Sign the Petition!

Friday, December 29, 2006

SHOULD I PAY CASH OR FINANCE MY CAR?

Most people don’t have any choice except to finance their cars. However, if you are reading this column, the chances are you are in that fortunate higher demographic category and can afford to pay cash for your next car. People who read Op Ed columns in newspapers tend to be more intelligent and affluent. But, just because you can, is it the right move?

Many people think they can get a better deal on a car if they pay cash. This was true 40 years ago before dealers discovered the new profit center referred to as the Finance and Insurance Department. 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 GMAC or Chrysler Credit. A dealer typically averages about $700 on every car he handles the financing on. Therefore, if the dealer’s minimum acceptable profit on a car was $1,000, he may sell it to someone who he could make $700 finance profit on for less than someone who he knew was a cash buyer. Dealers will sometimes sell a car for zero profit on the car because they can make a good profit on the financing.

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. The often overlooked fallacy is not making the comparison realistic by understanding that when you pay cash you are really “borrowing money from yourself”. If you have a 3 year CD paying you 6%, on $25,000, you will earn $4775.40 at the end of 3 years. If you finance a $25,000 car for 3 years at 6%, you pay only $2,379.80. But, to compare apples and apples you would have to pay yourself back for the $25,000 you “borrowed from yourself” to pay for your car. When you paid yourself back with interest monthly over three years, the interest you earned would equal the interest paid on the car loan. If you can earn more than 6% with your money, than financing the car for 6% would be a good idea.

One argument against paying cash for your car is that it becomes an asset of your estate and your net worth. This means that someone who won a lawsuit against you could seize your car for payment. If you had to declare bankruptcy, you could be forced to sell your car to settle your debts. If you owed the IRS money and could not pay, they could take your car. None of these things could occur if you had a loan on your car which offset the equity.

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?

Thursday, December 28, 2006

10 NEW YEAR’S RESOLUTIONS FOR FLORIDA CAR DEALERS

I am suggesting these New Year’s resolutions for car dealers.

(1) Stop charging your dealer fee (a. k. a. delivery fee and doc fee). This fee is really profit for the dealer disguised as an official fee charged by the state or federal government. When you quote a customer a price, it should include all charges except for sales tax and license fees. State law in Florida does not prohibit this or even put a cap on this fee as many other states now do, but it’s just the wrong thing to do.
(2) When you advertise a car at a price, clearly disclose to the reader how many cars are available at that price. Dealers get around the law by listing a stock number next to the car, as if this is will explain to the reader of the ad that there is only one available at this price.
(3) Don’t advertise a large discount on a car unless the discount is from MSRP. Dealers advertise huge discounts from prices that are artificially inflated. What good is a $15,000 discount if the dealer has a $15,000 markup above MSRP on that car?
(4) Don’t pander to folks with bad credit and give them false hope. Tell those with bad credit that if their credit is too bad, you cannot obtain financing for them. When you advertise…”No credit or Bad Credit is No Problem” you aren’t telling the truth. When you advertise that “no credit application is refused”, you are misleading the customers to think that no loan is refused because of bad credit. You are not telling them the truth.
(5) Don’t advertise that you can sell used cars as low as $99. There is no such thing as used car that can be profitably sold for $99. The scrap metal or the parts on a car that cannot run or is totaled in an accident is worth $150 or more.
(6) Have a heart! I received a call this morning from the son of an 81 year old man who had been diagnosed with bipolar disorder and committed to a mental health institution under the Baker Act. The day before he was committed, his father bought a brand new car for $32,000+ from a well known South Florida dealer. The son read my column instructing those with a problem with a car dealer to call the owner or the general manager before taking legal action or notifying the press. When he tried this, he was stonewalled by both the general manager and the president of the dealership. His father had bought the car the day before he was committed to an institution under the Baker Act. This is not only heartless but just plain stupid. What do you think this will do for that dealer’s reputation when their customer’s son contacts the local TV stations and newspaper?
(7) Be accessible to your customers. You might think that you own and operate a pristine business that never offends or takes advantage of anyone, but you can’t be sure about that if you insulate yourself from your customers. You might be amazed at what you find out when you speak directly to your customers and even to those who wanted to be your customer but changed their mind for some reason.
(8) Don’t surprise your service customers with a “miscellaneous supplies fee”. Sometimes this is called an “environmental fee”. The price you quote your service customers should be the price they pay…not that price plus 10% which is pure profit to the dealer.
(9) (9) Don’t mark up your “hot models” over MSRP. The manufacturer’s suggest retail price affords the dealer very generous profit margin. Don’t exploit the temporary situation where demand for that hot model exceeds supply. This is no different than some gas station operators do during fuel shortages before and after hurricanes.
(10) Do away with the fine print. If there is something important that is worth reading in your ad, print it in a font size that can be read without a magnifying glass. If it’ not important, don’t put it in the ad. The only reason for fine print in a car ad is to hide something that you don’t want the reader to find.

