Finance and Insurance - The Profit Center
I would like to make myself clear on a few items of interest before I get too deep into the sales processes at any dealership, including: automobile, recreational vehicles, boats, motorcycle, and even furniture or other big ticket items. A business has to turn a fair profit in order to stay in business. I believe that they should make this profit and use it to pay better quality employees a premium wage in order to serve you better. The financial strengths or weaknesses of any business can definitely have a dramatic effect on your customer service and satisfaction. I do not, in any shape or form, wish to hurt a dealerships profitability, as it is essential for his survival. I merely want to advise people how to negotiate a little better in order to make the profit center more balanced.
Let's get right down to this! Every dealership has a finance and insurance department. This department is a huge profit center in any dealership. In some cases, it earns more money than the sale of the automobile itself. Profits are made from many things that most buyers do not understand.
You as a consumer should understand the "flow" of the sales process to understand the profit centers that are ahead of you. Most negotiating from the consumer seems to stop after the original price is negotiated and agreed upon. Let's examine just a small portion of what leads up to that point.
The first thing that every consumer should understand is that when you go to a dealership several things come into play. One of the most important things that I could point out to you is that you are dealing with a business that has been trained to get the most amount of money from you as they can. They are trained and they practice these tactics everyday, day after day, week after week, month after month, and year after year. Let me point out a couple of important facts that I have said in this paragraph. First, you'll notice that I said a dealership and not a salesman and secondly, I emphasized times of day after day, week after week, etc. etc. This was done to let you know that the salesman is working very closely with the sales managers in order to make as much money as he can. Your interests are really not their objective in most cases.
One tactic that is used heavily in the business is that the salesman says he is new to the business. This may be true or not, however; keep in mind that he does not work alone. He is working with store management, who gives him advice on what to say and when to say it. These guys or gals are very well trained on how to overcome every objection that you may have to buying from them. They have been trained in the psychology of the buyer and how to tell what your "hot buttons" are. They listen to things in your conversation that you may say to one another as well as to the salesman. They are trained to tell their desk managers everything that you say and then the desk manager is trained to tell the salesman exactly what and how to answer you. A seasoned salesman does not need as much advice from his desk and may negotiate a little more with you directly without going back and forth.
The process of negotiation begins the moment that you walk into the front door or step foot out of your car and begin to look at vehicles. Different stores display inventory in different ways. This is done for crowd control or more commonly known as "up control". Control is the first step in negotiating with a customer. Ever who asks the questions controls the situation. Let me give you an example: A salesman walks up to you and says "Welcome to ABC motors, my name is Joe, and what is yours?" The salesman has just asked the first question- you answer "My name is George." He then asks you what you are looking for today, or; the famous "Can I help You?" As you can see, step after step, question after question, he leads you down a path that he is trained to do.
Many times a well trained salesperson will not answer your questions directly. In some cases, they only respond to questions with other questions in order to avert the loss of control. An example of this could be something like you asking the salesman if he has this same car with an automatic rather than a stick shift. Two responses could come back to you. One would be yes or no, the other could very well be something along the lines of: 'don't you know how to drive a stick shift?" In the second response the salesman gained more information from you in order to close you. Closing means to overcome every objection and give your customer no way out other than where do I sign. The art of selling truly is a science of well scripted roll playing and rehearsal.
We have established that the negotiating process begins with a series of questions. These questions serve as two main elements of the sales process. First and foremost is to establish rapport and control. The more information that you are willing to share with you salesman in the first few minutes gives him a greater control of the sales process. He has gathered mental notes on our ability to purchase such as whether you have a trade in or not, if you have a down payment, how much can you afford, are you the only decision maker (is there a spouse?), how is your credit, or do you have a payoff on your trade in? These are one of many pieces of information that they collect immediately. Secondly, this information is used to begin a conversation with store management about who the salesman is with, what are they looking for, and what is their ability to purchase. Generally, a sales manager then directs the sales process from his seat in the "tower". A seat that generally overlooks the sales floor or the sales lot. He is kind of like a conductor of an orchestra, seeing all, and hearing all.
