| Car
Dealer Tricks of the Trade
 In
this section we will discuss some of the techniques (tricks)
that dealerships employ to separate you from your money. As
discussed earlier, dealers and manufacturers spend hundreds
of thousands of dollars to train their sales force in such
areas as overcoming objections, the psychology of the auto
buyer, and how to maximize profit in an auto deal. Consequently,
the cards will definitely be stacked against you when you
enter the new car showroom.
For the record, there are
many honest dealers in the country whose only desire is to
get a fair price for their product and to earn a comfortable
living. The industry also has more than its fair share of
crooks. Because of the actions of these unscrupulous dealerships
the industry has a bad reputation.
So, how do you know if the
dealership you are walking in to is an honest organization?
You can start by learning what you can about their reputation
around town. Judge the appearance of the sales associates.
And finally, check them out with consumer advocate organizations
such as the Better Business Bureau and the Chamber of Commerce.
This should give you some clues about their business practices.
However, in the final analysis, you really can never be 100%
sure who you’re dealing with. Remember this: even the
dealer whose integrity tops the charts will not tell you about
the additional profit built into the deal, such as dealer
cash, holdback, and wholesale finance reserve.
We will discuss some of the
ways in which the sales associates and the managers can enhance
the profit in the negotiated sale price. Naturally, not all
of these profit building tactics are used in every negotiation.
You, the customer, should be prepared for the many tricks
or combination of tricks that may be employed during a sale
price negotiation.
Section one: The negotiation
The sales negotiation actually begins with the
“meet and greet.” This can take place either out
on the lot or in the showroom. The “meet and greet”
is the first learned sales technique and the most important.
During training it is impressed upon the sales associate that
the sale will be a success or a failure based on how well
the “meet and greet” plays out. The goal: GET
THE CUSTOMER INTO THE DEALERSHIP, OR BETTER YET, INTO YOUR
OFFICE. AND AVOID ANSWERING TOO MANY QUESTIONS. The name of
the game is control! If the sales associate loses control,
he/she loses the sale.
Everything is scripted, down to the last detail.
A good sales associate will arrange his/her office so that
he/she is between the customer and the door. There may be
a few awards displayed, but not too many. Too many awards
tend to be intimidating to some customers. It is suggested
that they display family photographs and personal items, because
it makes them appear less intimidating. When it comes to appearance
the sales associate will be well groomed, but dressed conservatively.
He/She is also cautioned not to wear too much jewelry. Expensive
clothes and jewelry cause customers to feel uneasy, as that
they believe that their sales associate has too much disposable
income.
When price negotiation begins, it is time for
the sales associate to work on establishing trust. It is imperative
that the customer believes that he/she is their advocate.
Enter the Sales Desk Manager, and the “good cop,”
“bad cop” game begins! If the sales associate
has done a good job implementing the paradigm, he/she should
be a signature away from a successful sale, and a “big
fat” commission. The “trick” is that the
customer is satisfied and happily ready to take delivery on
his or her new car. The sales associate and customer part
with a handshake. If you are that customer, you my friend
have been played!
Section two: Dealer installed accessories,
Paint protection, etc.
There is profit incorporated into every phase
of the new vehicle sale. Products, such as dealer installed
accessories, pin striping and paint protection are other ways
that the dealership can separate you from your money. These
after market products and services can have a mark-up ranging
from 50 to 175%. For example, the pin striping costs the dealership
somewhere in the neighborhood of $9.00, but the customer may
be billed $75.00 to $175.00. By now, you the customer, should
be beginning to see the bigger picture. FOR EVERY DOLLAR YOU
MAY SAVE DURING THE VEHICLE PRICE NEGOTIATION…THE DEALERSHIP
MAKES TWO SOMEWHERE ELSE IN THE DEAL!
Section three: Finance and Insurance (F&I).
This is one of your last stops in the buying
process, but one of the first areas you should prepare for.
