Car Financing Scams
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When buying a car, don't be misled by cost comparisons
between financing and paying cash.
Many car dealers now use fancy computer printouts to
show that financing a car is a better deal than paying cash
for it. -
Beware. The numbers may look good, but the bottom line
isn't. Although there may be good reasons to finance a car
or other expensive items, it's not usually because it saves
money.
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Be skeptical, then, if an auto dealer claims that
financing costs you less than paying cash. Information
telling the whole story may be missing.
How much will it cost?
The Federal Trade Commission (FTC) has taken action
against a company that distributed computer software used to
misrepresent the "savings" of financing versus paying cash
for a car. Many auto dealerships across the country may be
using similar software.
The computerized cost comparison seems to "prove" you
can save money by financing at one rate and investing the
cash not spent in a certificate of deposit (CD) at a lower
rate. But can you really come out ahead by borrowing at one
rate and investing at a lower rate?
No! This comparison leaves out a crucial point.
When you pay cash, you have no monthly payments to
make. If each month you invest an amount equal to the car
payment, the total you accumulate will be more than the
value of the CD described above. In the end, paying interest
on a loan always costs you more — unless you can invest
your cash at an interest rate higher than the loan rate.
Why finance your car or other purchases?
You may, however, find it advantageous to finance your
car. Many car buyers prefer taking out loans to paying cash
for any of the following reasons.
- You may need your cash for other purposes, such as
paying for other products or services, maintaining a
better cash flow, or building a "cash cushion" for such
things as emergencies or college tuition.
- You may be able to buy a more expensive car by using
financing.
- Under some circumstances, if you finance a car that
develops serious problems, you may not have to continue
making payments.
Be aware, however, that car salesmen may be earning
commissions when they convince you to finance a car through
their dealership. Think carefully, then, about any claims
that financing a car can save you money.
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