Why low interest car finance is a con
Some people say terrorism is the biggest threat to civilisation. Some claim it’s climate change. Others say nuclear war, the forthcoming zombie apocalypse, or even Donal Trump (in light of recent world events). But the biggest threat is clearly the runaway bullshit pandemic. And in very few places outside of politics is the bullshit deeper or more rancid than inside a car dealership. So let’s go 100 per cent jihadi, channel our inner ‘hood rat’ and bust a cap in bullshit’s grille, on the vexed question of low-interest car finance.
I get a lot of enquiries about this, like this one from Brian, a very naughty boy, who says:
"I’m thinking about buying a Nissan X-TRAIL TI with their 1% finance offer, but you recommended against this. Could you please elaborate on why this is SOOOOOO bad? I thought this was a good option for me as i could pay the car off (with very little interest) over the next four years, and then pay out the balloon when I’ve got a bit more money saved up." - Brian
Brian, mate, one per cent is a con. An intelligence-insulting con. It sounds too good to be true, and it is. It’s not true. The earth is round. We went to the moon. Low interest is a classic carmaker scam. So the two questions are: Why do they do it? Plus, how does it really work? Let’s crack the code.
WHY CARMAKERS DO THIS
The ‘why’ is easy - it’s a marketing hook. It gets you off your arse and into the dealership, and it helps them sideline potential competing brands. If you’re in the market for a medium SUV, and you’re half rational, you might have four vehicles on your radar: Mazda CX-5, Hyundai Tucson, Kia Sportage and Nissan X-TRAIL. (For example.)
They’re all reasonably good vehicles, with relative pros and cons - none are a major fail. I mean, you’re not considering a Volkswagen, or a Jeep. Are you? Kia’s got the big warranty but the most confronting look. Hyundai’s also very strong on the consumer front, and looks great, but in cachet terms, Japan still trumps South Korea. CX-5 has the best technology, but the warranty is comparatively crap and the spare is a space-saver.
Aaaand - Nissan’s on the back foot. X-TRAIL is the obvious loser among the four SUVs. The X-TRAIL range is mentally retarded (you can’t get an all-wheel drive seven seater), the engines are second rate, and Mazda is way in front on all robust technical criteria - and so are Sportage and Tucson. So what can Nissan do? Anorexic finance is a smart move, strategically … even though it’s BS. Lots of brands do it - when they’re desperate, and they don’t have a real advantage to sell.
Look, all car company advertising - no matter how good, bad or ugly - is designed to do one thing, and one thing only: it’s designed to get you onto that showroom floor where a salesperson can greet you, gut you, and hang you out to dry. And no matter how heavily some factors weigh in favour of competitors, one per cent finance, or zero - whatever - is sufficient to get a price sensitive dumb person to sweep the competitors aside, and take them out of play. So that’s a win - for Nissan.
So, if the one per cent offer dumps you on the showroom floor, and you’re standing there in that conventional car buyer position (holding your skirt up over your head and presenting your guts for the imminent dealing of a car salesman - and you know how that feels; we’ve all been there - there’s no shame) ... if you’re there in that position then the one per cent marketing campaign has already done its job.
Bloodbath soon to follow.
HOW IT WORKS
You have to understand that money is like any other commercial product. Pair of jeans, cosmetics, rubber dogshit - whatever - it’s all the same. The seller (in this case a bank) buys it at a cheap price, adds a margin, takes out the costs and pockets the profit. That’s how money works.
How money works
The cash rate here in Australia is 1.5%. That’s the rate at which the Reserve Bank of Australia (the central bank) lends money to the commercial banks. Commercial banks essentially buy money at 1.5% and they make a profit by selling it to you at a much higher rate. If they lend you money for your next car at 8%, they make 6.5% off the top. That’s how this works.
Buy it cheap, add a margin, take out the costs, make a profit. So if they were to offer you real, actual finance at 1% - without any fiddling under the skirt while you’re standing there wearing it over your head, they would lose 0.5% off the top. Banks don’t do that. (And all car dealer finance - Nissan Financial Services - whatever - it comes from a bank.) Banks are obliged to deliver a profit to their shareholders. They are therefore not allowed to do guaranteed loss-making deals. That’s how they roll.
Inside the scam
So, obviously, they don’t make a loss. On the showroom floor, they simply pump up the profit margin on the car by discounting it less than they normally would. They ‘sell’ you this deal by getting you to focus on the ‘too good to be true’ bullshit interest rate. They pay the financier and undisclosed kickback under the table - which amounts to a very profitable payment in lieu of direct interest.
