Monday, August 19, 2019
This is the Florida law that is supposed to regulate the Dealer Fee: “The advertised price must include all fees or charges that the customer must pay excluding state and local taxes.” The law also requires that the Dealer Fee must be disclosed to the buyer as follows: “This charge represents costs and profits to the dealer for items such as inspecting, cleaning, and adjusting vehicles and preparing documents related to the sale.”
This law is very weak and almost never enforced. When enforced, it isn’t enforced by the letter of the law; it’s done so as to “accommodate” the car dealers. The law is “weak” because it requires only that the dealer fees be included in the “advertised” price. The word “advertised” is narrowly interpreted to mean a specific car shown in a newspaper, TV, radio, or online ad, but, what about when you get a price on the phone, online, or from the salesman? You don’t find out about the Dealer Fee until you’re in the business office signing a bunch of papers. The dealers get around advertisements very easily by including a “number” in the fine print. This number is their stock number that designates one specific car. When you respond to the ad, this car is no longer available (sales people are usually not paid a commission for selling the “ad car). The advertisement might say “many more identical cars are available.” It’s true that identical cars are available for sale, but they are not available for sale at the sale price because they are not the advertised stock number car. If you buy one of those “exact same cars” you will pay from $700 to $2,000 more.
The reason I’m told that the law is rarely enforced is that the Florida Attorney General’s office is understaffed and too busy enforcing other Florida laws. I’m also told that Florida car buyers don’t file very many complaints against car dealers for violating the Dealer Fee law. I don’t believe that there can be too many other infractions of the law that take more money annually from consumers than dealer fees take from car buyers. Just one car dealer selling 1,000 cars a year and charging a $1,000 dealer fee is taking a $1 million annually from car buyers. Most car dealers in South Florida sell a lot more than 1,000 cars annually and many charge more than $1,000 dealer fee. I believe that the reason more complaints aren’t filed on the dealer fee is because most car buyers don’t know that they are being duped. They either don’t notice the fee or assume it’s an official federal or state fee. Dealer often tell their customers that all dealers charge it and that it’s required by law…not true.
The Attorney General also “accommodates” the dealers by not interpreting the law the way it was intended. For example, the law says that the dealer fee must be included in the advertised price. The Florida Senate has ruled that the law requires that the fee be “included” rather than “specifically delineated.” But the Attorney General allows car dealers to advertise car prices without including their dealer fees in the price if they mention their dealer fees in the fine print. They also allow car dealers to simply state in the fine print that they have a Dealer Fee but not even mention the amount. To me they are simply allowing the car dealers to break the law.
Lastly, the required disclosure of the Dealer Fee on the vehicle buyer’s order or invoice is confusing, misleading, and incorrect: “This charge represents costs and profits to the dealer for items such as inspecting, cleaning, and adjusting vehicles and preparing documents related to the sale.” It should not say “costs” because any cost that you pass along to the customer in the price of a product is pure profit. A dealer can pass along his utility bills, sales commissions and advertising if he wants to and call it a “dealer fee”. It should not say “inspecting, cleaning, and adjusting vehicles” because all car dealers are reimbursed by the manufacturer for “inspecting, cleaning, and adjusting vehicles”.
So, what should you do when you are confronted by a car dealer with the “Dealer Fee”? Besides “LEAVE”, here are some suggestions that may help you:
(1) Make it clear from the very beginning that all prices you discuss must be “out-the-door” prices. This way you don’t care if the dealer fee added up front because you will shop and compare their bottom-line price with at least 3 competing car dealers. Ideally you should require that they include tax and tag in that price. If you don’t, they might try to slip in something they call the “electronic filing fee” or “e filing fee” and trick you into believing it’s part of the license tag and registration.
(2) The dealer will often tell you that all car dealers charge Dealer Fees and that they are required by law to add the dealer fee on every car they sell. Simply tell them that you know this is not true and you can cite me and other car dealers like OffLeaseOnly.com who do not charge dealer fees. Print out a copy of this article, show it to them, and tell them that you know that there is no law that says he must charge you a dealer fee.
