The high cost of a low rate for your next car

According to the latest Deloitte Motor Industry Report1; Australians as a nation bought over 1,000,000 cars or vehicles last financial year.

• 80% of us had already narrThe high cost of a low rate for your next car owed the search online before setting foot into a dealership.

• 80% of these new vehicles have been financed in some way; and some car dealers are reporting 90% of profits now come from finance and insurance.

• Car dealers also made 40% more income as a group on their finance and insurance.

So if car dealers are predominantly making more money with finance than ever before, and the Reserve Bank of Australia (RBA) interest rates are currently at 3.5%, how are they making money offering finance at 1%, 2% and 2.9%?

The short answer is that they are not.

These low rates simply mask the fact that some car dealers are now actually losing money selling cars.

Brands such as Holden and Nissan are offering ridiculously low comparison rates, some even as low as 0%, 0.5% or 0.9%; but the key is that they are then paying a lump sum to the financier to subsidise the finance.

What that means for you as a buyer is that if you obtain finance at a special offer, you are probably paying far too much for the vehicle. Given the intense pressure on automotive manufacturers in the wake of the Global Financial Crisis to retain the margins on their brands, this trend of false interest rate specials is bound to continue.

No one enjoys feeling cheated. Here are some easy ways to help make sure you get the best deal:

1. Get the best price for the vehicle BEFORE you mention finance; ask for the best cash price first. If you want to ensure that you don’t pay too much simply because of where you live or don’t feel comfortable negotiating, you should take advantage of a discount car buying service, so dealers across the country compete for your business and you can be confident that you will get a competitive price before organising finance. You also can easily avoid being pressured into a costly decision ‘on the spot’.

2. Ignore the advertised rates and compare payment installments. Every comparison rate advertised on a vehicle will mention that the rate may not include all fees and charges – which means the rate isn’t genuine to begin with.

3. As a rule of thumb, the lower the interest rate, the more restrictive the terms. If the time frame for the special is short, it may well be that the dealer is under pressure to move stock to make way for new models. If this is the case, you should see significant differences between the recommended retail price and the price that could be available; often up to 20%! So depending on the situation, paying 20% more for the vehicle isn’t always going to be made up easily by obtaining a cheap finance rate.

4. Speak to your Accountant or Financial Adviser. Whilst it can be great fun choosing your new car, comparing the payments and the real cost of some of these deals isn’t always as straightforward as it should be. Some recent changes in legislation, particularly for vehicles owned for commercial purposes, has made it much more difficult for dealers to know what structure and term is best for your business without knowing the business and your full financial situation. Your Accountant or Financial Adviser will be able to help steer you in the right direction and help get the best deal for your new vehicle.

Verve Group is offering Asset Finance that takes care of you. You are eligible for a free 1hr consultation with one of our accountants, that offers a holistic approach to your Asset Finance options. Please contact matthew@vervegroup.com.au or call (08) 8120 4877 to arrange a time.

* free consultation is based on the decision to choose Verve Group as your asset finance provider.