Should You Finance Your Car With a Car Dealer or Bank?

As with most complicated issues, there’s no simple answer. The very fact that this question is complicated is exactly why you need to be very careful before you choose to finance the next car you purchase with the car dealer who sold it.

So, let me start by giving you a hard and fast rule. Never finance your car with the car dealer unless you have checked the interest rate and terms with at least two banks and/or credit unions. When you’ve completed the process of choosing the car you want to buy, the dealer who offers you the best price on that car, and the dealer who offers you the best price on your trade-in, you should be armed with quotes from at least two banks and/or credit unions on the lowest interest and best terms. Your own bank may even be the same bank that your dealer uses. If you have good credit, you can borrow the money directly from your bank for as little or even less than the rate the bank offers the car dealer. When you borrow money from the bank it’s called direct lending and when borrow through the dealer it’s called indirect lending. Just because the dealer says that he “does business” with your bank doesn’t mean that he’s giving you as good an interest rate that you can get from your bank; in fact, he’s probably not.

Did you know that the average car dealer makes more money on the car finance contract than he does on the sale of the car? A car dealer’s finance department is a separate profit center in a car dealership, just like the new car, used car, service, and parts departments. AutoNation, the largest retailer of cars in world, averages about $1,600 on finance contracts for every car they sell. This includes cars that they don’t finance because some buyers pay cash or finance through their banks or credit unions. If you factor those out, the average profit per car actually financed by the dealer can soar to well over $2,000 to $3,000 or higher. I’m often asked the question, “If I pay cash for my car can I get a better deal”? Counter intuitively, the answer is no! In fact, there’s a good chance you will end up paying more for your car if the dealer knows you’re a cash buyer because he knows he is forgoing his better opportunity to make money from that purchase.

The code word for interest rate profit for car dealers is “reserve”. Dealer reserve is what the banks kick back to the car dealer when they assign the finance contract that you sign to that bank. Dealers have reserve agreements with certain banks, including the manufacturers’ banking subsidiaries. Examples of manufacturer lenders are Honda Credit, Ally Bank (Chrysler and General Motors), and Toyota Financial Services. Manufacturer lenders are referred to as “captive lenders”.

The car dealer is, in effect, borrowing the money from his bank, marking up the interest rate as high as is allowed by the bank, usury laws, and you. The name for the markup is the “spread”. The dealer might be able to borrow money from a bank for 2.69% and the bank might allow him to mark it up to 4.69%, a “2 point spread”. Marking up 2.69% to 4.69% is a 75% markup above the dealer’s cost (dealer retention) from the bank. A customer with good credit, say a 740 Beacon score or better, could borrow the money directly from the bank at 2.69% if that customer knew to ask. A customer who doesn’t know, and assumes the dealer is trying to get him the lowest rate will pay the dealer an extra $1,004 profit if he finances $20,000 for 72 months. The dealer usually will sell various “products” which are added to the finance contract and included in the payments such as extended warranties, GAP, maintenance, road hazard insurance, emergency road assistance, etc. These products can add up to $1,000 or much more. With interest rates at historic lows, many people who haven’t financed a car in many years don’t know that, with good credit, interest rates on new car loans can go below 2%. If they financed their last car at 5% and are quoted 4.69% by the dealer, they might think that’s a very good rate when it’s really very high.

There are times when it definitely pays to finance with the dealer and the biggest one is when the dealer’s manufacturer captive lender offers special low interest rate incentives such as 0%. When you read an advertisement for 0% financing, be sure that the lender is the dealer’s manufacturer’s captive lender, like Honda Credit. If the dealer is offering 0% through a bank not affiliated with his manufacturer, it’s not a valid offer. The dealer is simply adding additional markup to the car he’s selling you so that he can “buy down” the real interest rate the bank is charging. When captive lenders offer 0%, be sure you ask if there is an alternative cash rebate. Typically the captive lender offers something like 0% financing for 60 months or a $1,000 cash rebate. You need to do the math to find out which is the better deal. This is calculated by knowing how much you can borrow the money for from your bank or credit union and how much you’re financing. Unfortunately it’s common for dealers to advertise the car price including the $1,000 rebate and also advertise 0% financing. In the fine print they say “no two offers can be combined”.