(3) As long as you and the dealer understand that the out-the-door price is the price you will shop and compare with his competition, you don’t need to be concerned whether there is a dealer fee showing on the vehicle buyer’s order. To be competitive, the dealer can simply reduce the price by the amount of his Dealer Fee and the bottom line is what you are comparing. You can download a legal form,www.OutTheDoorPriceAffidavit.com, that you ask the car dealer to sign before you sign the vehicle buyer’s order. The dealer legally commits that the price he quoted or advertised is an honest out-the-door price. If he won’t sign this affidavit, than you won’t sign the buyer’s order.
(4) Be aware that dealers usually do not pay their sales people a commission on the amount of their dealer fee. In fact, dealers often misinform their sales people just like they do their customers. The salesman who tells you that the all dealers charge Dealer Fees and that the law requires everyone pay a dealer fee may believe it. Sale people who understand that the Dealer Fee is simply profit to the dealer will be resentful of not being paid their 25% commission on it. A $1,000 dealer fee costs the salesman $250 in commission.
(5) When you respond to an advertisement at a specific price for a specific model car, object when the dealer adds the dealer fee. Unfortunately, the law allows him the loophole of claiming that the ad car is a different stock number, but you might be able to shame him into taking off the dealer fee. If you raise a “big enough stink”, the dealer would be smart to take off the dealer fee than claim that technicality, especially if you were to advise the local TV station or newspaper.
I hope that these suggestions help you and I hope that you will file a complaint with the Florida Attorney General, Ashley Moody. If enough consumers (who are also voters) let our elected officials know how they feel about Dealer Fees, it will bring positive results.
Monday, August 12, 2019
Have you ever wondered why you can get a firm price on just about any other product except an automobile? You can call a jewelry store and get a price on a diamond ring that costs as much or more than a car. You can go on Amazon.com, get a firm price, and buy virtually anything. Walk in or call any department store and they give you a firm, out-the-door price.
Car dealers don’t want to give you a firm price because they want to deprive you of a fundamental right of our American free-market economy, which is to be able to shop and compare prices so that you can choose the lowest one. There are some countries where the prices are dictated by the government or giant cartels. We have anti-trust laws in America that prohibit price fixing, monopolies, or collusion between companies which keep prices artificially high.
In fact, there’s even a federal law that says auto manufacturers must put a sticker on all vehicles that discloses the Manufacturer’s Suggested Retail Price, MSRP. This law was written by Senator Mike Monroney back in 1958. Senator Monroney felt there was a need for this law because, before then, car dealers could ask any price they wanted for car. They could put their own price sticker on their cars and mark their cost up any amount they chose. A car-buyer, pre-1958, had absolutely no basis for comparing prices between competing car dealers. The MSRP gave every car shopper a common basis for comparing discounts from MSRP. All dealers pay their manufacturers the same price for a car and all MSRP’s for a specific year-make-model have the same percentage markup. The Monroney label was a great idea and it worked well for a while, but it wasn’t too long before the car dealers figured out ways around this “handicap” to their profit margins.
The easiest way around an MSRP is simply to refuse to give the customer a firm discount unless they agree to buy the car, and therefore you can’t get a price from a car dealer until then. Another way is to give you a firm discount but add hidden charges like dealer fees, doc fees, electronic filing fees, or dealer installed accessories after you agree on the discount from MSRP. “Bait and switch” is a popular tactic which simply brings you in to buy a specific car only to find out that its “just been sold” …but here’s another one almost like it”. Another popular tactic is to advertise discounts from “list price”, “dealer list price”, or “sticker price”. Dealers even have counterfeit Monroney labels printed that they display alongside of the real Monroney label. These counterfeit price stickers I’ve named “Phony Monroney’s”. I’ve seen advertisements from a South Florida car dealer, advertising “$10,500 Discounts on Every Vehicle in Stock”. The discounts aren’t from the MSRP but from “dealer list” which is clearly thousands of dollars above MSRP.
