How does 1% finance work?
Dealerships offering 1% finance interest rates on their new cars has become a very popular marketing strategy. If you’ve seen 1% finance advertised before, and thought to yourself this seems too good to be true, then you’re not wrong.
We all know in this world you don’t get something for nothing, so when you see manufacturers offering to take a loss on their finance options, it’s worth asking yourself, “what is the catch?”
The first thing to understand is when you purchase a new car through a dealership, and do everything in house, they have multiple departments through which they are making money off you. For starters, they of course are making money off the sale of the car, then they have the aftermarket salesman offering you a range of products that you never thought you needed before such as paint protection, leather protection, and window tint, and then of course there is the finance and insurance department.
When you take finance with a 1% interest rate, due to the cash rate being higher and the time value of money, they are losing money on the finance. They make up for this however by simply charging you more for the car than they would if you weren’t getting 1% finance. There is always room for negotiation when you are purchasing a new car, however you will find there is almost none when you take 1% finance as they need to attain more margin in the car to make up for their loss on the finance side.
The other downside with 1% finance is there are often very restrictive terms and conditions attached, and you won’t have the same flexibility you would have if you weren’t taking the 1% offer. You will usually find the 1% finance offers only apply on a shorter loan term, usually with a balloon, often something like a 3 yr term with somewhere between a 30 – 50% residual. This is done to minimise their losses whilst still grabbing people’s attention with their 1% finance campaign. According to many dealership finance managers, due the restrictions applied to their 1% finance offers, more often than not when people enter the dealership looking to take up their 1% finance offer, they end up opting for a standard finance package with a standard interest rate where they can select the loan term and balloon that meets their requirements much better.
How do I know if I'm getting a good deal?
The reason 1% finance campaigns are successful marketing for dealerships is they prey on people who focus too heavily on 1 area of the transaction. Too many people only focus on the interest rate and believe that factor alone is what decides whether or not they are getting a good deal. Although the interest rate is an important factor, it is only 1 of many.
The best indicator of how good or bad the deal you’re getting is, is your bottom line i.e. how much money is coming out of your bank. If you’re interested in taking up a dealership’s 1% finance offer, take the time to compare your figures through a finance and vehicle broker. An experienced broker has access to a broad portfolio of lenders, and has relationships with a large network of dealerships Australia wide. Due to the high volume of business that brokers do, they are able to source much better pricing on a new car than what an individual can negotiate themselves, especially when 1% finance is on the table. In the majority of circumstances, a broker will be able to get the car at a price point where they can offer a lower cost of loan on the same car, with a standard finance package tailored to your needs, than what the dealership can offer with their 1% finance.
Talk to a broker today to see how much money you could be saving.