Today, the federal government is going after banks, including captive lenders, for discriminating against minorities by charging higher interest rate without regard to the customers’ credit scores. They should be going after the car dealers instead of the banks, since it’s the car dealers who raise the interest rates. But the car dealers are hiding behind a loophole which names the bank as the primary lender, even though the dealer decides the interest rate and signs the customer to the installment sales contract.  This is because the dealer immediately sells that contract to the bank. The federal government is saying that all customers with the same credit score should be offered the same interest rate. Since the dealer is the one who determines the interest rate, why isn’t he held responsible?

 

 

Modern Complex Accessories Make for Unsafe Driving

Ford Motor Company just announced that they are going back to “buttons and knobs” instead of their high tech touch-screen and voice recognition multimedia systems in their cars. They made this decision because of too many complaints, although, they said that the features were a motivation for customers to buy the car in the first place. This means that the high tech gadgets seemed like a great idea until you tried to use them while driving. They were too complicated, sometimes didn’t function the way the driver expected, and required too much focus which detracted from keeping their eyes on the road.

In case you haven’t noticed, technical advancements in cars are progressing at warp speed. We have far more computer power in a car today than in the rocket that took the first to the moon. Most of this is hidden under the hood and requires very little driver knowledge or participation. But car manufacturers have also started loading up the “cockpit” with high tech gadgetry like multimedia equipped with Bluetooth, touch-screens, and voice recognition. Your smart phone is automatically connected to your multimedia system when you start your car. Some cars have “micro radar” that detects cars approaching alongside in your blind spots or coming toward you as you back out of your parking spot. There’s even a camera mounted on the front of some cars that will tell you when you begin to move out of your lane and actually correct the steering wheel if you don’t hear the audio warning. This camera will sound a warning and automatically apply the brakes if you approach an object too fast.

To qualify for a driver’s license today, you have to learn all of the traffic rules and prove that you can drive a car on the road and park it. The driver’s test today is no different than it was 50 years ago when cars were far simpler to operate. Fifty years ago cars didn’t have cruise controls, navigation systems, front and rear video cameras, radar, Bluetooth, touch-screens, multiple warning lights and sounds, integration with smartphones, automatic braking and ability to keep the car tracking between the two white lines in the road.

Where we find ourselves today is on the verge of a driverless car. In fact, driverless cars are allowed on the road today and legal in several states including Florida.  Five or ten years from now when driverless cars become a reality, there will be virtually no accidents on the road. Computers are far smarter and coordinated than we and, even taking into consideration the occasional computer failure, they are safer. Computers don’t ever lose their focus. They don’t get mad at other drivers, look at pretty girls on the side of the road, drink too much, or fall asleep at the wheel. Car insurance premiums will go down drastically when driverless cars become a standard.

Until all the complicated high tech gadgetry on today’s car is completely taken over by the computer, we need to think about being sure humans are capable of safely focusing on their driving while they operate their navigation systems, touch-screens, Bluetooth, and multimedia sound systems integrated with their smart phone. Car buyers should be thoroughly trained on the operation on all of the high tech gear on their cars. They should be tested on its operation while demonstrating that they can drive safely at the same time they are operating it. A human being cannot focus on driving safely at the same time they are trying to figure out how to disconnect their iPhone from their Bluetooth when a call comes in that they want to keep private. It can be distracting just to change the station on a radio that has satellite, AM, FM, and interfaces with your smartphone. A driver should be so well trained that it’s almost reflex with no conscious thought required.