The best defense against all of this is to insist on an out-the-door price. The definition of an out-the-door price is “the full amount paid to the dealer plus government fees (tax and tag) only. Explain the following to the sales manager at the car dealership. “If you give me an honest out-the-door price, I will compare it with the two prices I already have from two other car dealerships. I will buy from the dealer with the lowest price. If you agree to give me your best price, you have a 33% chance of selling me a car. If you refuse to give me a price right now, you have 0% chance of selling me a car, because I will walk out that front door and you will never see me or hear from me again.” You can accomplish the same thing over the telephone or via email. You can download a form for the dealership to sign to guarantee this price at www.OutTheDoorPriceAffidavit.com. If the dealership refuses to sign this, they aren’t being honest about giving you their lowest price. Buy your car elsewhere.
I also recommend that you try www.TrueCar.com in addition to the tactic I just described. By way of full disclosure, I’m a TrueCar dealer, I own stock in TrueCar, and was member of the TrueCar national dealer council for three years. Another good third-party buying source is www.CostcoAuto.com. Costco requires an annual membership fee of $65 which is well worth the investment.
Monday, August 05, 2019
(1) If you decide to have your vehicle serviced by a dealership rather than an independent, choose the dealer with the best service department, not necessarily the dealer you purchased your vehicle from. You don’t have to have the same dealership service your car that sold you your car. You probably bought your car from the dealer who gave you the best price. You should have your car serviced at the dealer who can best maintain and repair your car. Your manufacturer doesn’t require that you have recommended maintenance done by their dealers, but you should keep receipts from the independent you choose to prove you had it done in the event of a warranty claim. You must have warranty repairs done by the dealer. The price of service is important, but secondary to the quality of the service and repairs. Do a little research. Ask friends and neighbors who drive your make of car. Check with the BBB and the County Office of Consumer Affairs. Ask the service manager at the dealership to show you his factory score on CSI (customer satisfaction index). Every manufacturer surveys dealers’ service customers and ranks that dealer by how well he treats his customers. Many auto manufacturers are measuring service satisfaction by the percentage of customers that return to their dealer for service, Service Retention. This is the most accurate measure of how well your dealer will service and repair your car.
(2) Establish a personal relationship with your service advisor. The person in the service drive who writes up your repair order is very important. Be sure you get a good one. He should be knowledgeable, attentive to your needs, promptly return phone calls, and recommend only necessary services. You might not find this person on your first visit, but if you aren’t comfortable with the person you are dealing with, ask for one with whom you are. When you make an appointment to have your car serviced, always ask for that service advisor.
(3) Don’t pay the “gotcha”, miscellaneous supplies fee. Almost all car dealers and independents tack on a phony fee when you pay your bill which is simply more profit to the dealer but is disguised by various labels. It’s sometimes called “environmental impact fee”, “sundry shop supplies” and many others. The service cashier just adds a percentage ranging from 5% to 10% to your bill. This is no different than the “hidden dealer fee” that the sales department tacked on to the price they quoted you on the price of the car. Most dealers will waive this fee if you complain about it, especially if you threaten to call the BBB, their manufacturer, or the Florida Attorney General’s office.
(4) Always road test your car, preferably with the technician. If you brought your car in for a drivability problem such as a noise, vibration, or pulling to the right or left, don’t accept the car back until you ride in the car with the technician or service advisor and confirm that the problem has been remedied. I also recommend that you drive the car with the service advisor to demonstrate the problem when you bring it in. His experiencing what you experience always communicates your problem more accurately than listening to your description of the problem. If your problem is a troublesome “noise” which the technician or service advisor cannot hear, but your do, insist on someone else driving with you who has better hearing.
(5) Ask for a written estimate of the total cost of repairs and maintenance. Florida law requires that the dealer give you a written estimate. By law, they may not exceed this by more than 10%.
(6) Make an appointment ahead of time. You should insist on making an appointment and you should try to make that appointment at a time when the dealer’s service department will be least busy…typically the middle of the afternoon on weekdays or Saturday and Sunday. Avoid the 7:30-8:00 morning rush. When your service advisor has written up your repair order, ask him how long it will take. After he tells you, ask him to let you know ahead of time if, for any unforeseen reason, your car will not be ready in the promised time. Often times when you call a service department they will tell you to “bring the car in anytime” or “come right over”. Service advisors will tell you this because they are either too busy or too lazy to take the time to make a proper appointment. When they tell you this, tell them that your time is very valuable and that you insist on an appointment at a time when they can get you in and out quickly. Always write down the name of the person that gave you the appointment.
