Car buyers who pay cash may see unhappy dealers
More shoppers are rejecting loan and lease arrangments
DETROIT -- There are two questions that greet every car buyer who walks into a showroom: "Are you ready to buy today?" and "How do you plan to pay?"
If the answer to the first is "yes," there are smiles all around. If the answer to the second is "cash," that warm greeting may grow chilly.
To be sure, no dealer will turn away a cash-paying customer, not in the atmosphere that surrounds the automobile industry these days, but all things considered, they are less welcome than buyers who want to lease or finance their cars. "We actually love all paying customers," said George Borst, the chief executive of Toyota Financial, "but we really want people to finance."
On the other hand, many car dealers are trying to clear out big inventories at the end of the 2007 model year to prepare for fresh models that begin arriving soon.
But buyers who pay cash, whether they write a check or borrow the money elsewhere and bring it to the showroom, provide dealers with fewer opportunities to make money.
That ranges from the cut they get from arranging a lease or loan to options like extended warranties or antirust coating that buyers are more likely to choose if they can fold it into the amount they borrow. In some cases, those extras account for up to 75 percent of a showroom's profits.
But, to some dealers' chagrin, cash deals are up in 2007. Some 11.7 percent of buyers paid cash for cars in the first half of this year compared to about 8 percent over the last few years, according to a survey by CNW Marketing Research, which studies car-buying habits.
In all, about 26 percent of buyers are bringing cash to the table, whether it is out of their bank accounts or in prearranged loans through their credit unions, banks, or home lenders, according to the Power Information Network, the research arm of J.D. Power & Associates.
That overall figure is up slightly from last year, but still below the one-third of buyers who paid cash in the 1950s, when customers, many with lingering memories of the Great Depression, came to showrooms with their check books or stacks of bills.
It is in line, however, with the rate during the 1970s and 1980s, before car companies made widespread use of cut-rate loans and discount leases.
One big reason for the recent rise in cash-paying buyers is the introduction of small and less-expensive cars into the American market, like the Honda Fit, Toyota Yaris, and Nissan Versa, said Art Spinella, the president of CNW Marketing.
Because many consumers purchase small vehicles as second and third cars, and have a car loan for their primary vehicle, a number are choosing instead to pay cash rather than take on another loan, Spinella said. That is particularly true for female buyers, who account for about 42 percent of cash-paying customers.
Cash-paying buyers, who tend to be wealthier than typical consumers, are often reaping investment profits. This year, 34.8 percent paid for their cars by selling stock, the most common source of cash, compared with 31.8 percent who took money out of their savings, Spinella's data showed.
Indeed, at brands like Mercedes-Benz, Volvo, Audi, and BMW, as many as one-third of transactions are cash sales.
For these customers, sticker price can be no object. One shopper at Lexus of Ann Arbor, Mich., recently paid $116,000 in cash for the Lexus LS 460 Lh, the hybrid version of Lexus's ultra-luxury sedan, which went on sale last month.
Mark A. Louria, the general sales manager there, said about 25 percent of his customers paid cash for their new cars, keeping them for an average of six to seven years. Louria said he tried to encourage many customers to lease their cars instead, arguing that it was a better way to take advantage of ever-changing technology.
In the end, he said, "it's whatever works best for them."
Shopping sites like Edmunds.com, Cars.com, Kelly Blue Book (kbb.com) and Autobytel.com are places where consumers can research data like the invoice price, and the amount that manufacturers are giving to dealers in rebates and extra incentives.
Those who plunk down dollar bills often cite a single reason. "I just don't like debt," said Todd Larson of Shorewood, Minn. Larson and his wife, Linda, paid $33,000 in cash for their 2005 Ford Freestyle, as well as a 2001 Jeep Cherokee.
For Matthew Galloghy, 30, who lives in Batavia, Ohio, outside Cleveland, it is simply saving money. He recently paid about $20,000 for a Honda Accord, and plans to drive it for about 10 years.
Galloghy takes his thrift to another level. He said he would make a monthly deposit equal to a car payment, or about $300, in a money-market account.
"And now I certainly have a cushion for emergencies or anything else that may come up."
Rob Butler, owner of the Butler Automotive Group in Indianapolis, said he doesn't discourage customers who want to pay cash from doing so.
"If a guy likes to write a check, fine," Butler said. "Cash is still cash." 