I cannot describe the entire sales process with you as this varies from dealer to dealer, however; the basic principals of the sale do not vary too much. Most dealerships get started after a demo or test drive. Usually a salesman gets a sheet of paper out that is called a four square. The four square is normally used to find the customer's "hot points". The four corners of the sheet have the following items addressed, not necessarily in this order. Number one is sales price, number two is trade value, number three is down payment, and number four is monthly payments. The idea here is to reduce three out of the four items and focus on YOUR hot button. Every person settles in on something different. The idea for the salesman is to get you to focus and commit to one or two of the hot buttons without even addressing the other two or three items. When you do settle in on one of the items on the four square, the process of closing you becomes much easier.
One thing to keep in mind is that all four items are usually negotiable and are usually submitted to you the first time in a manner as to maximize the profit that the dealer earns on the deal. Usually the MSRP is listed unless there is a sales price that is advertised (in may cases the vehicle is advertised, but; you are not aware). The trade value is usually first submitted to you as wholesale value. Most dealers request 25-33% down payment. Most monthly payments are inflated using maximum rate. What this all boils down to is that the price is usually always negotiable, the trade in is definitely negotiable, the down payment may be what you choose, and the monthly payment and interest rates are most certainly negotiable. If you do your homework prior to a dealership visit you can go into the negotiation process better armed. You still need to keep two things in mind through this process. The first item is that you are dealing with a sales TEAM that is usually highly skilled and money motivated. The more you pay the more they earn. The second item to remember is that you may have done your homework and think that you are getting a great deal and the dealer is still making a lot of money. The latter part of this statement goes back to the fact that it is essential for a dealer to make a "fair" profit in order to serve you better.
Once your negotiations are somewhat settled, you are then taken to the business or finance department to finalize your paperwork. Keep in mind that this too is another negotiating process. In fact, the finance manager is usually one of the top trained sales associates that definitely knows all the ins and outs of maximizing the dealerships profit. It is in the finance department that many dealers actually earn more than they earned by selling the car, boat, RV, or other large ticket item to you. We will break these profit centers down for you and enlighten you as to how the process usually works. Remember that finance people are more often than not a superior skilled negotiator that is still representing the dealership. It may seem that he or she has your best interests at heart, but; they are still profit centered.
The real problem with finance departments are that the average consumer has just put his or her guard down. They have just negotiated hard for what is assumed to be a good deal. They have taken this deal at full faced value and assume that all negotiations are done. The average consumer doesn't even have an understanding of finances or how the finance department functions. The average consumer nearly "lays down" for anything that the finance manager says. The interest rate is one of the largest profit centers in the finance department. For example, the dealership buys the interest rate from the bank the same way that he buys the car from the manufacturer. He may only have to pay 6% to the bank for a $25,000 loan. He can then charge you 8% for that same $25,000. The dealer is paid on the difference. If this is a five year loan that amount could very well be $2,000. So the dealer makes an additional $2,000 profit on the sale when the bank funds the loan. This is called a rate spread or "reserves". In mortgages, this is disclosed at time of closing on the HUD-1 statement as Yield Spread Premium. This may also be disclosed on the Good Faith Estimate or GFE. You can see why it becomes important to understand bank rates and financing.
