Financing A Vehicle? Here Are Some Pitfalls To Avoid

Information asymmetry occurs when one party in a transaction has more or better information than the other. I can’t think of a situation where this imbalance of power is more often on display than when it comes to buying a car.

Think about it. The salesperson shows you a couple of vehicles, you take one for a test drive, become enamoured, and then get whisked away to a corner office to discuss financing terms.

If you’re making an impulse buy, you likely haven’t given much thought as to how you’ll finance your new vehicle. Your dealer will throw around terms such as “Zero-percent financing” “Dealer invoicing” “Manufacturer’s rebate”.

Financing a Vehicle

Financing a Vehicle

Buying a car is an emotional experience; more than just four wheels, it’s how you feel when you get behind the steering wheel. Car dealers and salespeople know that once you’ve fallen in love with a vehicle you’re unlikely to walk away without making a deal.

Hopefully you’ve given some thought to the car buying process long before stepping foot onto a car lot. You know that you can arrange financing ahead of time through your bank, or you can set-up a loan through the car dealership on the spot.

Some dealerships offer financing through their manufacturer, such as Ford or GM. Others, like the Hyundai dealership where I bought a new Sante Fe in 2012, arrange financing through a bank. In my case, the four-year, 0.9% financing deal was arranged by Hyundai through Scotiabank.

You’ll often hear that you get the best deal on a new car when you pay upfront in cash. While not everyone can afford to lay down tens of thousands of dollars on a vehicle, arranging financing with a bank ahead of time can offer the same advantages.

Related: New or used – What’s your car buying approach?

With cash in hand you can turn the tables on the dealer and sit in the proverbial driver’s seat when it’s time to negotiate the price of a new vehicle.

Review the math to determine whether it’s in your best interest to accept the dealer’s zero-percent financing, or a manufacturer’s cash back rebate (in most cases it’s one or the other: zero-percent if you finance, cash-back if you pay upfront).

Is 0% Financing When Buying A Car Too Good To Be True?:

Car expert Mark Whinton, a certified mechanic with over 34 years experience, says that car financing through manufacturers like GM and Ford can be a great deal but beware of the fine print.

“Watch they don’t give you a zero rate that has extra payments in it, or tack on a $1500 administration fee. One way or the other there is no free lunch,” says Whinton.

Here’s the bottom line when it comes to financing a vehicle from a dealer or from your bank:

The car dealer is likely go above and beyond to get you to buy a vehicle and that means you have a better chance to be approved for a loan. The dealer has all the incentives at their disposal, from their own financing for higher risk borrowers, to factory incentives like cash-back rebates and zero (or near-zero) percent interest.

Ultimately your dealer is a one-stop shop and the fastest way to get financing for your vehicle purchase.

Beware that the high-pressure environment of a car dealership might lead to poor decisions like not reading the fine print or adding extras you don’t need.

Arranging financing in advance through a bank, on the other hand, relieves some of that pressure and can allow for the opportunity to make a more rational decision about your budget and how much car you can afford.

Rates can sometimes be lower than dealer financing, and having financing arranged ahead of time can give you the upper hand when it comes to negotiating the price of the vehicle.

It takes more time to plan ahead and work with a bank, however, and there’s always a chance the bank turns down your loan application.

My car-buying checklist:

  • Negotiate the price of the vehicle before discussing financing terms
  • Be prepared to pay in cash or have previously arranged financing in place
  • If financing, don’t take more than a four-year term. If you have to stretch your payments over six, seven, or even eight years, you can’t afford the car

What are your thoughts on financing a vehicle?

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  1. G Page on July 3, 2018 at 9:50 am

    What about leasing? I think you should devout a post to leasing. Would love to know more about the ‘ins and out’ of this.