(7) Shop and compare high cost repair prices. Most service departments are competitive on maintenance items like oil changes, wheel alignments, and tire rotations. However, the costs of major repairs can vary considerably. If you are looking at an air-conditioner, transmission, or engine repair that can cost several thousands of dollars, get bids from more than one service department. Often just suggesting that you will do this will keep the cost down from the dealership you prefer.
(8) Introduce yourself to the service manager. This falls along the same philosophy as developing a good personal relationship with your service advisor. It can’t hurt to know the “boss”. If you are on first name basis with the service manager, it just might earn you a slightly higher level of treatment from those that work for him.
(9) DO NOT BUY ANY SERVICE THAT IS NOT RECOMMENDED BY THE MANUFACTURER. Modern cars require far less maintenance than cars built ten years ago. Car dealers and independents are suffering from the small amount of factory recommended maintenance. To supplement this, they are inventing unneeded maintenance under the guise of dealer recommended maintenance. Be sure that you carefully review your car’s owner’s manual each time you bring your car in for routine service. Be especially careful not to buy “FLUSHES” of the radiator, transmission, fuel system, power steering, engine oil and brake fluid. These are inventions of the dealer and independent service departments to make money and are not recommended by your car’s manufacturer.
Monday, July 29, 2019
OK, you’ve just bought that new or used car and the pressure is off…right? WRONG! The next step for the car dealer is to get you into the “box”. You won’t hear this word mentioned. It’s inside car dealer slang for the F&I office or the business office. This is the place that you sign all those papers making the sale legal and final. But in addition to that, it’s also a very important profit center for car dealers. In most car dealerships it’s the most profitable department. It’s not uncommon for car dealers to make over $1,500 in “the box” on each car they sell. AutoNation, the world’s largest auto retailer makes over $2,000.
The auto manufacturers put a lot of pressure on their dealers to sell more new cars. Dealers have minimum quotas that they must meet or exceed. If they don’t, they can be penalized by losing large cash bonus rewards. To ensure that they don’t lose these bonuses, dealers are being forced to price new cars so low that many dealers are losing money in their new car departments. This puts even more pressure on car dealers to make up for the lost new car profits by increasing their finance department’s profits.
Here’s how that profit is generated. First, and usually foremost, is making money on the interest they charge you. Essentially, they make money on “the spread” just like banks make money when they loan it. For example, a car dealer will borrow money from Bank of America for 3% and loan it to you for 5% or whatever interest rate they can convince you to accept. The second way they earn that big profit in “the box” is by selling you “products” which are added to the price of the car you just bought. There are many products and some of the most common are extended service warranties, maintenance plans, road hazard insurance, GAP insurance, window etch, and LoJack.
The way you should protect yourself on the interest rate is to have already shopped your own bank or credit union and two other banks for the best interest rate you can qualify for. Never go into “the box” without knowing what the best rate other banks or credit unions will allow you. The best way to protect yourself against the products they will try to sell you is to completely understand each product. Do you want or need an extended warranty on your new car? If this product costs $1,900 for example, how long are you going to keep the car and how long are you likely to be driving it when it’s out of the manufacturer’s warranty? Ask the same questions of each product they try to sell you. If you’re unclear on the merits of a product, don’t commit. You can always go home and think about and seek advice from friends and advisors. If the finance manager tells you that you must decide immediately, just leave. He’s not being honest.
Another important tactic is to never go into “the box” alone. If it’s just you and the F&I manager [often called business manager], and there is a dispute over what was said, it’s just your word against his. Also, having a friend or advisor present will usually be a deterrent to any attempted deception.