 When I’m using my navigation system, guided by the woman’s voice,  and I reach the point where I know the rest of the way and don’t require guidance, I can never remember how to “make her stop talking”. I get irritated with her reminding me to turn at the next intersection when I already know to do so, but I can’t remember the procedure to mute her out. I take my eyes off the road while I try to figure it out. I know I should pull over to the side to do this, but if it’s rush hour on I-95 this can also be dangerous.

When a person takes a driver’s test, he or she should have to prove that they can easily and quickly operate the cars’ high tech accessories while safely driving. When a person buys a car with new gadgetry, the dealer should be required to train that buyer in the fast, efficient operation of all accessories and the buyer should complete a test to demonstrate that they did in fact learn what was taught. If the test wasn’t passed, the particular accessories that the buyer couldn’t demonstrate competence in would be disabled until that time that they can demonstrate proficiency.  

Currently, all a car salesman does for a new buyer is give her or him an owner’s manual which nobody reads. Even if a buyer was inclined to study the owner’s manual, they are way too lengthy and written in a boring,  non-user friendly style. The navigation systems are so complex that they have their own owner’s manual at least a couple of inches thick.

Governor Rick Scott recently signed a bill into law making it illegal to text while driving. Actually, texting with voice recognition is no more unsafe than talking on a hands free cell phone while driving. If a driver can demonstrate that they can text safely while driving, they should be able to do so. But they should also be required to demonstrate that they can safely operate all other accessories on their car while driving safely. 

I WRECKED MY CAR…NOW WHAT?

The article below was written by Alan Napier, the manager of my body shop, for my Toyota customers. However, the advice Alan gives applies to any make of car.

This Is Supposed To Be Easy  

Dealing with your insurance company has never been as difficult as it is right now. 2008 was a disaster for most insurance companies. Falling revenues, catastrophic disasters, poor investments and last years financial meltdown led to losses for most major carriers. Why should you care? Because now that the horse is out, they’ve slammed the barn door. This means that they are utilizing more aftermarket, remanufactured and junk yard parts to repair your vehicle. It means that insurance companies are applying discounts to their estimates that were not there prior to the collapse of Wall Street. It means that they are not negotiating in good faith with your repair facility to bring your vehicle back to its pre-accident condition.

What Can I Do?     

              

Most importantly, insist that your damaged parts be replaced with new genuine Toyota replacement parts. Toyota only provides warranties on new OEM parts. If necessary, involve your agent. Remember, your agent works for you and should be your advocate when dealing with claims staff. 

Second, insist that the insurance appraiser explain the estimate they are providing to you. Many times the estimate will not come close to paying for all of the vehicle damages. It’s not a mistake when this occurs, but a calculated tactic. Many people don’t repair their vehicles and have no idea that their insurance company did not provide enough funds to repair the car properly. Point out any damage that the appraiser doesn’t acknowledge on the estimate and insist that it be added to the appraisal right away. Often the appraiser will tell you he has already written the check, so he cannot change the estimate until the vehicle is at a repair facility. This is not true. The appraiser is obligated to pay for all of the visible damage regardless of how many estimates and checks he has to write. As with any negotiation, be polite, but firm.

I Don’t Have Time for This!! Somebody Help Me!!

If you just really don’t want to deal with all of that, that’s where we come in. Your insurance company will advise you to repair at a shop that “works with us”. Translation: “They do what we tell them.” Earl Stewart Toyota will insist that your insurance company pay to repair your vehicle properly, per the manufacturers’ recommendations, to its pre-accident condition. Bring in your car, show us the related damages, sign a repair authorization, hand us the keys and you are done. It’s that easy. We take care of everything from that point. All we ask is that you support our efforts to negotiate with your insurance company. They will do everything from using scare tactics to telling outright falsehoods to save a few bucks. You trusted us to sell you a Toyota and maintain it to manufacturers’ standards, now trust us to repair your collision damaged vehicle to its pre-accident condition.