SHOULD I TRADE IN MY OLD CAR OR SELL IT MYSELF?

When you trade your old car in on your next car, the dealer will try to retail your car or sell it at auction for more than he allowed you in trade. If he successfully retails your car, he will make about $2,000. If he wholesales it at the auction, the profit will be less. You should know that this is what the dealer wants to do. Sometimes it doesn’t work out that way and he will actually lose money on your car at the auction. Or, he may be unable to retail your car and then most certainly lose money when he is forced to wholesale it.

Obviously it is more difficulty for an individual to make a profit by selling her own trade-in than it is for the dealer. That is one of the main consideration you must consider before deciding to sell your old car yourself. Most people run an ad in the local paper and/or online to advertise their trade. If you do this, you need to know what to ask for your car and I recommend consulting www.kbb.com. This is Kelly Blue Book’s Web site and will tell you about what your car is worth wholesale and retail. Another way to determine this is to ask dealers for your make of your car what they will buy it for. This will establish the wholesale value. CarMax is a good company to consult if there is one near you. Once you establish the wholesale, you should consider a markup of less than what car dealers are asking. When deciding how much profit you want to make, remember that you are losing the sales tax reduction that you earn when you trade your car in. On a $20,000 trade, that amounts to $1,200. If you can make a $2,100 above wholesale, you are ahead of the game by $1,000. This takes a lot of work and you will be dealing with a lot of “tire-kickers” and people who cannot afford to buy your car. I very strongly advise you not to extend credit. Require full payment in cash. Set a time limit on how long you will try to sell your car. Remember that your used car is depreciating every week and your cost of advertising will climb. I wouldn’t suggest you hang on to your old car for more than a month.

Ebay is a good alternative to advertising your car in the newspaper. A lot of car dealers use Ebay to retail used cars and it is very effective. There are schools on how to retail merchandise on Ebay and Ebay has tutorials. There are also a lot of books at any bookstore on this subject. There are companies who will do all of the work for you and you only pay them a fee if they are successful in selling your car. If the dealer you are buying your new car from sells cars on Ebay (most do), you can ask him if he will post yours Ebay along with his cars for a fee.

If you fail in your attempt to retail your old car, remember to be careful to maximize the amount you get from your dealer as trade-in. Often times dealers will attempt to trade a car in for below wholesale. Be sure you have a firm handle on the true wholesale value of your trade. You can get bids from other dealerships to purchase your car for cash and you can check with www.kbb.com. If you are buying a car from a dealer franchised to sell a different make than your trade-in, be wary. This dealer will likely be unable to offer you as much as a dealer who is franchised to sell the make of your trade. People looking to buy a used Toyota are more likely to visit a Toyota dealership than a Chevrolet dealership. That is why it’s important to get bids from other dealerships before accepting the trade-in offered by the dealer you’re buying your new car from.

WHAT CAN CHANGE THE WAY CAR DEALERS DO BUSINESS?

I just finished talking to a friend of mine, Al Loson, from Pt. St. Lucie. We met after he read my column in this newspaper on dealer fees. In case you missed that column, a dealer fee a. k. a. doc fee, and dealer prep fee is just another profit the dealer tacks on the car after he quotes you a price. Al is a retired business executive from up North who was extremely successful running his supermarkets in a highly ethical fashion. He is lobbying his legislator, Senator Ken Pruitt, on this issue. He is asking that Pruitt take the lead in changing Florida law so that dealer fees become illegal as they are in many states like California.

