Last week I got a letter from our local car dealer (Hyundai) offering to buy our 2012 Sante Fe and giving out big incentives to purchase a new 2016 Hyundai vehicle. I recall opening a similar letter last year. It went something like this:
We want to buy back your Sante Fe.
As you may know we have a certified pre-owned program. There has been a North America wide shortage of good, clean vehicles, in particular the Sante Fe. We have selected you because of your vehicle’s year and service history (Ed. Note: the vehicle has never been serviced here). It turns out the Sante Fe is in high demand!
We can offer you finance rates as low as 0% and rebates as high as $5,000 PLUS you are eligible for an additional loyalty credit of up to $1,500, AND all 2016 new models will be sold at the dealer invoice price!
The deadline is May 31, 2016. With all of these incentives, we are extremely confident that we can help move you into a new Hyundai while maintaining a payment at or below your current budget!
The letter includes an “exclusive PIN code” so I can go online and tell them about my vehicle as well as my desire for “what’s next”.
All of this sounds very exciting but our Sante Fe will be completely paid off in four months and I have no desire to trade it in for another car payment. New car smell may be sweet, but not as sweet as being car-payment free.
So why is our car dealer trying to get us to turn in our lightly used vehicle for a brand new model? Will they lowball my used car and turn it around for a big profit? Are they just trying to drum up new car sales?
I asked a couple of experts to weigh-in on this offer and why my car dealer is trying to buy back my car:
First up we have Natasha Nystrom from the Financial Consumer Agency of Canada (FCAC). She says that Canadians usually trade-in new cars after four or five years.
“This might be one reason why your car dealer is approaching you with such an offer,” said Nystrom.
The auto finance market in Canada has changed significantly in recent years, doubling in size since the financial crisis. What’s more is that the growth of auto loan debt has now outpaced all other forms of household credit, including mortgages.
For more information you can check out FCAC’s recent research report Auto Finance Market Trends.
Ms. Nystrom says that upon receiving such offers, or when looking for a new vehicle, the FCAC urges consumers to spend as much time shopping for their car financing as they do shopping for the car itself.
You can reduce the risks of auto-financing by:
- buying a car that you can reasonably afford.
- choosing the shortest term loan your budget will allow.
- making a larger down payment.
- planning ahead: If you expect that your car needs may change in the near future, carefully consider whether buying a new car is your best option.
- avoiding frequent trade-ins.
I also sent the letter and a few questions to car expert Mark Whinton from CarQuestions.ca. Mark was a little more blunt in his response:
“This isn’t anywhere near the deal you think it is,” he said.
Mr. Whinton says to beware of the incentives being offered. Most likely zero percent financing and a $5,000 rebate can’t be had together; you get one if you finance and the other if you pay cash – no combining.
“The $5,000 rebate would never happen unless you bought the most expensive model 2016, which you’ll never find,” said Whinton.
He broke down the rest of the letter, arguing that dealer invoice pricing is a useless term that means little to customers.
“Dealers get incentives and rebates every quarter on what they sell so there is no way a salesperson will ever know what they make on a car – only the sales manager and dealer principal know for sure what the margins are – they are not $1,000 or $500 or whatever ridiculously small number the sales person states they make on each car.”
I also asked about financing a vehicle and whether it’s best to go through the dealer or through your bank to arrange a loan.
The FCAC’s new online material entitled “Financing a car” speaks to this.
Loan arranged through a dealer
One of the biggest advantages of a loan arranged through a dealer is the convenience, but a dealership can be a high-pressure environment.
Most dealers will make loan arrangements for you with a lender. You can apply for and receive a loan directly in the dealership. Dealers work with various lenders and the lender usually pays the dealer a commission for arranging the loan.
When you visit a dealership, dealers can arrange financing for you with:
- the financing division of a manufacturer
- financial institutions, such as banks and credit unions
- independent finance companies, such as those that specialize in providing car financing
Loan or line of credit from a financial institution
An alternative to a loan arranged through a dealer is a loan or a line of credit obtained by you, directly from a bank, credit union or other financial institution.
If approved, you will be offered an interest rate quote or a conditional commitment. You can negotiate the interest rate and terms with your financial institution.
If you have a strong relationship with your financial institution (you have a bank account, mortgage, credit card that are in good standing), you may be able to negotiate a better rate from your own financial institution.
A co-worker received a similar letter this week from her Mazda dealer. Curious, she called the dealership to discuss the letter and potentially trading in her 2013 MAZDA2 for a new model.
The car is paid off and my colleague had no intention of taking on another $20,000 loan. Still she ended up spending three hours at the dealership test driving new models and listening to sales pitch after sales pitch.
I’m not interested in becoming part of the statistic of Canadians who trade in their vehicle every 4-5 years. Instead I’d like to enjoy being car-payment free for several more years before we decide to replace our second vehicle (a 2007 Tucson).
What’s your take on this offer? Do you toss it out or take the bait?