Typically, you will have been in the dealership for several
hours examining vehicles, taking test drives, interacting
with sales associates, and locking horns with sales managers.
By this point in the game you will be physically, emotionally,
and mentally fatigued. The dealership counts on this and will
use it to their advantage. You have only one defense against
this tactic – proper preparation.
Before you leave your home or office to shop
for your new vehicle, call your bank or go online to determine
what the prevailing interest rates are for a new automobile
loan. Be sure to discuss your credit rating and the length
of time you wish to finance your new vehicle with the lender.
Both of these factors affect the interest rate, and consequently,
your monthly payment. It is very important that you accomplish
this first step for two reasons. First, you need to be able
to evaluate whether the vehicle you want to purchase will
fit comfortably into your budget and, secondly, you want to
eliminate a significant source of revenue the dealership can
build into your deal. This brings us to our first two “tricks
of the trade” in this section.
- Redirecting the customer’s focus –
one of the oldest tricks in the book is to get a customer
to focus solely on the monthly payment. In so doing, the
dealership is able to hide the selling price of the vehicle
as well as many other factors that affect the profitability
of the sale. This is why one of the first questions a sales
associate will ask you is something like “how much
were you hoping to pay a month for this vehicle”.
Armed with this figure, the sales desk can easily calculate
the highest price to use which will match your payment expectations.
- Increasing or “bumping” the
interest rate – When the dealership obtains a loan
approval on your behalf, the bank will assign the term (length)
of the loan and minimum rate of interest they will accept
on your loan – this is called the “buy rate”.
The dealership then increases the interest rate by as much
as 3 percentage points and is paid most of the difference
by the bank. Believe it or not, this is completely legal!
So, as you can see, in most cases it is better
that you obtain your own financing. If you can do this before
the first time you enter the dealership, all the better. However,
do not inform your sales associate, the sales manager, or
anyone else in the dealership that you will be getting your
own money. They may be less aggressive with regard to pricing
and other aspects of the deal if they know there will be no
profit to be made in the finance office.
Next, you’ll be offered several other
“products” in the F&I office. We will discuss
them one at a time, as well as the pros and cons of each.
- Life and Disability insurance- Whether or
not to purchase insurance is a personal decision. When to
buy it in relation to your automobile purchase and for how
much, is an area that we are comfortable giving advice.
As with everything else, there is considerable mark-up for
the dealer built into these policies which makes them rather
expensive. In most cases you can get a lot more coverage
for less money by simply purchasing a good term insurance
policy. Also, auto loan policies expire when the covered
individual reaches the age of 65 years and six months whether
there are loan payments remaining or not.
- Gap Insurance – Here’s
where the dealership makes those last few hundred dollars
of profit. These policies generally have a cost in the neighborhood
of $150 - $200, and are usually sold for around $500. Even
at this mark-up, the customer’s loan payment is hardly
affected.
The purpose of gap insurance is to pay
the remainder of the loan, in the event that the vehicle
is stolen, or is a total loss due to an accident. In this
case, the gap policy will pay the outstanding balance after
the auto insurance company has paid their portion. This
type of insurance is applicable when the unpaid loan balance
is greater than the depreciated value of the vehicle. What
gap insurance does not pay however, is the negative equity
or, “roll over,” from the previous loan. In
addition, it generally won’t be responsible for monies
borrowed to pay the taxes and tags. The bottom line is that
anything you borrow beyond the selling price of the vehicle
will not be covered.