The Federal Trade Commission: Most Car Ads are ILLEGAL

Can you remember reading, seeing or hearing a car dealer’s advertisement that had no fine print? The TV advertisements are especially egregious because, even with HD, it’s literally impossible to read the fine print. If the print were large enough, it’s not displayed on the screen long enough for you to completely read it. You’ve all heard the radio “fine print”. The advertisers are experts at making it incomprehensible. One trick is to put the disclosure at the beginning of the ad so that it appears not to be a part of the advertisement. They will use a different voice, which speaks very softly and very fast. I believe that they record the disclosure at normal speed and electronically increase the speed of the recording to an incomprehensible level. The fine print in newspapers and direct mail is the only fine print that is even possible to read and it often takes a magnifying glass to do so. Some tricks to make it even more unreadable are to make the color of the print blend with the background color of the paper (dark blue print on a dark red background), obfuscate the message by mixing in some legitimate, irrelevant disclosures like “Dodge is a copyrighted brand name of Chrysler Corporation, and they usually locate the fine print as far away from their false claims as possible.

Of course fine print deception is not limited to car dealer advertisements. Car manufacturers, pharmaceutical companies, and most other retailers take advantage of their customers in this manner too.

The Federal Trade Commission says that advertisers are not allowed to “contradict other statements in an ad or to clear up the misimpressions the ad would otherwise leave.” The FTC also says that “Accurate information in a footnote or a dense block of text likely will not remedy a deceptive representation conveyed by a headline or other prominent selling message because reasonable consumers may not read the footnote.”

Car dealer leasing ads and car manufacturer leasing ads commonly advertise low lease payments with large down payments, often obfuscated as “capital cost reductions”. You’ll see a new BMW advertised for $399 per month but when you take in consideration the $8,000 down payment which is impossible to read on the TV screen, the payment might actually be $899 per month.

You see a lot of “100% Guaranteed Credit Approval Ads”, but the fine print says that your credit score will affect the terms and down payment. Interpreted, this means if you have bad credit, you will have to make a down payment up to 100% of the price of the car and the financing terms could be as short as one month. The disclaimer in the fine print is a total contradiction of the headline, bold print claim of the ad and a violation of Federal law.

A popular deception by many car dealers is to advertise a very low price in the headline of the ad with the fine print totally contradicting the ad price. This is done by the fine print saying that the “price excludes dealer installed accessories” which can total thousands of dollars. The fine print also often says “customer must qualify for all rebates and incentives”. These are impossible for any one person to qualify for such as military rebate, college rebate, loyalty rebate, and conquest rebate. To qualify for all the rebates one would have to be on active duty in the military, a graduate of a 4 year accredited college within the past 6 months, drive the same make car as is advertised, and drive a specific competitive make car at the same time.

Another fine print scam is “Lowest Price Guaranteed or We Pay You $1,000”. There’s even one dealer who says he’ll give you the car free if he can’t beat his competitor’s price. The fine print says the dealer reserves the right to buy the other car from his competitor at the lower price. Now, what are the odds that your car dealer’s competitor will agree to that? The fine print also says that you must bring him a buyer’s order signed by the other dealer to verify the lower price. Have you ever asked a car dealer to give you a signed copy of a buyer’s order without actually buying the car from him? He won’t give it to you for the simple reason he doesn’t want to allow his competitor to see it and beat his price.

Florida law requires that dealer fees be included in the advertised price of all cars. Most dealers do not to this but instead disclose the dealer fee in the fine print. Often times they do not even disclose the amount of the dealer fee but simply say “plus dealer fee” or “plus fees”. Florida law does not put a cap on dealer fees as many states do. In theory, a dealer could have a $10,000 or higher dealer fee. Many have dealer fees over $1,000 now. This practice is a clear violation of the Federal Trade Commission’s rules.

I read in the newspaper last week that Governor Rick Scott had just signed 8 more bills into law. This week we have 8 more laws than we did last week. What our state and our country need are not more laws, its more enforcement of the laws we already have on the books.