During consultation and counselling sessions the two most important forms of credit people want are mortgages and car loans, everyone wants a new car. Not necessarily a brand-new car but new to them. Back street dealers are flourishing as returns on investments in traditional capital markets decline. Some people are investing their savings in mortgage and car loans with higher rates of return as well as higher risks.
Car loans are available with interest rates at around 30% so
if you bought a car for $20,000 using a loan from a private lender (or
consortium of lenders) with the loan amortized over five years (60 months) your
payments would be $647 per month. That
may seem more palatable if the payments are weekly at $149 per week and some
people will eagerly jump at the option as it is easier to cash flow.
If you are one of the dealership’s investors your money is probably spread around as secured loans on many different vehicles – probably most will make (at least most of) the payments and some will default. As long as the majority of borrowers make the payments your average annual rate of return on your investment will still be in the double digits – much better than a bank RSP at 2-3%.
That’s the money side but what about the car? In our industry we hear horror stories of bait and switch techniques being used and people buying cars for $8,000 on Monday morning that were sold across the auction block on Thursday for $1,200 and polished up over the weekend. There’s nothing wrong with making a profit, regardless of what industry you are in, but some types of profit may appear morally offensive. There is good reason “used car salesmen” have such notoriety – right up there with horse traders.
Buying a new car is no panacea either, there is an old adage that new cars lose 30% of their value as you drive them off the lot and that may be true. Carcost Canada is a company that, for a subscription. can tell you what the dealers real cost on a vehicle is and they will also help you to negotiate a better deal, knowing what the dealer actually paid for the car. The dealer markup on some new vehicles may very well be in excess of 30% of the eventual sales price of the car. The industry itself reports that it spends far more money on sales and marketing than it does on production of its vehicles.
Some dealerships negotiate arrangements with banks for low or no interest car loans – presumably the bank is getting money from factoring the cost of the vehicle, for example if your vehicle is sold to you for $45,000 and the dealer markup is $15,000 the dealer may only get paid $40,000 from the bank that issued you the $45,000 interest free loan. In that way, the bank gets paid $5,000 and the dealership gets $10,000 for the sale. Remember, no one works for free and the banks certainly don’t.
Imagine that you head over to you new car dealership looking for that low or no interest car loan only to find that you don’t qualify for financing because your credit rating is not up to par. But your current vehicle needs a $800 repair and you need it to get to work. You are worried that the car might have other problems. You see an advertisement that reads something like “no one walks, bad credit, no credit, bankruptcy, no one is declined” so you negotiate your vehicle purchase, on a vehicle that has passed the safety check and is only going to cost $7,500 at 30% interest with monthly payments at $242 – easier to cash flow than the $800 repair and it’s safety checked and guaranteed for one year.
That is a familiar scenario, but the longer-term implications of such an arrangement may be far worse than simply repairing the existing vehicle. Certainly, the deal would be far more costly in the long run as used cars will undoubtedly require repairs at some stage. Should you find yourself back in the same situation and you end up buying another vehicle on similar terms adding the new vehicle to the existing loan (or the residual from the prior loan to a new one) the costs could easily push you over the financial brink. If you’re already over the brink call us at 519-646-2222 for a free consultation to review all your options.