These are some of the kinds of deception you should be on the lookout for. Tying the sale of a product, like an extended service contract, to the interest rate or the bank’s willingness to approve your financing is illegal. But this practice happens all too often behind the closed doors of the “the box.” The F&I manger may tell you that the bank “requires” you to buy the extended warranty, GAP insurance another product to protect the bank’s collateral. This is simply a lie. Another common form of deception is to not disclose the products or interest rate, and have you sign the contract without reading it. There are many documents to be signed after you buy a car. Buyers are often in a state of euphoria now that they have bought their dream car and are in too much of a hurry to sign everything and drive their new car home. The car dealer is required by law to give you a signed copy of the installment sales contract. Be sure you carefully read it, and be sure have a copy. If you don’t get a copy, you may find that you signed a different contract than the one you read.
Extended service warranties, GAP insurance, and other insurance products are regulated in Florida unlike many other states. This affords you some degree of protection like being able to cancel an insurance product if you did not use it. You can do this in 60 days for a 100% cancellation. You don’t get the cash back and your monthly payment won’t go down, but the amount is taken off the principal amount you are financing through the bank. You can cancel insurance products after 60 days, but the cancellation is not pro rata and you pay a large penalty.
If you remember nothing else from this article, please remember this one thing. Don’t hurry the process of financing your car and signing the papers. Don’t let the car dealer encourage you to sign anything you don’t understand. Time is on your side because it will allow you to think and to consult with others who can help you make your final decision. I get a lot of calls from victims of “the box” and the one thing they all have in common is that they let themselves be rushed into signing the documents so that they could drive their dream car home that same day.
Monday, July 22, 2019
(1) Discount from Dealer List. Anytime you read or see a car advertised with a large discount, determine whether that discount is from the MSRP [manufacturer’s suggested retail price] or the dealer’s retail price. An all too common practice is for a dealer to mark up his cars thousands of dollars over the MSRP and call it “dealer list” so that he can show huge discounts that aren’t real.
(2) Prices exclude “impossible” rebates. Manufacturers often offer cash rebates to customers who qualify for special reasons. Some of these are being on active duty in the U.S. military. This rebate can be as much as $1,500. If you graduated from an accredited 4 year university within the past 6 months you can qualify for $500 to $1000 from some manufacturers. There is a customer “loyalty” rebate which affords you $1,000 or more if you own the same make car that you are buying. There’s a similar rebate for lease customers. There’s even a “Farm Bureau” rebate which qualifies you for $500 if you’re a farmer. Dealers are combining all of these rebates and deducting them from advertised prices of their cars. Of course, what are the odds that any customer would simultaneously qualify for all these rebates? The average reader of these ads qualifies for none of the rebates.
(3) Lease payments based on large down payments. Virtually every lease payment advertisement requires a large down payment which is concealed in the fine print. Most people lease because they want to lay out as little cash as possible. If they had $4,000 cash to spend, they would probably opt for a purchase. Those that fall for this trick often end up leasing the car at the full retail. Leasing companies will allow dealers to lease cars for “only” up to 110% of capitalized cost. When you make a down payment, this reduces the net capitalized cost which allows the dealer to sell your contract to the leasing company.
(4) Lowest Price Guarantee. This guarantee is worthless. If you read the fine print, you will note that it says that “the dealer reserves the right to buy the car from the other car dealer [his competitor] at the same price his competitor quoted you”. No car dealer is going to accommodate his competition so that they can steal away his customer. Of course, the other fact that makes this guarantee worthless is that it requires that you prove the lower price by presenting a buyers’ order from the other dealer signed by a manager. Very few car dealers will give a signed copy of the vehicle buyers’ order to a customer unless they drive the car home or make a substantial, nonrefundable deposit.
(5) Only one car available at ad price. When you are reading or listening to an advertisement, you will often see a strange number next to the advertised car. If you are watching the ad on TV or listening on radio, the number will be unreadable or undecipherable as is the fine print. An example is STK #T91832. This is the stock number of the car and means it is the only car of that model and accessories you can buy at the advertised price. They don’t say “only one car available at this price” because you would realize that the chances of that car being there [or sold to you if it is there] are very slim. Don’t be misled if the ad also says, “many more identical models available at this price”. Florida law requires that dealers include the dealer fee in their advertised price. But if that specific stock number car is unavailable, they can add their hidden dealer fees to the price of an identical car. This scam is why I continue to lobby Tallahassee to require that all profits to the dealers be included in all prices whether advertised, verbal, or on the Internet.
