Home » Car Dealerships Don’t Want Your Cash—They Want to Give You a Loan

Car Dealerships Don’t Want Your Cash—They Want to Give You a Loan

Fred Hebert

wanted to buy a Lexus sport-utility vehicle late last year with cash, but he said the dealership gave him a proposition: Finance it or it will cost you almost $2,000 more.

He felt he had little choice. Supply-chain bottlenecks were making it tough to find the white RX 450 hybrid model he wanted elsewhere, and he had an immediate need for the vehicle. The dealership arranged a loan.

“He was very open,” Mr. Hebert said of the dealership staffer he spoke with. He said he was told the dealership would collect nearly $2,000 for arranging the financing, and “they were not going to give up that fee.”

Car buyers say they are hearing from dealers that cash and financing from outside the dealership aren’t welcome. Dealers tried to get some of them to finance by quoting higher prices for cash sales or refusing to sell if they couldn’t arrange the financing, according to interviews with buyers.

The hot car market, where heightened demand is meeting thin supply, is giving dealerships the upper hand, allowing them to wrangle more money and drive up their profit. Some have been selling cars for more than the sticker price, raising the eyebrows of industry executives.

Financing is a key profit center for dealerships, which collect a portion of the interest rate or a fee when they arrange a loan on behalf of a bank, auto company or other financial firm. The financing also makes it easier for dealers to sell high-margin add-on products like insurance. In the years leading up to the current supply crunch, financing and insurance have driven more profits per new vehicle for dealers than the sale itself, according to J.D. Power, a data and analytics company, deepening the industry’s reliance on credit.

Separately, some carmakers have long offered loans as a promotional tool.

Auto lenders extended $734 billion of loans last year, a record high in Federal Reserve Bank of New York data going back to 2004. 

Mr. Hebert, a retiree who lives in New Harbor, Maine, took a 60-month loan at an interest rate of 3.69% from

Toronto-Dominion Bank,

reasoning that paying a few months of interest would be less than the extra dealership charge. He said he recently sent a check to pay off the loan. 

He was also charged almost $6,000 over the manufacturer’s suggested retail price on the vehicle. The experience at the dealership, Darcars Lexus of Mt. Kisco in the suburbs of New York City, left a sour taste in his mouth. “The deeper they could get into my pockets, the happier I think the guy was,” Mr. Hebert said. He has since submitted a complaint through the Lexus website.

A spokesman for the auto dealership said in a statement: “We strive to make every sales experience excellent and obviously value our reputation.” He said the dealership didn’t know Mr. Hebert was dissatisfied, citing an online survey in which he gave the sales experience high marks. The spokesman said, “There is nothing we can reasonably do about the market clearing price” that resulted in the vehicle selling for above the suggested retail price.

Fred Hebert, a retiree in New Harbor, Maine, tried to buy a Lexus with cash last year but says the dealership told him he would have to pay more if he didn’t finance it.

A spokeswoman for Lexus said the customer-service team “is aware of the complaint and is actively working with the customer to resolve the situation.” A spokeswoman for TD Bank declined to comment.

Some 55% of car buyers used dealer-arranged financing last year, the greatest share in records going back to 2005, according to car-shopping website Edmunds. The share using cash, check or outside financing dropped to less than 18%, its lowest on record last year. 

Dealer-arranged financing has long been the default for a swath of buyers. At least some of the shifts are also explained by the falling share of customers taking out leases after those terms worsened during the car boom.

But consumer attorneys have observed dealers using more pressure tactics recently to steer customers away from bringing outside financing or paying cash, according to

John Van Alst,

an attorney at the National Consumer Law Center. Regulators have also received complaints.

“When you have 10 people who want to buy one vehicle, and car lots are empty, some of these things I think are the result of that,” said

Christine Graham,

supervising financial examiner at the Texas Office of Consumer Credit Commissioner. “We are concerned about these practices.”

The state regulator has received several dozen complaints from buyers who say they were pressured to use dealer-arranged financing, many after Dallas news station WFAA ran a report on the topic last summer. The office has been investigating the claims. Texas law prohibits dealers from charging different prices for vehicles based on payment methods.

Heightened demand for vehicles is meeting thin supply, giving dealerships an upper hand and allowing them to wrangle more money out of vehicle transactions.

The Federal Trade Commission has also received at least a half dozen consumer complaints in the past few years regarding dealers refusing to accept cash or outside financing, according to complaints provided through a Freedom of Information Act request.

New York City’s Department of Consumer and Worker Protection sued two used car dealerships in November, alleging in part that they engaged in false advertising by promoting prices that buyers only received if they financed the vehicles. A 2017 city law made it illegal to increase the price of a used car for buyers who use outside financing.

Financing has long factored into the cost of buying a car. The auto-lending arms of car companies routinely offer incentives like 0% financing and discounts for buyers who take out loans, generally to make the deal more attractive to the buyer. Some buyers say taking the loan worked in their favor.

Bruce Sawyer,

a retiree living in North Carolina, said that last year he was offered a $1,000 credit on his new


F-150 purchase if he took out a loan from Ford’s lending arm. The incentive came from the lender, he was told. He had intended to pay cash, but came around to the financing after talking with a friend who had encountered a similar deal about a decade earlier.

Mr. Sawyer took a $31,000 loan with a 6.74% interest rate, then paid it in full a few weeks later. “They said, you can pay it all off as soon as you want to,” Mr. Sawyer said. He estimates that he paid roughly $100 in interest, which was more than offset by the financing credit.

A spokeswoman for Ford said “customers may choose to pay off before the end of the loan term, which they are welcome to do with no prepayment penalty.” A dealership representative didn’t return requests for comment. 

Others felt taken advantage of.

Jacob Pyper

said a staff member at Sherwood Park Volkswagen near Edmonton, Alberta, told him he had to take out a loan if he wanted to buy a 2014 Kia Soul last summer. When he said he wanted to pay cash and offered to bring in a certified check, the dealer told him they weren’t accepting cash because of the risk of fraud.

“I should have walked away at that point,” Mr. Pyper said.

It was his first auto purchase, and the dealer said someone else might buy it if he waited, said Mr. Pyper, who is a 22-year-old student. He bought the vehicle with a down payment of 5,000 Canadian dollars, equivalent to roughly $4,000, and a 48-month loan from

Royal Bank of Canada

totaling around 13,000 Canadian dollars, or about $10,400.

Dealer representatives didn’t return requests for comment. A spokeswoman for RBC declined to comment.

When Mr. Pyper set up the online account with the bank, he said, he logged on and paid off the loan.

Some regulators and consumer attorneys have observed dealers using more pressure tactics recently to steer customers away from bringing outside financing or paying cash.

Write to Ben Eisen at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8