Al called me a few days ago when he saw part of a TV news show on WPTV, Channel 5, regarding this subject. He wanted to know if I had, but I missed it. I obtained the video tape from WPTV and Al and I watched it together this afternoon. It was based on a Wall Street Journal article which ran several weeks ago on this subject. The reporter did mention that Florida was one of the states that did not even have a cap on dealer fees. The reporter said that in Florida dealer fees could range as high as $600. This is inaccurate. I know of at least two dealers charging $895.

We also discussed other issues regarding the lack of ethics with many car dealers. We talked about bait and switch advertising, car invoices that dealers lead customers to believe is their true cost but actually has hundreds of dollars in hidden profits included, and illegal ads that were permitted to run because the Attorney General’s office was too understaffed to police car ads.

I told Al that I respected and admired how hard we was lobbying his legislator and for being such a strong advocate for ethical car advertising and sales practices. But, I also told him that I didn’t think he would have much luck. Car dealers have a powerful lobby in Tallahassee. Dealer associations are there to protect their dealers, not the consumers. Dealer associations would never advocate changing Florida law in such a manner that would negatively affect the profits of its dealers. With all due respect to all of our politicians, even our good politicians’ first duty and responsibility is to get elected. What good can a politician do if he doesn’t get elected and how can he get elected if he doesn’t “play ball” with those who fund his election? You can complain about this all day long but our political system is all about compromise and it is still the best system on the planet.

The way car dealers will begin to change is through evolution…natural selection and the survival of the fittest. This will be a very slow process, taking years. American consumers are getting smarter and smarter. They also have much greater resources of information available to them, especially through the Internet. With greater education and data resources they are also becoming more demanding and intolerant. The new American consumer will not patronize car dealers who try to lure them in by bait and switch ads. They will not pay an $895 dealer fee which is supposed to cover the dealer’s paperwork or new car get ready when it is really only additional profit for the dealer. The new American consumer will seek out car dealers where they can be treated with respect, courtesy, and integrity. When other dealers seeing these dealers selling more cars, service, and parts and prospering more than they, they will have an opportunity to change. And if they don’t change, they shall perish.

Never Go Car Shopping Alone

A woman wrote me a letter this week in response to one of my columns. Her husband had recently passed away and this was the first car she had bought on her own. The dealer did not have the model car with the accessories she wanted and was unable to locate one at another dealership. She did not want to make a decision without seeing the actual car she wanted to buy but the salesman and manger talked her into signing a buyer’s order, assuring her that she was under no obligation to buy. They also included two accessories that she did not want because “the manufacturer required it”. I’ve heard of distributors ordering cars with certain accessories from the manufacturer which essentially makes them “standard”, but never “ $250 floor mats” which was one of the accessories she mentioned. I get a lot of emails, phone calls, and letters from people who made a bad deal in their car purchase and want to know how they can get out of it. This is actually one of the less egregious, but I chose it because it was a simpler and shorter example.

There is strength in numbers when shopping and negotiating to buy a car. In fact, this applies to any serious decision in life. You might be the sharpest, shrewdest negotiator on the block, but your odds of striking a better deal and not get taken advantage of are enhanced when you have others on your side. Personally, I make a habit of always having at least one partner when I am engaged in a serious, adversarial decision making process. When meeting with those on the other side, I make it a point to arrive with at least as many people as they have present. One reason is the psychological factor. When you are in an office by yourself with 2 or 3 others, it can be intimidating. Another reason is that you always have people on your side to corroborate what was said. If a salesman or a sales manager makes a verbal promise that can be corroborated by a friend or two, it is far less likely to be broken. It will also hold up in court, if it has to come to that. Of course, the better solution is to see that all promises are committed to writing.

Buying a car, especially a new car is more often than not, an emotional decision. Having a friend or two with can help you make more of an analytical, logical decision. Another point of view is always useful when making an important decision. Also, having one or two friends with you slows down the process to a level more easily absorbed and understood by you. A friend will often think of a question you should have asked but forgot.

Ideally you should bring someone with you who is skilled in negotiation and experienced in buying cars. However, if you don’t know someone like that, somebody is better than nobody.

By the way, most car dealers are unhappy when prospective customers bring in advisors and friends. Naturally they feel that way because they recognize their chances of making a fast, very profitable sale are diminished.