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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Personal Finance Meltdown Makeover - Take the Long View
Americans on Main Street have been urgently requested to take the plunge with Treasury Secretary Paulson and Ben Bernanke to bailout Wall Street's bad debt to the tune of $700 billion and counting. We have been told that this must happen in order to not only stabilize Wall Street but the economic system itself. Or else! As of this writing 9/29/08, the House has just voted to reject the bailout.
If a bailout bill does eventually get passed, it won't be a magic bullet and we as a nation will continue to flounder in uncharted economic waters. But perhaps more importantly, millions struggle to maintain their equilibrium when it comes to household finance.
Personal finance gurus have taken front and center, weighing-in on the news and talk shows. They beat the drum of "whatever you do, don't liquidate" and please, stay calm. Stay calm?
My concern is what the personal finance gurus are not telling Americans. Their advice to John and Joan Q. Public as regards the best approach to decision-making in light of the current financial meltdown is flawed. Why? Their solutions do not reflect the-elephant-in-the-living -room-root cause. Instead, we are told the financial crisis is due to the sub-prime mortgage collapse, mortgage defaults and the subsequent downturn in housing prices nationwide. Yawn.
The Emperor's New Clothes
It's the mainstream media that has served up this convenient cover story. As in the Hans Christian Anderson tale of The Emperor's New Clothes, though the king is most certainly naked as he parades down the street, virtually all the spectators of the royal parade see the king as he himself wants to be seen; wearing magnificent robes. Only when a child in the crowd proclaims the king's nakedness is the mass delusion of the townspeople shattered.
Thanks to the Internet, the "children" with eyes to see and ears to hear the truth about money are growing in number. As a result, many cracks exist in the official story line about why we are in the financial mess we're in and what we must do to get out of it. There's much more to know.
The real root cause goes back to the time of widespread understanding of how interest-based money lending, also known as usury, corrupted the fabric of relationships and of society. In modern times, usury has come to be considered business as usual via a global network of central banks. Almost no one today gives it a second thought.
The central-banking system is global and was carefully designed to be a debt-based in nature: Money is issued into existence at the time it is loaned at interest. Interest that compounds over time becomes both revenue for the system's shareholders and inflation in the cost of living for you and me when debt service gets added to the cost of goods and services.
To most people's amazement, The Federal Reserve, the U.S. central bank, is not actually even part of the government but a private for-profit corporation with shareholders. However, as in The Emperor's New Clothes, don't expect TIME magazine to run a cover story on this any time soon.
The System of Money
My association in the 1980's with R. Buckminster (Bucky) Fuller led me to understand the wisdom of the saying "the whole is greater than the sum of its parts". Money is but a part of a monetary (central banking) system in the same way the earth is but one aspect of the solar system. It's impossible to fully understand earth as a planet without understanding the system that contains it.
A more complete picture of money comes into view with the big picture of the monetary system. As we were changed forever when we saw the whole earth from space for the first time, getting the big picture of the monetary system changes the way we think about money.
A comprehensive view would put an entirely different spin on the Paulson Plan for a mega-bailout. A comprehensive overview would tell us that going $700+ billion more into national debt in a debt-based system will only delay the inevitable bottoming out of an already heavily indebted system. Such an injection of capital would be much like giving a heroin addict a larger injection to continue to be able to experience their high.
It's really no different. The monetary system by design needs larger and larger sums of credit (digital money) to pay down debt and access working capital. It's an insatiable beast needing more and more new credit to keep the wheels turning. As a result, I humbly submit that what we have is a completely unsustainable monetary system.
For international, national and personal financial solutions to be more than Band-Aid measures as a mega-bailout is certain to be, the entire system must be reformed via a total-systemic makeover. As Bucky taught, systems ultimately shape and determine the possibilities of their moving parts.
You're on Your Own
Until national leaders make monetary reform a top policy priority, everyday Americans are on their own to find the best ways to navigate their personal finance concerns. Each of us is affected by the mechanics of a debt-based monetary system by way of lost purchasing power. What's more, government purchases of Wall Street's "toxic assets" will only accelerate this ongoing process.
Yet almost no financial advisors will tell you. Actually, it comes as no real surprise since the professional training of most licensed financial advisors never covers central banking 101 and its personal implications. Advice devoid of understanding the personal impact of the monetary system is short-sighted at best.
The Long View
Like nuclear waste to waste dumps, hundreds of billions of dollars of additional debt due to the purchase of "toxic assets" will have to go somewhere. That somewhere, after the liquidity injection-high wears off yet again, will be directly out of our pockets as lost purchasing power and tax increases.
Job-outsourcing, bankruptcies, foreclosures and debt have meant millions of Americans have traded peace of mind for chronic stress. Enough is enough! Individuals, families and communities stand to gain from (hopefully) an eventual monetary reform but need real answers right away.
Over 25 years of independent research, study and working one-on-one with individuals and families have led me to the following conclusions as regards a long-term approach to personal financial well-being especially while living with the risks inherent to a debt-based system.
The traditional approach to personal finance tends to destabilize lives by use of its main strategy; the repeated leverage of credit and debt. The following recommendations empower people to stabilize their financial lives long term.
Time is of the essence, however. The erosion of purchasing power accelerates over time and dramatically so when billions and trillions are injected into the system all at once. So the sooner corrective action can be taken by individuals and families, the more options they may have for creating a sustainable financial situation.
Here is the formula I recommend:
First and of utmost importance: Get the whole story about money. There are many resources, for example, watch (Google) the short and amusing animated documentary Money as Debt by Canadian Paul Grignon. By becoming fully informed, you are more likely to empower yourself by taking necessary action steps.
Get out of debt. Mortgage debt is still debt.
Track your monthly money-in and money-out.
Do whatever it takes to have more money coming in to your household than going out. You must be willing to change your lifestyle if need be. This is a goal that generates a process.
Once you have more money coming in than going out, strive to live below your means.
Create a cash-flow engine that will drive your finances to keep you ahead of the increasing cost of living going forward so you will not have to revert back to credit use. It's important to keep in mind what goods and services people will be willing to pay for in both good times and bad. This also applies to people on fixed incomes who are likely to need more money-in (than they thought they would) to keep up.
Become a member of an alternative currency exchange system such as Fourth Corner Exchange to access a second-tier economy. If there is not a system in your community, create one.
Once you have changed your mindset about money, are debt free and practicing the above, you will be out of the matrix once and for all. It's an opportunity to re-build a quality life on your terms, long-term!