(6) Advertised price is “plus dealer installed accessories”. All this means is that the price you see is notthe price you get. Dealers love to add their accessories to their cars because they can set any price they want and drastically increase their profit margins. A dealer charging you $299 for pin stripes and floor mats would have a real cost of about $100, allowing him a 300% margin.
(7) Lease payment based on unrealistically low mileage allowance. All leasing companies limit the number of miles you can put on their car without paying a penalty. This is because the higher the mileage, the lower the resale value and the leasing company must sell their car at the end of the lease. The average American drives her car 15,000 miles per year. It’s very common to see mileage limits of 10,000 and even 7,500 miles per year with penalties of 25 cents per mile. For an average driver in a four-year lease, that would be a penalty of $7500! The dealers don’t get this money, the leasing company does, but the dealers do this so that they can advertise an unrealistically low lease payment.
(8) Lifetime Warranty. A lot of dealers are advertising these “lifetime warranties” on every car they sell. This is a very limited warranty which applies only to the car’s powertrain. The term powertrain has different definitions as to which parts of the car it consists of. It typically means only those parts of the engine, transmission, drive shaft, and rear axle that are lubricated. These parts virtually never fail if you change your oil as prescribed by the manufacturer or by the issuer of the warranty policy. If you fail to change your oil as prescribed, the warranty is null and void. It’s a win-win for the car dealer. You must come in to have your car serviced regularly so that he can make more profit and, if you do comply with this, there will never be a claim. Dealers do pay outside warranty companies for these warranties, but the cost to the dealer is minuscule, around $25. The low price the dealer pays the warranty issuer is further proof that the warranty is worthless.
(9) Purchase payments include “balloon payment”. How would you like to buy a new BMW 328i for just $339 per month only to discover that your last payment was $12,983! Oh, and you also had to make an upfront down payment of $2,500. ALWAYS READ THE FINE PRINT!
(10) Internet Quotes Exclude “Dealer Fees”. The average “dealer fee” in South Florida is over $1,000. At least half of car buyers are using the Internet to buy cars today. Almost 90% used the Internet for information about buying their car before going to the dealership. Virtually every car dealer in Florida charges multiple, hidden dealer fee and they all exclude those from the price you are quoted on the Internet. I spoke to a woman just the other day who drove all the way from Lakeland to West Palm Beach to pick up the new Infinity that she had purchased on the Internet. When she got to the dealer, he added an additional about $1,000 in hidden dealer fees.
Monday, July 15, 2019
Our lawmakers could get virtually all these cars repaired very quickly just by passing a law to make it ILLEGAL TO SELL A VEHICLE WITH A DANGEROUS RECALL. Their lack of action on this issue is not a mistake; it’s premeditated to enhance their chances of reelection.
You may be thinking that the auto makers are doing all they can because they issue recall notices to drivers and will fix their cars free when the owner brings it to one of their dealers. One wonders how many recalls would be issued if they weren’t required to do so by the National Highway Traffic Safety Association, NHTSA.
The reason that recalls don’t solve the problem is that only 1 out of 4 recalled cars is ever fixed. That’s because most drivers of recalled vehicles are unaware that their vehicles have been recalled and many procrastinate or just don’t care enough to have it fixed. Also, there are hundreds of thousands of recalled cars for which there’s no fix available.
Older recalled cars are often the most dangerous, especially those recalled for defective Takata airbags that become more dangerous over time. A driver of a 2010 used Honda could easily be the second, third or even fourth owner. The chances of that owner receiving a recall notice in the mail are slim. When the car was purchased new, there was no recall. When the car was subsequently sold by used car dealers, there was almost certainly no disclosure made to the buyer. Most states don’t require the disclosure. When and if a disclosure is made, it’s usually buried in the fine print. Yes, this information is available to buyers online via CarFax, NHTSA, and the manufacturers, but the reality is that very, very few used car buyers avail themselves of this.