Many finance managers use a menu to sell aftermarket products to you. This process is very similar to the four square process that I discussed in the beginning. There are usually items like gap insurance, extended service contracts, paint and fabric guard, as well as many other after market products available from this dealer. The menu again is usually stacked up to be presented to the consumer in a way that the dealer maximizes his profitability if you take the best plan available. The presentation is usually given in a manner in which the dealer wins no matter what options are chosen. With the additional items being pitched to you at closing, your mind becomes less entrenched on the rates and terms and your focus then turns to the after market products. Each aftermarket item can very well make the dealer up to 300-400% over what he pays for these items. Gap coverage for example may cost the dealer $195.00 and is sold to the consumer for $895.00. The $700.00 is pure profit to the dealer and is very rarely negotiated down during this process. The service contract may only cost a dealer $650.00 and is being sold for $2000.00. The difference in these items are pure profit to the dealer. You see, if you only paid $995.00 for the same contract, the dealer still earns $345.00 profit from you and you still have the same coverage that you would have had if you had paid the $2000.00. The same is true for the gap coverage. You are covered the same if you paid $395.00 or $895.00 if the dealers costs are only $195.00. The only difference is the amount of profit that you paid to the dealer. Another huge profit center is paint and fabric protector. In most cases the costs to apply the product are minimal (around $125.00 on average). In many cases the dealer charges you $1200-$1800 for this paint and fabric guard.
As you can see, these products sold in the finance department are huge profit centers and are negotiable. I also have to recommend the value of most all products sold in a finance department. It is in your best interest to get the best coverage possible at the best price possible. Always remember this: The dealer has to make a fair profit to stay in business. It just doesn't have to be all out of your pocket.
15 Fakta Pelik Tapi Benar
Protect Yourself and Your Finances During This Economic Storm
If you've been watching the news lately, you might have heard the media celebrating the fact that American job loss was lowest in April than it's been since October of last year. I caution all of you not to break open the champagne just yet, unfortunately. The stabilizing unemployment rate was a bit skewed by the 72,000 jobs added to Uncle Sam's payroll. Keep in mind that roughly 60,000 of these new employees were hired on a temporary basis to work the 2010 census, but they'll be back in the unemployment line as soon as the gig is up.
And besides, since government salaries are paid by taxpayers and the U.S. is already battling an enormous tax deficit and declining tax revenues, the new jobs will have to be funded by inflation. The bottom line is that more government jobs isn't a sign of an economic recovery -- it's a sign that we're digging ourselves even deeper into a bottomless pit that will ultimately end with the collapse of the dollar bill.
It's not all doom and gloom out there, fortunately. There are steps you can take to protect yourself and your family in this uncertain economy. Americans are losing their jobs in record numbers, and while you're powerless to some extent, read on to learn how you can help safeguard yourself and your financial future.
1 Pay off bad debt
Ideally, you have whittled your debt and monthly payments down to size, using any extra money you can spare each month to reduce them even further. Or better yet, you're debt-free and can sock a significant portion of your dispensable money away for the rainy days ahead.
By the way, you may be wondering what I mean by bad debt. Basically, I'm talking anything that is unsecured and has a high interest rate. Yes, that vacation you charged last year and are now paying back plus interest counts as bad debt. No, your mortgage or car loans don't count. They are what I consider to be necessary debt as you need a roof over your head and transportation to and from work (unless you have access to public transportation, but that's another topic altogether).
2. Reduce your expenses.
While you're eliminating bad debt, which is a monthly expense for your family, start cutting other unnecessary expenses as well. One way is to stop buying in bulk. What good are 500 rolls of toilet paper going to do you if you lose your job and, as a result, your home?
You'd be better off scouring the sales and finding a good deal on a 24-pack of t.p. and saving your money. Cash is king, and it's better to have your reserves in cash than depreciating material goods.
The bottom line is that you shouldn't stockpile on items for the future. Now more than ever, you should be living in the present. Buy what you need right now and save that extra $10 you would've spent on bulk items for whatever you might need next month. Most of all, from a biblical perspective, be content with what you have and stop trying to keep up with the Joneses.
Now isn't the time to be making frivolous purchases. Sure, a new plasma TV screen would make a great addition to your living room, but that money could be saved as a cushion against hard times that can unexpectedly hit anybody at any time. How many groceries could you buy with the money it costs to buy a plasma TV? Quite a few! So until the economy makes it turnaround, hold off on those big purchases and build your nest egg instead.
