How 'forced financing' makes some car dealerships more money

Some dealerships in Canada just don't want your cash when you're trying to buy a car.

Tammy Hussey discovered that when she took her 84-year-old father car shopping this summer. After test-driving a 2021 Jeep Compass at a Toronto dealership, John Hussey had the money in his bank account to buy it outright — but his daughter says he was told he could only drive it home if he financed it.

After spending 30 minutes trying to convince the salesperson to let her dad use his savings to buy the car, Hussey said he "abruptly" told them to "please leave." 

"Everybody jokes about the used car salesman — they're known to chase deals and move product. So to be told to leave a dealership when you basically are ready to write a cheque for the car? I still can't get over it."

North York Chrysler did not respond to an interview request. However, according to its website, "to prevent exports and non-retail purchases, cash sales are restricted to local customers residing within eight [kilometres] of the dealership."

That meant John Hussey, who lives in the northeastern Ontario city of Timmins, was out of luck. 

But one consumer watchdog says what happened to Hussey is an example of "forced financing," a tactic some Canadian car dealerships have been using to make more money on every sale.

Shari Prymak is the executive director of Car Help Canada, a non-profit that helps drivers find cars and negotiate prices. He says when a dealer sets up a loan on a used vehicle, it gets a commission from the lender — whether that be a bank, credit union or alternative lender.

But that doesn't happen when a customer pays cash.

"The dealership makes more money when you finance. So it's in their best interest for you to do so." 

Cost of Living reached out several times to Canada's largest lenders: Scotiabank, CIBC, RBC, BMO and TD for more information about the commissions they give dealerships, but their spokespeople either did not respond or declined to comment.

According to Kenton Maitland, general sales manager of Platinum Mitsubishi in Calgary, commissions can range from $500 to $2,000 per vehicle, depending on how much a customer finances and the interest rate on the loan.

While Maitland said financing is a "big revenue source" for dealerships, he doesn't turn away customers who want to pay cash because he thinks that would tarnish his "long-term relationship and reputation."

Cost of Living7:59Why some car dealerships don't want your cash

Fewer cars to sell 

While lender commissions are a long-standing practice in the automotive industry, Car Help Canada only started hearing about forced financing in 2022. Since then, the non-profit has received more than 100 complaints.

Prymak said the issue typically only affects used car buyers because cash purchases on new vehicles are "quite rare." He said those buyers usually need to finance because of the higher sticker price.

George Iny, director of the Automobile Protection Association — a non-profit consumer advocacy group with offices in Toronto and Montreal that helps people buy cars — said forced financing is a reaction by dealerships to the Canadawide vehicle shortage that cropped up during the pandemic because of supply chain problems.

"So in the old days, if you were a cash buyer, dealerships would lose the commission," Iny said. "But they always figured, 'You know, we could sell another car to a different buyer.' Today, they can't get enough vehicles, so they're trying to get as much profit on every vehicle."

• Buying a car has never been more expensive, assuming you can even find one — here's why
• Why used car prices are locked in high gear — and what government could do about it

Less supply and more demand is making things worse, according to Keith MacDougall, who sold cars for Honda, Ford and Volkswagen in Ontario for a decade before he changed careers in 2018.

"When I was selling cars ... it didn't really matter if you wanted to pay cash or you wanted to finance. The dealer was pretty happy to sell the car, make a couple of dollars and get it off the lot." 

This summer, MacDougall said, he walked away from a used vehicle he was interested in buying from a downtown Toronto dealership because he felt pressured into financing a larger portion of the car than he needed. He said the salesperson "did not care one bit about losing the sale."

"There's so much demand for these cars that the dealer really isn't so inclined to make any given deal work because they know there'll be a new one [customer] in the door the next day who will buy it at whatever offer they're trying to get."

Dealers not breaking law

There is no law in Canada that says a business must accept cash. Just like some retailers only take debit or credit, a car dealer can accept any form of payment it chooses.

Even if that's financing.

According to the Ontario Motor Vehicle Industry Council, or OMVIC, forced financing could be considered a form of "tied selling," where in order to obtain one product — for example, a car — a consumer has to buy another product — financing.

However, under the federal Competition Act, tied selling is only illegal if certain conditions are met — such as substantially lessening competition in the market.

"While tied selling may go against the spirit of fair and open competition in the automotive sales industry, it is not generally prohibited by existing laws," an OMVIC spokesperson wrote in an email.

'Scratch our back to make it work'

Vancouver resident Bryan Balmer and his partner, Dan West, wanted to buy a 2020 Volkswagen E-Golf last fall from a local dealership and made three cash offers on the spot. All were rejected — even the one that offered the advertised price.

Balmer said the only counteroffer the salesperson came back with included financing.

"He sort of said: 'We need you to scratch our back to make it work.'"

But the general manager of Applewood Nissan Richmond said the issue was their first two offers were too low and their last offer was verbal and not in writing.

"If a client is asking for discounts, we may reject the cash offer and counteroffer a lower price but with financing," said Leon Cheliadin in an email.

"We don't do things verbally…. Had they entered proper negotiations, things would've been agreed upon and likely closed as a cash deal."

In the end, Balmer and West decided to take their business elsewhere and were able to buy the same EV for roughly the same price, without financing. However, the vehicle did have more mileage and they had to travel to Vancouver Island to pick it up.

For 'no drama,' shop around

Walking away from a deal you don't like is always an option, but you could also just take the loan and pay it off right away.

Most non-mortgage loans in Canada are open and can be paid off anytime, without penalty. This is something the Alberta Motor Vehicle Industry Council has been educating consumers about.

However, there are some jurisdictions — such as Nova Scotia and the Northwest Territories — where provincial consumer protection laws do not prohibit dealerships from charging customers a fee for paying off their loan early.

Tammy Hussey said her dad opted to shop around and was able to find a dealership that gladly accepted a cash payment for a new Toyota RAV4. 

"No drama, no requirement to finance. He's a very happy man."