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Let's face it, most car buyers are worried about one thing: a payment.
I have sold hundreds and hundreds of cars in my career, and most of the prospective or actual buyers had one thing on their mind, and it involved the payment. It was almost a given. Clearly, it is no wonder why when we consider the fact that most people do not have the liquid cash to buy a vehicle outright.
Of course, it begs me to reflect upon the past, present, and ongoing advise of personal finance guru, Dave Ramsey, the developer of Financial Peace University, that no consumer should buy much of anything at all if he/she cannot pay cash - especially in the case of a depreciating asset like a car or truck. Dave has always been adamant that unless you can pay cash, then you simply cannot afford it. Moreover, when one considers the taste of today's consumer and the inflated present cost of vehicles, people's egos simply will not allow them to make a realistic decision.
In today's car market, it is certainly not unusual to see what appears to be about a $30,000 median price point on vehicles. Say that to yourself: $30,000.... Say it again: $30,000.... How many people do you know that have $30,000 of disposable income to spend on a vehicle? Do you? While some consumers have the ability to purchase big ticket items in cash, it is reality that the average American car buyer does not.
So, how is it that we see the local fast food restaurant manager driving a new $45,000 car equivalent to their base salary backed into a parking space out in left field parked away from all impending ding damage as we pass it each day on our way to work?
PAYMENT!
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Car dealers have many advantages over consumers, as we have attempted to diligently point out at The Car Business Insider. And, the one thing that every dealer preys upon (besides naivte) is the fact that you want a vehicle SO badly that you will absorb a payment that you cannot handle to satisfy your automotive ego. Sadly, this is where dealers really excel. They play upon your emotions with tricks in psychological projection causing you to envision yourself in a position that you are not, and you buy right in.
There are two ways to buy a vehicle and two ways only: cash or finance (including leases). Period.
For the astute dealer, they want everyone to finance. Why? As we discussed in my previous article, "BEWARE: The Dealership Finance Office", there is an individual laying in wait, ready to exploit every possible commissionable income stream on you! They practice every, single day and they are praying that every customer that walks in is a payment candidate.
So, you are asking why the dealership wants you to finance so badly?
Let's review: you open up multiple income streams for the dealer, including service contracts, points on interest reserve, GAP insurance proceeds, profits from protection packages, and so on.
Let's review: you open up multiple income streams for the dealer, including service contracts, points on interest reserve, GAP insurance proceeds, profits from protection packages, and so on.
Let me provide some examples:
EXAMPLE 1) Les has seen a car online and has pretty much decided that he wants the pre-owned sport sedan that is the color he likes and it has all the equipment that he needs. The car is also within his budget at $18,990. He has already had communication with a sales consultant and has an appointment to drive the vehicle. The sedan has been determined to be mechanically sound and all looks great. Now, Les just has to agree to a final price. They negotiate a figure of $17,695 with all fees and taxes included, and both the dealer and buyer are satisfied with a fair deal. Les has brought his checkbook and informed the sales manager that he will forego any further products and will stroke a check for the total. Deal done. Dealer made a $1570.00 front-end profit.
EXAMPLE 2) Michelle, on the other hand, does not have enough cash-on-hand for the SUV she saw online. She knows it is the right vehicle with respect to equipment and appearance, but only has $1500.00 cash-on-hand to remit as a down payment. For the sake of discussion, her prospective unit is also priced at $18,990. She, too, has made an appointment, but was asked to 'complete an online credit application' on the dealer's website so that the F&I manager could get a 'pre-approval ready' for her. She visits the dealership upon appointment, is satisfied with the soundness of the vehicle, and decides that this is the SUV she really wants.
So it begins...
Michelle has been 'approved', according to her sales consultant, who also informs her that 'the F&I manager called in some favors and got her done'. Not sure if Michelle has ever been to a Turkish prison, but she is about to be violated.
First, Michelle pays an identical profit of $1570.00 on the front end derived from the vehicle sale. Second, Michelle will pay a three-point interest rate reserve mark-up over the next (72) months amounting to another $3250.00 after all (72) payments have been remitted. Third, Mr. F&I has convinced Michelle that she definitely needs the wheel and tire protection and service contract deriving a combined $1500.00 profit between the two. Fourth, she sees real value in the GAP insurance only increasing her payment by $11 per month just in case she totals the vehicle during the life of the loan. Another $400.00 commissionable profit.
Do you see the stark contrast? Les paid a $1570.00 profit and Michelle paid $6720.00!
Chances are, Michelle is happy as a clam; she feels fully protected and got the payment she could afford at $385/mo. Oh, don't forget that she also handed the dealer $1500.00 cash.