- Extended warrantees – This will
be the biggest decision you make during this phase of the
deal and, in reality, should be considered prior to going
to the dealership in the first place. If you’re buying
a new vehicle, first give some thought to how long you’re
going to keep the vehicle and what your driving habits are
( how many miles do you average each year). If you drive
less than 12,000 miles a year and are going to trade this
vehicle in within three years, then the manufacturer’s
3 year/36,000 mile warrantee will be sufficient. However,
if you drive 25,000 miles a year or are going to keep the
vehicle for five years then maybe an extended warrantee
would be useful. Secondly, if you’re purchasing a
used vehicle with limited or no manufacturer’s warrantee
remaining, purchasing an extended warrantee might not be
a bad idea. Regardless of which case applies to your purchase,
a few rules do apply. They are:
| A) |
Whenever possible, buy the policy offered by the
manufacturer. These may cost a little more but they
are well worth it as they tend to act and feel like
a new vehicle warrantee and are virtually seamless
when the vehicle passes from the original warrantee
to the extension
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| B) |
Buy only what you need. Give careful consideration
as to how long you will keep this vehicle and how
many miles you will put on it. |
| C) |
Remember that most extended warrantees have a
dollar value until they are used up. What this means
is that if you trade your vehicle back in before
the policy expires, the dealer should refund you
the cost of the extended warrantee on a pro-rated
basis. |
| D) |
Dealers can charge whatever people are willing
to pay for extended warrantees. Before going to
the dealership to buy your new car or truck, call
the manufacturer and ask what they charge for their
extended warrantees for that particular vehicle.
The service department should have the number to
call for this information. |
Section four: A word about leasing.
First and foremost, it is important that you
understand what a lease is and what a lease is not. Simply
stated, a lease is an alternative form of financing your vehicle.
The main difference being that you will only pay for that
portion of the vehicle that you actually use as opposed to
signing a four to six year commitment for a vehicle that you
never intended to keep past the end of the third year. What
a lease is not is a rental policy and it does not give you
unlimited use of the vehicle. Typically, a lease will be set
up as low millage (12,000 miles per year) or standard (15,000
miles per year). You can purchase additional miles upfront
or pay for excess miles at the end of the lease. But be careful,
this can become very expensive, very quickly. Probably if
you are considering buying more miles a lease isn’t
your best option for financing your vehicle.
When discussing leases, there are a couple of
terms you need to understand, these are as follows:
- Residual value or lease end value: This is
the value that the lender projects your vehicle will be
worth at the end of the lease with the maximum miles allowed
by the contract.
- Cap cost reduction: This is the amount of
money you put down or the amount of equity you have in your
trade-in vehicle, or any combination of the two.
- Security deposit: This is usually equivalent
to your monthly payment and is paid to the lender at the
beginning of the lease. In most cases, this money will be
refunded to you at the end of the term provided there is
no excess wear and tear, or excess millage.
- Money factor: This is the rate of interest
expressed as a multiple, such as .0036 as opposed to a percentage
such as 6.25.
- Lease termination charge: A fee charged by
the lender to wrap everything up at the end of the lease.
It is usually equal to about 150% of your monthly payment.
Many dealerships and some of our competitors
will encourage you to lease your new vehicle, however we
do not. This is simply another way to get you to
focus on monthly payment rather than trade in value, sale
price, down payment, etc. Leases can and in many cases will
provide you with a lower monthly payment. However, to throw
a client into a lease without counseling them on the millage
requirements and other conditions of the lease is unscrupulous
in our opinion. As with all aspects of a vehicle
purchase, careful deliberation is the order of the day.
Section five: Miscellaneous.
Here’s where we put the things that
we just couldn’t fit anywhere else, however they are
still important.
- Dealer prep charge. This amount, usually
between $150 and $500, is added to the window sticker price
at the bottom or on a separate “Add-a-tag”.
This is pure profit for the dealer and should be the first
thing that you negotiate away. The sales associate will
give you a laundry list of things they must do to get the
vehicle ready for display. What they won’t tell you
is that they are compensated by the manufacturer to do these
things.
- Adjusted dealer markup or adjusted
market value. This is extra money the dealer wants to charge
you for a vehicle that is in extremely high demand. If this
truly is the case and you really must have that particular
vehicle, then you need to be prepared to part with your
money. In this case the dealer knows that he will get the
asking price for a popular vehicle, in high demand.
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