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.
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The Core Principals to Money Management - Learn How to Manage Your Finances Famed football coach Vince Lombardi always used to take his fabled Green Bay Packer teams back to the basics of football when they struggled. He would have them perform blocking and tackling, believing they needed to reestablish a good foundation for other football activities. This is a good principle to follow in one's financial life as well -- go back to the basics when things go awry. Let's talk about those principles of credit repair, money management, and financial prosperity now. With the glut of foreclosures hitting America in the past year, it is clear many are living beyond their means, violating one of the core financial principles: live within your means. It's understandable why many don't do that, however. Everyone wants the American dream of home ownership, financial prosperity, and the overall good life. Seeing others have the things you want is difficult and in a land of wealth like America, you see it all around you. Conspicuous consumption is all around you and many fall prey to taking the pathway of least resistance and use credit to finance their desired lifestyle. Wealth is not inherently evil for money does many good things like provide medical care to the sick, create farms, build bridges, provide for the nation's defense, and allow us to meet the necessities of life. As human beings, we all have an innate desire for something better and of course for more of everything. It's when this desire crosses the line to covetousness when things go awry. So, what are the core foundational principles of which I speak? They are: *Spend less than you have coming in and save for a rainy day *Learn to distinguish between needs and wants *Use debt as a financial instrument of necessity, not as a prime financial tool -- Use credit cards in place of cash for safety reasons *Pay all bills on time Let's briefly discuss them now. Spend Less Than You Have Coming In By learning how to save, you naturally discipline your financial impulses. By unrestrained spending, people run up credit card debt, which can be extremely difficult to manage. By learning how to spend less than you have coming in allows you to save money for that rainy day that inevitably comes. When our financial sun is shining we tend to think it will be that way forever, don't we? But unforeseen events often can unexpectedly knock us off of our reverie. Losing one's job, an unplanned for baby, an accident, a health challenge, or a natural disaster can very quickly drain what little savings we have if any. By learning how to spend less than we have coming in and then carefully safeguarding that income can allow us to plan for a comfortable retirement or to use those funds when that rainy day comes. One of the unexpected byproducts of this principle is that you have money to buy the nicer things in life. By following this strategy has allowed me to afford some of the things I want in life. It can for you too. Learn To Distinguish Between Needs and Wants Many Westerners who have lived in abundance all of their lives grow accustomed to modern-day living. Modern-day transportation, plentiful food, good housing, sanitation, clean water and modern-day technical conveniences, opportunities for good education -- all are taken for granted. And consequently, the line between needs and wants gets conveniently blurred. We began to think we need that new car, that new washing machine, that new TV, but do we? Actually no. That's not to say modern-day conveniences are bad, they're clearly not. It is our attitude toward them that is at issue here, not the conveniences we enjoy. Here's the point: When one lives beyond their means, a host of problems inevitably ensue. The use of debt in living beyond our means allows us to prolong the day of reckoning but debt is a keen observer of dates and times and that day of reckoning will come. It is an interesting financial phenomenon that one's needs expand when financial prosperity has already been attained. Such an attitude is due to pride, the inevitable byproduct of wealth or prosperity and that attitude is usually at the use of consumer debt itself in our society, and that leads to the next point... Use Debt As a Financial Instrument of Necessity, Not As a Prime Financial Tool -- Use Credit Cards in Place of Cash for Safety Reasons Famed Founding Father Benjamin Franklin said, "Debt is a tanglesome net." In a literal way, debt is bondage with your creditor having authority or command of you. A friend of mine says that "debt is a four-letter word." While his point was made in humor, it has some common-sense applicability. Buying a home and paying for an education are the two main reasons to use debt. To use it for consumer purchases however, that is when one gets into dangerous territory. The instant gratification nature of consumer credit is a narcotic to many almost akin to the high the gambler addict feels and if not controlled could lead to financial ruin. A good rule of thumb to use when considering going into debt for a consumer item is to ask yourself the question, "Do I really need this?" Needs involve the bare necessities like food, water, housing, and health. If it doesn't meet that criteria, then it is not a need. Replacing an old washing machine with a new one is an example of that. Can you perhaps have the old washing machine repaired instead of buying a new one? Can you make that old suit last a little longer instead of buying a new one? In most instances, the answer is almost always yes. Last point for this subtopic -- use credit cards as cash either to avoid carrying a lot of cash around, which could endanger your personal safety, or just as a convenience. I use my credit card all the time. For every purchase I can actually. But I only have one credit card -- one. I don't need another. I use it to avoid carrying cash around yes, and I admit I use it to accumulate cash reward points, but I mainly use it for convenience. And, here's the kicker: I always pay its balance in full when the bill comes due. I've only once in my life ever carried a credit card balance and that was only for one month as I inadvertently read the statement and paid only the minimum amount. I use the card the same as cash and always pay it off at statement time. The result? The credit agencies love me and I have a sterling credit score. Pay Bills on Time The belief that one will be able to pay all bills on time without any issue is a common belief to those who acquire wealth. Not so. Let me tell an anecdote from my personal experience. While living in New Jersey in 1991, I was shopping for a new CD stereo system in Bernardsville, New Jersey, a very wealthy enclave for many celebrities. When I had decided upon a particular system, I asked the proprietor if he would take a check to which he readily agreed was no problem. He then made a very interesting comment. "In my years of business, I've only had one person ever bounce a check." I was intrigued. "Who?" I asked. "You won't believe me." He responded. "Seriously, who?" I cajoled. "Mike Tyson." He chuckled. "The boxing champion?" I asked in shock. "Seriously, yes." At that time, Mike Tyson's wealth was estimated in the $80 to $100 million range -- and he bounced a check for maybe three or four thousand dollars?! You can see that wealth doesn't automatically allow you to be financially upright or to pay your bills on time. If you allow you money to control you, or perhaps I should say, if you allow your attitude on money to control you, then you will fall into unwanted circumstances. So, pay your bills on time. This ensures financial honesty, which is at the heart of our current system of usury. Your creditors will respect you, the credit agencies will give you a sound credit score rating, and you will escape the financial ills that befall those who don't know how to manage their money appropriately. Closing In closing, while this article hasn't given you specific strategies on improving your credit or financial life, these principles can and should be the foundation of all you do financially. If you do, you will have significantly less stress, greater credit capacity, and a sure foundation for financial prosperity.




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