I’ve mystery shopped dozens and dozens of car dealerships in South Florida over the last three years and virtually everyone is selling cars with dangerous recalls and no disclosure. Many car salesmen lie about the recall, saying there is no recall, or the recall was fixed. Many tell the buyer that all she must do is take it the new car dealer and have it fixed when he knows there is no fix available. You can read these mystery shopping reports at http://www.mysteryshoppingreports.com/.
The auto manufacturers and car dealers are fully aware of all the above, but if they voluntarily refused to sell a recalled car to a customer it would have a significant negative economic impact. The auto manufacturers and many of the car dealerships (AutoNation, CarMax, Penske, Sonic) are publicly owned companies. A public company has a fiduciary responsibility to their stockholders to make a profit by every legal means. Mike Jackson, then CEO of AutoNation, made the right and moral decision not to retail used cars with defective recalls to its customers. After a year of declining used car profits and outcries from stockholders, he reluctantly began retailing these dangerous cars.
The only way to get these dangerous vehicles off the road, fixed and safely back on the road is for our federal and state legislators to make it illegal to sell a vehicle with a defective recall. This is almost laughably simple and obvious. It’s also sadly simple and obvious that the only reason they don’t is because they will lose the financial support for reelection from the auto makers and auto dealers.
Monday, July 08, 2019
Many people think they can get a better deal on a car if they pay cash. This was true 50 years ago before dealers discovered the new profit center referred to as the Finance and Insurance Department aka “Business Office”. Today this is not true. In fact, paying cash may even make the actual vehicle cost you more! The reason for this is that car dealers make money when they handle the financing with the bank or with the manufacturer’s lenders like Honda Finance, Chrysler Credit or normal banks like Wells Fargo or Capitol One. A dealer typically averages about $4,000 on every car he handles the financing on. Therefore, if the dealer’s minimum acceptable profit on the car’s markup was $1,000, he may sell it to someone who he could make $4,000 finance profit on for less than someone who he knew was a cash buyer. Dealers will sometimes sell a car for zero profit or even lose money on the car because they can make a good profit on the financing.
If you plan on paying cash for your next car, my recommendation is DO NOT TELL THE CAR DEALER THIS. Tell the car dealer that that you are considering financing with him. This will help you get a lower price because the dealer still has hope that he can make money when he finances our car. The average profit a car dealer makes financing cars is much larger than he makes marking up the selling price. AutoNation, the world’s largest retailer of new vehicles, made the decision about one year ago to increase their new vehicle prices because they were losing money in their new car departments. They were always very profitable in their finance and insurance departments…averaging over $2,000 per vehicle on every car sold. In fact, they’ve focused more on increasing profits in the finance department even more with “branded products” …AutoNation GAP insurance, Auto Nation Maintenance Plan, AutoNation Extended Warranty, etc.
My second recommendation is check interest rates and terms with your own bank or credit union before you talk to the car dealer’s finance people. The finance manager (aka business manager) is on commission and paid a generous percentage of the profit he makes by marking up the bank’s interest rates and selling you extra “products” like extended warranties, GAP insurance, and car maintenance.
One argument in favor of financing a car is being able to keep your money invested, and earning a greater return than your interest cost of financing. There has never been a never time in our history that this is true. The bad news is that interest rates are not only at historical lows for borrowing but also for CD’s and interest income. With very good credit, you can finance a new car today for between 3% and 4%, but you can’t find a short federally insured CD for that amount. However, you can find secure equity and bond investments that will earn considerably more than your cost of interest on financing a car.
There is one very important intangible reason why some people should pay cash for their car. That intangible is called “peace of mind”. My older brother, Doug, grew up during the Great Depression. When he built his new house, he paid cash for it. I couldn’t believe this and was severely critical of him. It was entirely illogical for him to pay cash when he could get a very low interest rate and home mortgage interest is tax deductible. His investments earned him far more than the interest rate on his mortgage would cost. After a while I finally realized why Doug was right and I was wrong. He paid cash for his home because it made him feel better. Growing up in the thirties, like many of my customers did, made an indelible impression on his emotions. Owning his home with no debt made him feel happy and secure and what could be more important than that?