Just wondering if there were any gotchas I might be missing. Dealer gave me a better deal on a used car over the phone for agreeing to finance it. I am going to test drive it tomorrow. I asked if there were any pre-payment penalties and they said no.

I will be sure to read the entire contract before I do it. But, what am I missing here? How are they making more money on me if I just pay the entire thing off on the first payment? Is this a common thing? Thanks in advance.

I did this recently with a Ram truck (2023). They knocked an extra $1000 off the out-the-door price if I financed. I agreed and asked the same question on pay off penalties. They told me the best (cheapest) way to pay it off was to make 2 small or normal monthly payments, then hit the payoff, which was a bald faced lie, and the finance manager saw my head shake and smirk….he didn't care because they were screwing Wells Fargo and he knew it, and so did I. He did tell me if I didn't make 3 payments it would hurt my credit, not that I cared. He got another not-well-hidden smirk

The only rub was when I went to make my first of the 3 payments. I wanted to do 90%, 5%, 5%, or something to that effect to do the 3 payments. The online system maxed at $5000. When I called, the lady on the phone (Wells Fargo), told me the only way she could increase that max was if I went to my bank, then had them call Wells Fargo, and do a wire transfer right then and there. I was pissed, intentionally trying to make it a pain. I asked if there was any other options and she said payoff was the only other option. Perfect logic. Can't do 90% or even close, but could do the full amount?

I was pissed at that point and did the full payoff, credit score be damned.

So….be prepared for that type of Shennanigans.

Credit score hit was temporary, but if you're buying a house soon, you should consider that.

Thanks. Yeah, this is the sort of crap I am concerned about. I am like you though, I don't care about some credit score ding.

Odd, I just logged into the bank and requested a payoff statement and mailed them a check with the payoff statement in the mail. Got the title ~30-days later.

Everyone seems to think of a car purchase as one big transaction. It isn't. It is a bunch of smaller transactions. Sort of like a supply chain. Obviously, there is a supply chain involved but what I mean is even at the retail level, there are several moving parts.

The dealer "owns" the car because he bought it from the OEM. Well, sort of. He "paid" for it through what is called a floor plan, short term financing through his bank that allows him to use as little actual cash to get as much inventory as possible. I'm not sure if all OEMs have the same financing arrangements with their dealers -- i.e. cash on delivery -- but regardless, bank money is almost always involved. Dealer rebates, and holdback, are also factored in at some point, not necessarily the "wholesale" purchase or delivery point in time.

When you go in to buy a car, the dealer has selected financing arrangements in place for all kinds of buyers -- mostly due to credit. Sometimes due to whether the car is new/used. These lenders give the dealership "wholesale" lending rates based on factors like credit score and percentage of invoice financed. In the "old" days (probably pre-1990ish), you were lucky to finance 102-3% of invoice. Now, with even decent credit, you can go much higher -- 125% in some cases. But no matter what, most down payments are designed (by the dealer) to go into their pocket and they will give you the rate they get from whatever lender with their own profit built in. Say the lender said a 750 score is a flat 5%. If the dealer gets you financed at 5.25%, they'll get, say, $500; at 5.5, they'll get a 1000. The dealer is on the hook for the fee (or at least some of it) if there is a prepayment in the first 30-90 days.

This may be an oversimplification, but it is more or less the broad brush strokes.

agracer said:

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Odd, I just logged into the bank and requested a payoff statement and mailed them a check with the payoff statement in the mail. Got the title ~30-days later.

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I ended up paying mine off too, but it wasn't what I was trying to do.

I've also used their financing to get tint all around or get upgraded floor mats.

dealers get a spiff from lenders and some of the dumber lenders have no chargeback period. That's what's going on.

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The only rub was when I went to make my first of the 3 payments. I wanted to do 90%, 5%, 5%, or something to that effect to do the 3 payments. The online system maxed at $5000. When I called, the lady on the phone (Wells Fargo), told me the only way she could increase that max was if I went to my bank, then had them call Wells Fargo, and do a wire transfer right then and there. I was pissed, intentionally trying to make it a pain. I asked if there was any other options and she said payoff was the only other option. Perfect logic. Can't do 90% or even close, but could do the full amount?

I was pissed at that point and did the full payoff, credit score be damned.

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Maybe I'm misunderstanding, but why not just do 5%, 5%, 90%?

If you were planning on making 3 payments anyway, what's the difference?

Salesmen also have an incentive to work with you on price in exchange for financing. The salesman gets a higher commission on back end sales than on the car. E.g., he might get 5% of the profit (not gross sale price) on the car, but they might get as much as 20-25% on financing, floor mats, paint protectors, etc. So if you drop the price $1k, he'll lose $50 in commission (more likely $30 after accounting losses). But, if the financing has a $500 profit, he'll come out ahead because of the $125 commission. Plus, because people are financially stupid, many buyers will say "wow, I saved $1k on the car I can use that on the super neat Scotchguard seat treatment"

AgGrad99 said:

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The only rub was when I went to make my first of the 3 payments. I wanted to do 90%, 5%, 5%, or something to that effect to do the 3 payments. The online system maxed at $5000. When I called, the lady on the phone (Wells Fargo), told me the only way she could increase that max was if I went to my bank, then had them call Wells Fargo, and do a wire transfer right then and there. I was pissed, intentionally trying to make it a pain. I asked if there was any other options and she said payoff was the only other option. Perfect logic. Can't do 90% or even close, but could do the full amount?

I was pissed at that point and did the full payoff, credit score be damned.

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Maybe I'm misunderstanding, but why not just do 5%, 5%, 90%?

If you were planning on making 3 payments anyway, what's the difference?

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Because the finance charge is based on the remaining principle. I was trying to not give back the $1000 savings.

Gotcha. I'm not familiar with this, because I rarely finance. But the times I have in the past, I've always taken advantage of incentives, and paid it off early without penalty.

If the loan is for a set amount, and there is no pre-payment penalty, how do you give the finance discount back?

(Just looking to educate myself)

AgGrad99 said:

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Gotcha. I'm not familiar with this, because I rarely finance. But the times I have in the past, I've always taken advantage of incentives, and paid it off early without penalty.

If the loan is for a set amount, and there is no pre-payment penalty, how do you give the finance discount back?

(Just looking to educate myself)

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I think you may be taking my comments too literally. I wouldn't have had to directly give the finance discount back.

Here's the jist of what I meant: Paying two smaller payments before the bigger payment would have increased the total amount that went toward financing. When you are early in the term of a loan, the bulk of the money in a payment is finance charge. Very little of it goes toward the principle. So, just for theory sake, if I'd have made two $1200 payments, then paid the 'balance' of ~$64K final payment, that would have meant I paid probably $2000 in finance charge (I'm using round numbers, not exact numbers here). I would have effectively given back all of the benefit of the finance discount and then some. That's what I meant by giving the discount back.

What I was trying to do was make an effort to make the 3 payments that supposedly preserve the credit rating. The smart way to do that and minimize out of pocket is to pay $64K upfront, followed by two equal small payments. Paying the big payment first cuts the principle, and therefore the amount of finance charge I would get hit with, down to a very small number. My last two payments would have been $600 or so.

I will fully admit that I don't know if that would have still dinged my credit, but that was the approach.