    • B on July 3, 2018 at 11:41 am


    • john on July 3, 2018 at 11:50 am

      Yes some information on leasing would be helpful

  2. fbgcai on July 3, 2018 at 8:29 pm

    @ G Page, B and John – sorry guys leasing only makes sense if you are writing the vehicle off as a business expense (imo) – if it is for personal use it’s an expensive way to get a new car.
    Having just bought a new car I can highly recommend (Bob Prest) as a no hassle way to get the best price on a new car (or lease if you must 🙂 ) caveat- the service is for new cars only and no trade-ins ; fee is $169 + tax – I have used this service, as have several of my friends – 100% satisfaction everytime.
    If you want to go at it on your own, getting numbers works well or get cost numbers from Consumer Reports (check if your local library has a subscription in which case you can get the numbers for free – Toronto Public Library is an example) – give the dealer 4-5 % profit.

    • Beth on July 4, 2018 at 5:42 pm

      Not necessarily. I leased my car for .5% and then bought it out at the end. When I looked at the total cost, it ended up being cheaper than financing or cleaning out my savings account to buy it outright. The difference was I planned to buy my car at the end, and plan to drive it into the ground, rather than just getting another lease.

      That being said, I didn’t like leasing – I just wanted to own the car already!

      Ultimately, the best thing you can do is buy good quality and drive the car for many, many years. Doesn’t matter if it’s new or used, or how you paid for it – that’s probably the biggest determinant of saving money.

  3. Galove on July 4, 2018 at 6:45 am

    We just went through the process of purchasing a new vehicle and the trick to getting the best price is to request quotes from a few dealers as they all want to earn your business. Local dealers are counting on the fact the buyer will not request quotes from their competition an hour away and buy doing so it forces them to improve on the price once indicate the other dealer beat their price significantly.

    Something else to keep in mind is high volume dealers will always have the best price as they receive the best manufacturer incentives. In the case of our vehicle our local dealer could not understand how the other dealer was beating their price by so much as it actually pushed them into negative territory and without the manufacturer dealer incentive they would of lost money — readers may find this hard to believe, but when speaking with the finance manager he let it slip that I had to sign a form so they could get the manufacturer credit so they made $100.00 on the sale. This was the first time I had to sign a form on a purchase which I found strange.

    I also found that when making a purchase I ask about loyalty discounts, serving and former military discounts which also help with the price. A relative of mine just bought the same vehicle and through a little negotiation via emails I managed to pay $3,755 less than they did as they negotiated the vehicle price on the showroom floor which I advised them that was a mistake as they want you in the showroom for that new car smell to close the deal.

  4. Jim Stickel on July 4, 2018 at 8:39 am

    Worth mentioning that when you elect the cash discount option, you also save the HST. A $5000 discount would keep another $650 in your wallet.

  5. Owen @ on July 4, 2018 at 11:24 am

    I’ve bought both new cars with 0.9% financing and used cars with cash and I’ll definitely buy my next car used with cash again. Not having that monthly payment makes you very flexible plus you save a ton of money avoiding those high depreciation years.

    To finance our next car we set aside $200 per month, but we can stop these ‘payments’ anytime if we run into financial trouble, you can’t do that if you finance.

  6. Ryan on July 4, 2018 at 4:24 pm

    Hi Robb, I work at one of the Big 5 and can tell you we rarely process vehicle loans at the branch level. Where a regular consumer should obtain their financing depends a lot on the age of the vehicle they would like to purchase. For example, anything < 4 years old, the dealer will most likely have the advantage (49/50 times). Anything older and it may be worth speaking to your bank, and purchasing privately eliminates the dealer option altogether. One exception might be if a consumer has a home equity line of credit at a low rate. The dealership is also more flexible in who they are willing to lend to… specifically, anyone with a pulse, whereas the bank requires income and good credit, unless you have a cosignor. Hope this helps – would be happy to write a guest post about this topic.

    • Robb Engen on July 4, 2018 at 5:05 pm

      Hi Ryan, thanks for your detailed comment. When I wrote, “arrange financing through your bank”, I did mean through a line of credit. I appreciate you spelling it out here for readers as I was not clear in my post.

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