell them how much I'm approved for until it's time to close. Usually I buy less than 1/2 of what they would loan me. (Dave Ramsey would still be disappointed, LOL.)

I tell them I am open to better terms if their F&I team has a lender that can beat it.

Sometimes they do, the last purchase, they were upfront and said they couldn't.

Never ran my credit, just took the draft from my lender and walked out with a new car in about 30 minutes. Second visit as I was there before to drive the car.

 

[javacontour]

But then you're refinancing a used car rather than new car. Dealer financing rates must be really high in your area.

My last purchase was a "used car" (dealer service loaner) but my lender considers 2023 and 2024 models as new cars and offers new car rates. So perhaps the lender considers the car new based on the model year.

 

[KRock29]

I worked in F&I for a few years at both a Ford and a Hyundai dealer.

I would never, ever, ever buy from a dealer that charges more to pay cash or ties financing as a condition to buy. Why? That dealer does not see the big picture, does not understand the laws of averages, and does not want to build long term customer loyalty. Dealers that do that are merely chasing month end, not business over the long term. That likely means the used cars are not reconditioned as well (lipstick on a pig) and may not have been top rated inventory at auction. In other words, a sign you are dealing with Herb Tarlek and his bad suits.

In my experience the loan origination fee (aka commission) was paid once the money was forwarded to the dealer by the bank. Lenders use volume and rates to compensate for the extremely small number of loans that get paid off instantly or within 90 days. From my days working in dealers, this was less than 1%, vs 4-5% loans that go delinquent that banks also lose (more) money on.

This is partially why rates on used cars are higher. They are, in fact, lower risk loans as the car depreciates less (all things being equal otherwise - same borrower, same income etc) but there is a small amount factored into every loan to compensate for the ones they don't make money off, either via very early payout or delinquency. The same is true for new cars, but since most are financed via the manufacturer, it is a different animal altogether.

Also remember the bank makes the MOST money at the beginning of the loan, as the interest-principal ratio is much higher.

The long and short is this - dealers make money financing cars no matter what. Most make the equivalent of 1-2 months of payments as a fee, depending on loan amount and amortization.

Auto finance companies themselves (aka Ford Credit, Toyota Credit) do hold back a percentage of the commission for 90-120 days, but the dealers still get some regardless. But, that generally only affects new cars, and very few new cars are sold without financing due to price and incentives to finance.

 

[Cheetah-kins]

When people say paying by cash I assume they mean paying by money order or check in one lump sum. People that actually show up at a dealer with a literal bag of cash are not the brightest individuals, imo. There are many reasons it's bad for any business that sells high ticket items to accept cash, so I would not fault a dealer for not being willing to accept a duffel bag full of money.

 

[brages]

Regarding paying with checks or cash, my dad bought a new pickup a few years ago... paid in SOYBEANS

 

[dja4260]

I paid cash (certified bank check) for my truck. I wasn't offered a discount for financing. The price was the same, regardless...

 

[Hohn]

I don't finance cars anymore. That means I drive older ones usually. Until the Accord purchase this last January, I was running three vehicles with a combined age of 52 years and half a million miles.

Selling off one of them and upgrading to the "new" 2022, my fleet is now much younger at a total age of 41 years with a combined mileage of only 405k between the three of them.

 

[demarpaint]

It has been a long time since I sold cars. During my tenure there was no law against paying off a loan early, although the dealership wanted people to believe that. I'd check with the FTC to be sure if it's the same now. The kickback the banks pay the dealers is the financial reserve. When I sold cars we begged people to keep the loan for at least three months or the kickback would get taken away from the dealer and in turn the salesman and finance manager would get charged back for the commission they made on the loan. I had financial reserve commissions taken back more than once because of an early loan payoff. More than once they were fake charge backs, the dealership ripping off the employees.

 

[duck__dodgers]

usually nothing. Most loan models assume x% of people pre-pay their loans----depending on credit score, etc. The loan holders (usually) assume the risk that 100% of their loans are pre-paid early.

same w/mortgages.

 

[Blagoje]

So obviously the dealer wanted that cut of the financing...

I can answer what I think your question is but you need to realize that you are operating from an erroneous presupposition.

You're asking a question because you don't know what you're talking about but then presuming to think that you do know (something?) when if you did you wouldn't be asking the question the first place.

Frankly I don't know why this matters to the consumer because it has absolutely zero impact on them and they do not need to know. The short answer is it has nothing to do with the dealership and everything to do with the financier but I'm well aware of the fact that the consumer is always going to presume bad faith and suspicious intent on the part of the dealership even if the dealership really doesn't have anything to do in the equation.