Chances are, Michelle is happy as a clam; she feels fully protected and got the payment she could afford at $385/mo. Oh, don't forget that she also handed the dealer $1500.00 cash.
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Good salespeople are trained to sell payments if at all possible for the stated aforementioned reasons. If they are effective, profits soar. In most cases these days, dealers have taken all negotiating authority away from salespeople and given it solely to a manager to maximize the possibility of profit - and that profit adds up quickly when you are willing to submit to a payment.
Let's take a look at our INSIDER TIPS to see how we can save ourselves from ourselves:
1) Pay cash for your vehicle!
If you can only save $9000.00 for a new vehicle, then some like Dave Ramsey would say that that is the price you can afford. I happen to agree.
If you can only save $9000.00 for a new vehicle, then some like Dave Ramsey would say that that is the price you can afford. I happen to agree.
2) Don't let your vehicle purchase be driven by ego!
We all love that new car smell, the new tires, the awesome dashboard, and the feeling of success, but how successful will you feel if you lose your current job already making a stretched payment that makes paying the rent five days late as it is?
We all love that new car smell, the new tires, the awesome dashboard, and the feeling of success, but how successful will you feel if you lose your current job already making a stretched payment that makes paying the rent five days late as it is?
3) Vehicle purchases can be financially ruinous!
It may seem repetitive to restate, but one irresponsible vehicle purchase can negatively affect your life for the next ten years. You may lose your residence, damage your credit, and be unable to provide utilities ALL because you over-estimated your buying power.
It may seem repetitive to restate, but one irresponsible vehicle purchase can negatively affect your life for the next ten years. You may lose your residence, damage your credit, and be unable to provide utilities ALL because you over-estimated your buying power.
4) People view financing vehicles as a short-term proposition!
They aren't... The average finance term for a vehicle is likely 60 months - that is (5) years. That equals (60) payments. Think long and hard about your stability level before making that commitment.
They aren't... The average finance term for a vehicle is likely 60 months - that is (5) years. That equals (60) payments. Think long and hard about your stability level before making that commitment.
5) If you must finance (which is again not advisable) visit your credit union or personal bank.
While they are in the business of making money loaning money, it is very likely that you will pay far less profit in a lender-direct financing arrangement.
While they are in the business of making money loaning money, it is very likely that you will pay far less profit in a lender-direct financing arrangement.
6) The bigger the down payment, the better!
Again, if you must finance, the more money you put down on your purchase, the less the amount financed. This means less interest costs to you and a much quicker payoff to get that vehicle title in your hands. But, do this at the bank. Once dealers and salespeople know you have a substantial down payment, they see you as much easier prey and see commissions.
Again, if you must finance, the more money you put down on your purchase, the less the amount financed. This means less interest costs to you and a much quicker payoff to get that vehicle title in your hands. But, do this at the bank. Once dealers and salespeople know you have a substantial down payment, they see you as much easier prey and see commissions.
7) Keep financing arrangements aloof!
Simple. When asked by the sales consultant and then by the sales manager if you will be financing with the dealership, simply state that 'you have already arranged financing' and will be bringing certified funds upon delivery.
Simple. When asked by the sales consultant and then by the sales manager if you will be financing with the dealership, simply state that 'you have already arranged financing' and will be bringing certified funds upon delivery.
8) If you have to finance, only do it short term!
In today's job market, the average tenure of an employee is (24) months. As unfortunate as that may be, it is reality. You can lose your job and your income just like that. Unemployment offices are full of educated people who made great salaries and they can not longer support their lifestyle. Do not be that person because of a car. What is most common is finding out after the fact that you cannot afford the vehicle and will have to come up with $6000.00 out of your pocket to sell it due to negative equity.
In today's job market, the average tenure of an employee is (24) months. As unfortunate as that may be, it is reality. You can lose your job and your income just like that. Unemployment offices are full of educated people who made great salaries and they can not longer support their lifestyle. Do not be that person because of a car. What is most common is finding out after the fact that you cannot afford the vehicle and will have to come up with $6000.00 out of your pocket to sell it due to negative equity.
Finally, remember that buying a car for the average consumer like yourself is trying in an of itself. Your prime objective is to negotiate the best price possible for the dealer's vehicle and the best selling price possible for your trade vehicle if applicable. A sales proposal should only be based upon a price or a difference price NOT a payment. The best advice (as always) is not to over-step your own expertise and stick to the basics. You will save yourself thousands of dollars in the process and a lot of unnecessary heartache.
Always remember what one of my business mentors, Bruce Williams, used to say ad nauseum in his renowned radio talk show:
'Don't ever love something that doesn't love you back...'
Copyright 2015. All Rights Reserved
Copyright 2015. All Rights Reserved
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