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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Can You Overcome Instant Gratification Urges and Get in Control of Your Finances? The media constantly bombards us with messages saying that we can instantly have whatever we want and not only that, we really do deserve it. The oft repeated commercial jungle sums it up nicely with "You deserve a break today." Every day, advertisers spend million of dollars trying to convince us that all our aspirations can be met and are within easy reach. This selling technique touches all aspects of our lives. Eating too much or need to improve your diet? Not a problem, take a pill for instant stomach relief or weight loss. Advertisers are very good at convincing us that there are in deed, magical solutions for all of our needs and wants. Stressed out? Go on a cruise to ease your mind... and not six months from now when you have saved up the money for it... but take the cruise tomorrow and just put it on your credit card! This type of persuasive advertising has effects beyond the individual good or service being sold. Most people in our society have an overdeveloped sense of self-indulgence; an "instant gratification" attitude. We expect constant and immediate gratification from our interactions with service providers, employers, and even family and friends. A famous experiment was conducted where 4 year old children where given marshmallows. Each child was individually taken to a room and given one marshmallow and told they could eat it. But, the experimenter said, I'll return in 5 minutes, and if you still have the marshmallow when I get back, I'll give you another marshmallow. Its up to you, eat your marshmallow or save it. The experimenters tracked the lives of the children afterward. The main conclusion: the children who did not eat the marshmallow were more confident, has more friends, earned better grades, and got better jobs. But are we really surprised by this result? We have become a nation that can't resist eating the marshmallow, and like those 4-year-olds, we'll pay a price down the road. Starting soon, the boomers will desperately need the second marshmallow. Trouble is, they've already eaten the first one. (Fortune Magazine) America's savings rate has plunged to the lowest level in history. Statistics show that in the past few years we've saved between 1% and 2% of income. That means we"re spending 98% to 99% of everything we earn (and in some cases we are spending more than 100% of our income by using credit vehicles such as credit cards, lines of credit and loans) to finance our perceived needs, and then we are shocked to find our retirement is in trouble or not possible when we had hoped. This is beyond poor judgment. It's just self-delusional. Keeping in mind that the average life expectancy is getting higher and that the basic cost of living constantly increases, we are definitely not in a good position (as a society) for the future. Yet we continue to save minuscule amounts for our future, or nothing at all. We have a hard time believing that tomorrow really will come, and a day of awaking to our financial reality will soon be ours. Presumably, we live beyond our means in an attempt to obtain a measure of comfort and happiness in the midst of a stressful lifestyle. Anyone who sits down to try and understand happiness will understand that an instant gratification attitude does not contribute to lasting peace and happiness. In fact, developing a mind that is constantly looking for the next "need" to be met by others leads to an insatiable appetite for instant gratification... bringing unpleasant after-affects which almost always outlast the quick fix. Here is a somewhat typical scenario: A husband and wife both work at good paying jobs, where together they earned in excess of $100,000/year. However, they live in the husband's parent's basement and have their credit cards and lines of credit maxed out. Of course they enjoy their big screen TV and a nice, expensive stereo system; they drive new luxury cars and have, what seems to everyone else, a very luxurious lifestyle. But, it's all a facade. When asked about one of his recent purchases, the husband replied, "Hey man, we live in an instant gratification world." Many of us do not follow good financial principles just to satisfy our societal programming; the craving to keep up with the Jones'. While many people just make poor choices, this problem often boils down to a lack of good financial planning education. Financial planning is one of the most critical issues we all have to deal with as adults, but its noticeably absent or only lightly treated in schools. For the most part, we get our financial education by observing the behavior of our parents, and unfortunately, most parents are not in a good stead themselves to be able to teach by example good financial planning skills. Individually, we need to get back to financial basics. These basics boil down to a few things: Live within your means (spend less than you earn and use a budget) Understand the difference between good and bad debt and get rid of bad debt as quickly as possible Differentiate between needs and wants. Learn to ask yourself before purchases, is this something I need or want. Make sure you take care of needs first, then wants can be addressed when your savings support them. Living Within Your Means Living within your means, now almost a cliche statement, means that you plan to spend less than you earn. When you do this you plan for success. The phrase "live within your means" is one championed by prophets, personal coaches and financial planners; an exhortation that usually goes unheeded, to its hearers financial doom. Lets examine a typical personal/family budget. Income is listed at the top, with expenses below and finally we see the difference: your net income. If your net income is a negative number (meaning you have more expenses that income for a given month) or below a comfortable threshold you have only a few options: Make more money Reduce expenses Too many of us are choosing the hidden third option and borrowing money to cover the difference without