Looking for insights as to dealer and bank relationship

MachTee

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I made a deal to trade in one of my cars (not my MME!). Basically my car plus $500 is the cost of the new car, so I'd only be charged sales tax on $500. Day before my scheduled pickup, I emailed my salesman to confirm some details, and realized that I'd be taxed on ~$20K because that's what they want me to finance for a minimum of 4 months. I own the car I'm trading so the dealership was going to cut me a check for the amount financed. I refused as tax on the $20K is ~$1200. I made them the offer of splitting the sales tax that I would've had to pay with the dealership, or to finance half the amount they wanted me to. Either method I'd only be taxed on $10K. They refused and I canceled the deal.

I'm genuinely curious. How much can they possibly make off the bank on a $20K loan, that I fully intend to pay off in the 4 months that they stipulated? A $20K loan at 2.9% over 60 months is about $1500 in interest, never mind that I'll pay it off in just 4 months. Let's say the bank cuts them half of the interest I would have had to pay, which surely cannot be that much, how can they turn down my offer of an extra $600?
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Why would the amount financed have anything to do with sales tax? It should be based on the purchase price minus what they gave you for trade. How much is paid in cash vs what's borrowed should not come into play at all.

But even if it did, why would the dealer expect your to borrow $20k for what's essentially an even trade? Just so they could milk the system and get commission on a loan you don't need? That's just shady.
 

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I made a deal to trade in one of my cars (not my MME!). Basically my car plus $500 is the cost of the new car, so I'd only be charged sales tax on $500. Day before my scheduled pickup, I emailed my salesman to confirm some details, and realized that I'd be taxed on ~$20K because that's what they want me to finance for a minimum of 4 months. I own the car I'm trading so the dealership was going to cut me a check for the amount financed. I refused as tax on the $20K is ~$1200. I made them the offer of splitting the sales tax that I would've had to pay with the dealership, or to finance half the amount they wanted me to. Either method I'd only be taxed on $10K. They refused and I canceled the deal.

I'm genuinely curious. How much can they possibly make off the bank on a $20K loan, that I fully intend to pay off in the 4 months that they stipulated? A $20K loan at 2.9% over 60 months is about $1500 in interest, never mind that I'll pay it off in just 4 months. Let's say the bank cuts them half of the interest I would have had to pay, which surely cannot be that much, how can they turn down my offer of an extra $600?
If the dealer writes your contract at the net rate from the bank they'll usually get a flat payment from the bank. Usually $100 to $300. But in addition sometimes if they make a certain number of contracts per month they can get even more money as a bonus for making their targets.

The contract usually has to remain open for 3 payments in order for the dealer flat payment to not be reversed by the bank.
 

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Why would the amount financed have anything to do with sales tax? It should be based on the purchase price minus what they gave you for trade. How much is paid in cash vs what's borrowed should not come into play at all.

But even if it did, why would the dealer expect your to borrow $20k for what's essentially an even trade? Just so they could milk the system and get commission on a loan you don't need? That's just shady.
It's not a tax on the amount financed it's taxed on the cash sales price. The trade in would count as a down payment which is applied after tax is calculated on the sales price.
 

generaltso

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It's not a tax on the amount financed it's taxed on the cash sales price. The trade in would count as a down payment which is applied after tax is calculated on the sales price.
That depends on the state, no? A lot of states only charge sales tax on the difference between the cash sale price and the value of the trade. I assumed that's what the OP was talking about. In my state, the old car doesn't even have to be traded in. It can be sold to anyone within 90 days before or after the purchase of the new car.
 


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MachTee

MachTee

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Why would the amount financed have anything to do with sales tax? It should be based on the purchase price minus what they gave you for trade. How much is paid in cash vs what's borrowed should not come into play at all.

But even if it did, why would the dealer expect your to borrow $20k for what's essentially an even trade? Just so they could milk the system and get commission on a loan you don't need? That's just shady.
Since $20K of my trade is not applied as an equity and they're cutting me a check for that amount, it is not counted as trade in value and taxed will be assessed on it.
 

