Why car dealers insist on loans, and why Tesla's rates are lower

Some car dealers charge you more if you pay cash. Why? They earn a commission when you take a loan.

A $200,000 car with a loan attached

Suppose a dealer offers a car at $200,000 if you borrow at least $100,000 for 5 years at 2.28% flat interest. Decline that loan, and the car costs $5,000 more!

You pay $100,000 upfront, and the bank pays the dealer the other $100,000. You then repay the bank:

Interest = $100,000 × 2.28% × 5 years = $11,400
Total loan repayments = $111,400
Monthly repayment = $111,400 ÷ 60 = $1,856.67

Including your down payment, the car costs $211,400. Paying cash costs $205,000. Taking the loan costs $6,400 more overall, but keeps cash in your bank account at the start.

These conditions also appear in Car Expo packages, where the advertised discount can include finance, insurance and trade-in rebates.

The bank pays the dealer too

UOB says it may pay dealers commissions for marketing its loans, and isn’t obliged to tell the buyer how much.

OCBC’s head of car financing, Kenny Tan, was more direct in a 2021 interview: its then-1.88% rate preserved a “competitive commission” for dealers.

Part of the interest rate you pay supports the dealer’s commission.

Guan Chao Holdings, whose Singapore operations included Vincar, disclosed referral commissions of 3% to 6% of the loan amount in its 2019 prospectus. On a $100,000 loan, that’s $3,000 to $6,000 of revenue from arranging the financing.

The dealer receives a one-off commission when the loan is advanced. You make repayments for years; the dealer gets paid at the start.

That historical example explains the incentive. A dealer can use some of its commission to discount the car and still earn from the loan.

Refuse the loan, and the dealer loses that income. The higher cash price helps make up for it.

A flat rate makes the borrowing look cheaper

The 2.28% rate is charged on the original $100,000 for all 5 years, even as you repay the loan.

A housing mortgage usually charges interest on what you still owe. That’s why comparing the 2.28% headline rate with a mortgage rate gives the wrong impression.

Use the effective interest rate (EIR) to compare borrowing costs. It accounts for the timing of your repayments. Our 2.28% flat loan works out to about 4.33% EIR over 5 years, before fees.

Why Tesla’s rate can be lower

Tesla told me the reason: it sells directly and doesn’t have an independent dealer expecting to earn a commission from the loan.

Tesla’s DBS financing example shows 1.38% flat interest, or 2.66% EIR over 5 years. BYD by 1826 uses 2.28% in its SEAL repayment estimates.

Apply both rates to our $100,000 loan over 5 years:

That’s $4,500 less interest at Tesla’s rate. The difference isn’t necessarily all dealer commission, but it’s money you would otherwise pay to borrow.

What if you keep the cash invested?

Your retained cash needs to earn more than about 2.7% a year to beat Tesla’s 5-year loan. That’s the effective annual cost of its repayments.

Singapore Savings Bond rates have risen overall this year. The November SSB offers an average annual return of 2.13% if held for 5 years.

That’s roughly 0.6 percentage points below Tesla’s borrowing cost. The SSB doesn’t quite cover the loan, but the gap is small. I think Tesla’s loan is reasonably priced if keeping cash available matters to you.

Our SSB rates and coupon calculator lets you check returns for different holding periods. Match that period to the loan you’re considering.

Our Tesla cash-versus-loan example works through a $220,000 car over the full 7-year loan term.

Chasing higher returns in shares adds the risk of losses while the loan remains due.

The three ways to pay

Pay cash: no loan interest or monthly repayments, but more savings go into the car. Include any cash-price top-up.

Use dealer financing: keep more cash and get the finance discount. Count the interest, fees and any charges for settling early.

Arrange your own loan: choose another lender, but account for any dealer discount you lose.

You can vary the loan amount and repayment period within those choices. What matters is whether the monthly payments fit your income, how much cash you want available, and what that cash can earn elsewhere.