Currently on my second car with a Toyota dealership and would like to change to a Honda for my next one.
How does car financing work and what are my options for returning my Toyota and moving over to Honda? Is it possible to transfer value from the car I’m currently financing into a deal with Honda or would I need to completely end things and return the Toyota and start fresh with Honda?
In: Economics
While you might get financing at a dealer, the actual money comes from a bank or a manufacturer’s lending subsidiary. Once you sign the forms, the dealer has no hold on you because it wasn’t their money in the first place. For warranty work, you can go to any dealer.
For car financing, you can get a loan from your bank or finance through the dealership (they usually have a bank they partner with). The loan isn’t attached to any dealership – you can buy a car there and then never have anything to do with them again.
You can trade in your old car for a new one regardless of what the make is of the original (i.e., you can trade in a VW at a Ford dealership if you want). If you still owe money on the car, bear in mind that the trade-in value might not cover the amount you still owe.
I have a car salesman friend and I’ll give you the insight he gave me:
As a courtesy and a service, the dealership will accept your trade-in, whatever it is. They will sell your car, either off their lot as a used trade-in, or they’ll sell it to another dealership, or worst case – as scrap.
The finance department of a dealership works with lender broker services. They basically put you up for auction, and lenders bid to win the dealer’s business. The dealer gets a commission for sourcing clients to these lenders, so the financing you will be offered by the dealer will be THE MOST PROFITABLE for the dealership.
When it comes to negotiating financing, dealers will use a 4-square sheet. This is just a piece of paper with four sections, the trade in, the price, the down payment, and the monthly payment. This whole stage of negotiation is pantomime. There is essentially nothing of value TO YOU happening on that piece of paper, the salesmen learn how to use this sheet to misdirect and distract you. They will intentionally draw and scribble all over the damn thing to keep the paper confusing and misdirect you.
Understand the salesmen have the advantage. They can, and they will, push the numbers around to get the results they want. They can do the mental arithmetic, which to them is easy, but to you, is hard just to keep up unless you’re a car salesman yourself. If you try to argue for a lower price because you’re trade-in is worth more, they’ll give you a higher trade-in value but they’ll increase your financing to make up for it.
They will NEVER discuss the total price of the vehicle. You will never be able to manipulate the conversation where they will give you that number, and it’s literally the only number you need to care about and literally nothing else about the negotiation matters. The sticker price will always be way higher than MSRP, they will always have an excuse about how the price is adjusted for your region and market and all the bullshit features of the car and the services the dealership provides their customers. What they WILL discuss is monthly payments. What they want to do is make it look like the monthly payments are easy and affordable, and they will obscure the fact that you’re paying over 48, 60, 72 months and while the payments get lower, that they get longer means you’re actually paying MORE.
There is more pantomime. The salesman will put on this donkey show where he says he has to go talk to his manager or some shit and walk out of the room. This is 100% a farce. He went to get a coffee, or to flirt with the girls in financing. The salesmen all have complete autonomy and can close any deal at any time.
The things you can do are the following: Go find yourself your own lender broker service, come into the dealership with your own financing. **ALWAYS** come into the dealership with your own financing. If they can beat it with their own broker service, fine. Do not discuss the trade-in value of your other vehicle. Bring a laptop with an Excel spreadsheet. When they talk about interest rates, durations, and payments, it is up to you to reverse engineer those numbers and calculate the total price of the vehicle. It’s the one and only thing that matters. Learn how to use that spreadsheet and how to do the math. It’s as easy as plugging in the numbers. If they don’t like that you’re there with a laptop, fuck-em. YOU WILL BE THERE FOR HOURS. Hours. It’s going to be hot in there. You’re all going to be sweating. They’re going to wear you out with time. With heat. With hunger. With thirst. And when THEY get tire, they’ll bring in a fresh negotiator. That’s how you know you’re half way there. You have to wear them out. When they finally get to the point where THEY are willing to give up on YOU, you know you’ve hit THEIR bottom dollar and that’s actually as low as they’re going to go.
You have alternative options, because I have zero patience for the donkey show. It’s just a car. It’s just a commodity. You’re either buying it for the utility, or you’re buying it for the luxury. Either way, you’re going to buy the car, and you’ve likely decided before you ever went for a test drive. Hell, you can go for a test drive and walk away. Buy your car online and have it delivered. There are auctions and other means of buying vehicles where you can completely bypass people. They don’t deserve to earn a cent off you.
The other thing you can do that sounds insane because it’s so unusual, but it’s actually surprisingly effective. You call up the dealer and you tell them *exactly* what you’re looking for, and you ask them for their best price. They’ll tell you to come in to talk. No sir! You are buying a car today and over the phone. You are calling every dealer in the surrounding region and you will only go with the dealer that offers the best price. You will arrive with a check already written out, and if the deal changes, you’ll go to the next best dealer for their best price. Tell them this. Tell them the best price you have thus far. Tell them you won’t be calling back, you’re just going to show up. Or not. This is their one chance, and every subsequent dealer has the advantage of knowing what your best price is from the last dealer. What you’re forcing them to do is an auction for your business. Some won’t play the game – that’s fine, they would have been THE WORST deals if you shopped in person anyway. If they complain that the next dealer is simply going to undercut them by $100. Tell them if they can go $100 lower, then go $100 lower. If they won’t give you a price because your best deal beats them, ask them what their best price would have been anyway, that way, if your best deal changes, they may be a valid second best.
People think this process is a bad idea – they won’t know your face or recognize your voice. If you for some reason end up reverting to traditional negotiation, they only know you as John, as on the phone, as in person, just like any other John Doe. It’s not like they’re looking out for you. Not every dealer is going to change the deal when you walk in. And you’re not going to somehow blacklist yourself making it impossible to buy a car anywhere in your region. Remember, buying a car is one of the most expensive and unpleasant experiences you can voluntarily put yourself through. If this technique somehow blew up in my face, I’d rather buy online than deal with these fuckers, regardless.
Another thing you can do is pay a little money to find out what dealers are typically paying to buy the car. That way, you can also estimate how much profit they’re making off you. You have to expect some profit, because many of these jobs are 100% commission, so the guy is trying to make a living. You need to decide how charitable you are willing to be, until the day returns you can just buy straight from the factory and take delivery, like we used to be able to do in the 80s until the fucking auto sales industry lobbied to make that illegal. Fuck them. Tesla managed to overturn that precedent.
Finally, consider leasing. Cars are not an investment, because they never appreciate in value. Even multi-hundred thousand dollar Lamborghinis, even their limited editions all depreciate – they’re not collector items as they would have you believe. In fact, the only Lamborghinis that appreciate are the ones with manual stick transmissions. All this is to say, cars are always an expense, and owning tends to be more expensive for most car owners, even if you do all your own maintenance. There is a very narrow window in which owning is cheaper. And you sound like one of those who will end up switching cars too frequently to own. When leasing, you’re dealing with that payment – and you’re already talking financing, so what’s the difference? And in return, you ALWAYS HAVE A NEW CAR, because lease agreements are typically 1-2 years. You will thus never accrue the additional loss of depreciation and increasing maintenance costs. The car, then, is only an investment asset to the dealer through the lease agreement, and then they sell it off to some sucker who can’t math.
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