When you consider the sale price and the cost of the finance together, you end up paying more for the car than you previously would have. It’s a rip-off, and it targets the people I would categorise as dogshit dumb. Who never paid attention in mathematics. IE - almost everyone. Let’s crunch the numbers.
Example: Nissan's 1% deal
The fine print of Nissan’s one per cent bullshit offer rolls like this:
- It’s $50,160 drive-away.
- The one per cent comparison rate is based on a five-year secured loan of $30k - but the actual deal is one per cent for just three years, with a balloon payment of 50%.
- So you’re only financing half the car, for three years.
- You are financing that half at $728 a month.
The first thing I find when I run that proposition through a financial calculator - the NRMA one, see below - is that Nissan is touching you up for about $20 a month via the disclaimer. That’s what happens whenever a person does that with his skirt during a commercial dealing. Actual repayments on $25,160 at one per cent for three years are $709.72. Those Nissan number-fiddling, book-cooking, bullshitter arseholes. Always the little extra touch up … which in this case amounts to an extra $658 paid by you, over the term.
What goes on under the table
So let’s say the financier - Nissan Financial Services - the underlying bank - whomever - needs to target 7.9 per cent to make a decent margin for the dealership, and for Nissan and for the bank - because they’re all clipping your ticket on this while you hold your dress in the clouds on the showroom floor to facilitate this violation.
If that was a real interest rate at 7.9 per cent, the payments would be $787.26 (see below). That’s about 60 bucks a month difference, compared with the Nissan 1% repayments of $728/month, times 36 months, for a total of: $2133.
That’s the extra margin they need to build into the final sale price of the car to make this deal equivalent to charging you 7.9% in the finance.
How to get yourself a better deal
So, with this offer, Nissan is parading the X-TRAIL TI petrol AWD five-seater at $50,160 drive-away. That price is completely un-discounted. So, if you bowl up to the dealership, decline their bullshit one per cent offer, and follow my car dealer-smashing tips (right), you will save thousands off the top.
This is a game - just like football. There are rules. If you don’t know them, you will get smashed. But if you know the rules, you can win. Let’s assume you do moderately well negotiating: You knock $4000 off the price, by negotiating hard, the old fashioned way - end of the month, the car’s in stock, go for the jugular, etc. And let’s assume you get your own finance at six per cent. That should be do-able.
That means you get the car for $46,000. Discount like that: dead easy. A politician could do it. (OK - maybe not a lame duck loser like Malcolm Turnbull.)
But let's say you secure six per cent finance, independently, over three years. To compare apples with apples, we'll finance only 50% of the car ($23,000 in this case, owing to you negotiating the price down to $46,000). There’s your repayments (below) at $699.70 per month. This means you’re $30 a month better off compared with Nissan's $728/mth 1% offer.
That’s a saving of a bit over a grand, over the term ($1019). And at the end of three years, your balloon payment is $2000 less. Suddenly you are a little more than three grand in front of the bullshit finance deal.
Click to enlarge the screenshots below:
So basically that’s how real finance at six per cent and proper negotiation to a fair price beats a bullshit one per cent offer, with your dress over your head, gutted, any day of the week. And you won’t be compelled to buy a Nissan - you get a choice - so that’s a plus.
I’m waiting for someone to say: Just negotiate a better price and take the one per cent. Hypothetically, that’s a neat suggestion - only they’ll never go for it. They need to maintain the margin to pay the real - undisclosed - extortionate - bullshit interest under the table. You will not get the big discount if you take the one per cent.
Of course, this practice of offering ridiculously low rates is immoral and unethical - but, like so many other things, it’s perfectly legal. I mean, if you walk in and lift up your dress, it could be construed as an invitation, or even consent even. This practise is called ‘subvented' finance - and it’s a naked con aimed at the gullible and the innumerate (ie most of society).
If you want to save thousands on a new car here in Australia, and insulate yourself from this (and other rip-offs) - hit me up via the website. I get new cars cheap, in Australia, and it’s not a scam: click here to enquire >>. There’s no need to hold your dress over your head, to get this done. I’m not saying I’d be unreceptive to that in some limited cases … just that it’s not a prerequisite.
Don’t get burned by these grubby 'unbeatable' low-interest bullshit offers. Get a better deal for yourself with real finance.