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That depends on the state, no? A lot of states only charge sales tax on the difference between the cash sale price and the value of the trade. I assumed that's what the OP was talking about. In my state, the old car doesn't even have to be traded in. It can be sold to anyone within 90 days before or after the purchase of the new car.
That may be. I don't have any experience with that because here in MI there's no tax refund on trades. When you buy a car the sales price is taxable. What happens after that happens.
 

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That may be. I don't have any experience with that because here in MI there's no tax refund on trades. When you buy a car the sales price is taxable. What happens after that happens.
Okay, so even if that's the case for the OP, why would he have to pay more tax if he finances $20k instead of just paying the $500 difference between the old car and the new car? Wouldn't the cash price be the same, and therefore the sales tax be the same?
 

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Okay, so even if that's the case for the OP, why would he have to pay more tax if he finances $20k instead of just paying the $500 difference between the old car and the new car? Wouldn't the cash price be the same, and therefore the sales tax be the same?
When the dealer reports the sale they report the top line number they sold the car for (before any cash or trade down payment). That's why even if you pay cash for the whole car you're still paying tax on the sales price.

So yes, the top line number is the same.
 
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MachTee

MachTee

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If the dealer writes your contract at the net rate from the bank they'll usually get a flat payment from the bank. Usually $100 to $300. But in addition sometimes if they make a certain number of contracts per month they can get even more money as a bonus for making their targets.

The contract usually has to remain open for 3 payments in order for the dealer flat payment to not be reversed by the bank.
Thanks for the insights. Obviously I don't know the inner workings, but turning down an extra $600 in immediate profit to make $300 plus whatever bonus seems counterintuitive to me. Plus, for sure they have far more borrowers than cash buyers so missing out on my one contract can't totally put them under target.
 

generaltso

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Since $20K of my trade is not applied as an equity and they're cutting me a check for that amount, it is not counted as trade in value and taxed will be assessed on it.
Ah, it's not the financing that's causing the issue, it's that they're giving you $20k less for your trade on paper. This whole deal sounds sketchy, and I would run from it.
 

generaltso

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When the dealer reports the sale they report the top line number they sold the car for (before any cash or trade down payment). That's why even if you pay cash for the whole car you're still paying tax on the sales price.
But only in some states. I guess it would be helpful to know what state the OP is in.
 

RickMachE

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That may be. I don't have any experience with that because here in MI there's no tax refund on trades. When you buy a car the sales price is taxable. What happens after that happens.
Actually, that changed in Michigan in 2013, but still sucks. Started with $2,000 max of value, i.e. $120 credit, in 2014. Increased by $500 each year, until it reached a maximum of $14,000 in 2039.

That was increased in 2019 to $5,000 of value, and go up by $1,000 per year until $14,000 is reached in 2029, after which there is no limit. Snyder signed the first bill, and attempted to veto the second bill, but failed.

So, in 2022, up to $8,000 of trade-in value is reduced, i.e. $480.

Last year we privately sold our Fusion Energi to Carvana for $25,546. Yes, we didn't save $420 in taxes that we could have if we traded it in, but the price was $6,546 more than the dealership offered.

Some states give full credit, some states give partial credit, and some states give no credit.

South Carolina limits sales tax on the car to $500. Of course they also charge an annual tax on the car, paid in your county. I looked at one example for the Mach-E, and it was $800 a year.
 
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MachTee

MachTee

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Ah, it's not the financing that's causing the issue, it's that they're giving you $20k less for your trade on paper. This whole deal sounds sketchy, and I would run from it.
Exactly. I'm an experienced car buyer but I still can't possibly know all the little tricks dealers have up their sleeve. Maybe they plan to close the business and let that check bounce as soon as I sign me title over lol.

It really seems counterintuitive, that they turn down an immediate extra $600, a highly desirable trade, and the whole transaction itself, to make a few extra hundred bucks from the bank.
 

generaltso

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It really seems counterintuitive, that they turn down an immediate extra $600, a highly desirable trade, and the whole transaction itself, to make a few extra hundred bucks from the bank.
Yeah, especially if their books show that they acquired your old car for $20k less and have to pay income tax on the huge profit they make when they sell it. This makes no sense no matter how you slice it. They're essentially just asking you to take out an unneeded $20k loan and giving you a check to use to pay off the loan. Not sure if that's technically fraud, but it's all kinds of sketchy, so I think you're better off not doing business with that dealer.
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