3. Secure your income.
Easier said than done, I know, but do whatever you can to make sure that your job is secure. Hopefully, you have done your homework and learned that your employer is in good enough shape to keep funding your paycheck in the coming months. You're doing your job to the best of your ability and offering to help in other areas as needed. Basically, make yourself as indispensable as possible. You should also consider avoiding unnecessary job changes that can lead to instability and job loss. After all, it's much easier for employers to can a worker who's been on the payroll for two months than one who's been contributing to the business for twenty years!
Unfortunately, nothing will guarantee that you'll keep your job. This is one reason that many savvy investors build their own companies instead of seeking out high-paying jobs working for others. Many hard-working Americans have experienced the misfortune of unemployment through no fault of their own. The key is to do whatever is in your power to secure your income and keep putting money aside in case the unthinkable happens.
4. Keep a roof over your head.
By now, you have likely made sure your family will continue to have a roof over its head by either 1) Deciding to stay in your home and using my action plan for saving it come hell or high water -- or, 2) Deciding to sell your home and rent an equal or better home for less. If you are getting behind on your mortgage payments, you may want to consider moving to a small apartment until you can get on your feet again. Part of the problem is that you must weight your options with your lender. Generally speaking, I believe you should stand your ground and try to work out a payment system with your lender to keep your current home.
If you are being evicted due to non-payment, you will still need some money on hand to put down a deposit and first month's rent, so be prepared with cash. In today's market, most lenders will work with you as long as you are making some type of payment each month. The banks don't need any more bad debts on their books right now and are more willing to work with you than ever before, so take advantage of the situation before it's too late.
5. Protect your money in the bank.
Make sure your money is in the safest bank available to you. Contrary to common belief, I recommend keeping some cash on hand at home and using smaller local banks for the rest of your money. Many of the local banks have managed risk well and are in better positions to hold your cash, so do your homework and ask to see the debt ratio at the bank you use or are considering using. Obviously, the lower the ratio the better. Fannie Mae was leveraged 100 to 1, which is a prime example of what not to do.
Reduce or eliminate your exposure to plunging stocks and bonds, saving your portfolio and your retirement from further disaster, and ...
Hedge against further losses in the value of your home and in investments you can't sell. Which leads us to number 6...
6. Make wise investments.
Because the stock market is experiencing a government-inspired rally, now is the time to sell! Sell every soft stock you have and check out some of the alternative investments below that have stood the test of time.
Physical gold and rare gems are good investments for economic hard times. But they aren't the only investments you might consider. Cash is king, at least in the short run until inflation kicks in and the dollar starts diminishing in value. Not sure about the best way to buy these items? Contact me to learn everything you want to know about alternative investments.
Since the beginning of time, metals and gems have increased in value, making them the best safe haven and hedge against dropping currency in troubled times.
Other investments, like Managed Future accounts, have been growing in popularity.
Managed Future accounts are secure investments that allow professional traders use your money during business hours returned to you at the end of the day. The volatility in the current market offers day traders opportunities they have not seen in years. Right now, the stock market is not a buy-and-hold scenario for the savvy investor. If you are getting that advice, I respectfully warn that you may need to reconsider your financial advisor.
More about Managed Futures: Integrated investment platforms improve profitability and better manage risk. You keep custody of your own funds, but let professional traders do the trading. Traders (which are highly regulated) have Limited Power of Attorney to trade the managed account only. Only you have deposit or withdrawal authorization. Returns typically average in the 20-30% range, even during shaky economic times like those endured in 2008! If your portfolio was down last year, you need to get into a managed account today. Don't quit your day job to become a trader; let the professionals do it for you. Your time is better used doing what you are good at and have a passion for, not pursuing a new carrier in this market.
You can see that while the economy is dismal, there is still hope for a strong economic future. You just need to take a few precautionary steps to protect yourself and your finances, and then hunker down and weather the storm. This too shall pass!