rectifying the problem for the long run, thus building a debt load that will never be paid off until a fundamental change takes place. These 2 options are easy to read but actually making a change there is a different matter. Most of us cannot simply go and earn more money, so we are left with reducing our expenses. The problem is, we are conditioned by our society to believe that we deserve the latest, greatest things, that somehow we are poor or inferior if we don't have the things that our neighbors have. However, if you recognize this conditioning, you can get back in control and realize that you are in control of your spending. You'll find you can change your spending in many ways to save more, to reduce your debt load, to donate to your church or charities, to do whatever worthy thing we want to. One of the keys to living within your means is the ability to differentiate between good debt vs. bad debt, and wants vs. needs. Once you learn that, the rest is a simple matter of character (defined as "the determination to stick with a decision after the excitement of making the decision is over"). Good Debt vs. Bad Debt Until we are independently wealthy, we all need to borrow money to get ahead in life; there's no escaping it. When borrowing money (taking on debt), its important to understand the difference between "good debt" and "bad debt" and avoid bad debt whenever possible. Bad debt is borrowing money for something that becomes less valuable over time (depreciates). Most regular purchases fall into this category. Think about some of the things you buy: an automobile, a television, a computer. These items are worth less as soon as you walk out of the store with them and as time passes they become worth less and less. A sure way to stay poor or middle class is to buy lots of things that depreciate. If you want to build wealth, you should try to buy things that appreciate. However, since we all like some things that depreciate, you should at least plan to not buy these items with borrowed money. Purchasing "bad debt" items with borrowed money always puts you in a losing scenario. Here's how: You are acquiring an item that immediately loses value and gets worse over time, such as a car and you use debt to pay for it - a loan in this case. You'll never get that money back. If you fall on hard financial times, you cannot simply sell the car to pay off the loan since the sale price of the car will always less than the original purchase amount, and often less than the remaining balance of the loan. That car loan is charging you interest, as borrowed money always does. Interest is always throw away money that you'll never get back - the cost of the convenience of spending money before you actually have it. It doesn't take a genius to see that borrowing money for bad debt items never makes sense. Now, sometimes bad debt will be forced upon you, but as much as possible - avoid it like a disease. To avoid it, you must be careful to differentiate between wants and needs - waiting for the wants until you have saved enough money to pay cash for these items only when you determine you can actually afford it. Then, at least you are not throwing away money on interest and there is no risk of being left with a debt if hard times come. On the other hand, good debt is borrowing money for something that becomes more valuable with time or improvement (appreciates). This can be property, education or fine art, for example. Items like these are more valuable when you try to sell them in the future. For example, you sell your education by applying on the job in exchange for money. You can normally sell a house for more money than you paid for it, since property typically appreciates in value. Debt is good whenever the value of the item you financed increases with time. In conjunction with that, the appreciation of the item should be greater than the interest incurred for borrowing the money. For example, if you buy a house for $250,000 at an interest rate of 7%, and you find that the house value is appreciating at a rate of 10%/year, wonderful! However, if you find that the value of the house is growing only at say, 3%, then your "good debt" isn't so good after all. In this case, you are still losing money after everything is calculated. Note, this is still much better than bad debt because, if needed, you can sell that house and pay off the debt in its entirety, but its definitely not ideal. So, the conclusion here is, borrow money for good debt items, but not for bad debt ones. When you have to (want to) buy something that depreciates, plan to save the money first and pay with cash. This may be difficult for big items, such as a vehicle, so you have to be careful to distinguish between needs and wants. You should never buy the big screen TV on credit. Bad, bad bad. Needs vs Wants Our true needs consist of food and shelter and associated things. There may be a few others depending on where you live, your religion, etc... but you should not feel that you "need" the big screen TV. I heard it said the other day that all guys need a big screen TV. Of course it was said as a joke, but it highlights the attitude many people have. We confuse our needs with our wants and end up being unable to prioritize our spending effectively. You should always prioritize needs before wants when planning your budget and spending. Once your needs are taken care of, you can determine if you have enough money leftover to buy some of your wants. Wants should be purchased with cash - not on credit. So guys... you have to control that desire for the new electronic toy until you have enough money saved up to afford it. Don't get sucked into the blackhole of credit because debt is a constant companion and will wear down on you, and it is very difficult to get rid of. Application of these basic principles will keep you, your family and your budget happy and get you on the road to a positive financial future. Eric Poulin is the co-founder of CalendarBudget an online money management tool. Eric also has a blog [http://blog.calendarbudget.com] with other money management tips.




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