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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International Finance for Trade and Commerce
International trade involves international financial transactions because different countries have different units of money. When your nation wish to buy goods from other nations, they usually must pay for the goods in the currency of the exporting country. In other words, Japan will probably demand yen, France will demand francs, West Germany will want deutsche marks, Great Britain will insist on pounds, and Mexico will demand pesos in payment for the goods they sell. Foreign currencies are called foreign exchange, and they are bought and sold in foreign exchange markets, which are markets that deal in the buying and selling of foreign currencies. Some banks specialize in financing international trade, and they are the major participants in foreign exchange markets. If an American importer wishes to buy automobiles from a Japanese manufacturer, the importer will go to a bank that specializes in financing international trade, and will exchange dollars for yen.
Exchange Rates: The foreign exchange rate is the price of one currency in terms of another. For example, the British pound might be worth 76 times more in Indian money. Historically, there have been two major types of foreign exchange rates: fixed exchange rates and flexible exchange rates.
Under the fixed-exchange-rate system, the price of one currency was fixed in terms of other currencies so that the rate did not change. The advantage of such a system is that importers and exporters know exactly how much foreign currency they can purchase with a given quantity of their own nation's currency today, next week, or six months from now. Foreign exchange markets operated under a fixed-exchange-rate system from 1944 until the year early 1970. Prior to 1971, the value of the United States dollar was tied to gold at the rate of $1 equals 1/35 of an ounce of gold. In other words, one ounce of gold was equal to $35 in American money. Since the value of other currencies was also fixed in relation to gold, the dollar price of each foreign currency remained constant.
The disadvantage of the fixed-rate system was that it did not make allowances for changing economic conditions in various countries. For example, if the developed country like United States of America was experiencing high inflation at a time when Japan or China was experiencing little or no inflation, American-made goods would become increasingly expensive in relation to goods made in Japan or in China. As a result, Japan or China would purchase fewer American-made goods while Americans would tend to buy more goods made in Japan or in China. This in turn would lead to a serious imbalance in imports and exports between the two countries.
With a flexible-exchange-rate system, the type of system under which world trade operates today, the forces of supply and demand determine the value of a country's currency in terms of the value of other currencies. Therefore, under this system, the price of a country's currency can fluctuate up and down daily in response to market conditions.
The supply and demand for foreign exchange usually are largely determined by the supply and demand for goods and services. For example, if United States of America importers wish to import increased quantities of goods from a country, suppose from Japan, there will be a strong demand for the Japanese yen. This could force the price of the yen up substantially unless Japan was at the same time providing a large supply of yen in order to increase their imports from the United States of America. The demand for goods and services is not the only factor that determines the demand for a nation's currency. Political or economic instability in other countries may cause people in those countries to exchange their currency for a more stable currency, such as the dollar of United States of America. In addition, high interest rates in a particular country may cause foreign investors to convert their currencies into the currency of that nation. This happened in the United States of America during the early 1980s. Interest rates became so high in this country that many foreign investors were prompted to exchange their currency for American dollars for investment purposes. This increased demand for dollars caused the value of the dollar to increase in terms of other currencies. The "strong" dollar made American-made products more expensive in world markets. As a result, Americans bought more foreign-made products, and foreigners bought fewer American-made products.
Balance of Trade: The amount of goods and services that a nation sells to other nations, and the amount it buys from other nations, are not always equal. The difference between the dollar value of exports and the dollar value of imports is called the balance of trade. If the United States exports more goods to foreign nations than it imports from foreign nations, it has a trade surplus. However, if the United States of America imports more than it exports, it has a trade deficit.
In 1971, the United States recorded its first trade deficit of the century. In all the years since then, except in 1975 when there was a modest surplus, the United States has imported more than it has exported, and the trade deficits of recent years have been so large that they have caused major concern among some economists.
However, not all economists agree on how serious a problem the trade deficits are, or even on their causes. Some believe that, in the long run, market adjustments will correct the problem. Others are not so sure. Some economists believe that the high trade deficits are linked to the large deficits in the federal government's budget in the past two decades. They argue that heavy government borrowing to finance high budget deficits helps to keep interest rates high and encourages foreign investors to exchange their foreign currencies for dollars. However, so many things influence the trade deficits that it is not always clear which factors are playing the biggest role in the deficit at any specific time. The one thing that is clear is that the United States must increase its competitiveness in world markets. Like it or not, the world is moving rapidly toward a global economy. The volume of international trade is bound to grow rapidly in the decades ahead. Competition is still the name of the game, but the number of players has increased.
Balance of Payments: Economic relations between nations involve much more than just imports and exports. There are many different kinds of transactions that involve the exchange of money between nations. For example, American businesses invest funds in foreign nations, and American banks make foreign loans. In addition, the United States government spends money for foreign aid and to support military personnel stationed abroad. Americans spend money for goods and services when they travel abroad, and American citizens often send money to relatives living in other nations. On the other hand, money flows into the United States from other countries when foreign citizens travel in the United States, when foreign businesses make investments in the United States, when Americans receive dividends on foreign investments, and so forth.
Each nation keeps an accounting record of all its monetary transactions with other countries. This accounting record is called the balance of payments. A nation's balance of payments account includes all payments that it makes to other nations, and all payments it receives from other nations during a year. A country's balance of payments includes imports and exports, flows of investment funds into and out of the country, loans between nations, and all other transactions that involve payments between countries. The balance of payments is a broader measure of the financial transactions between countries than the balance of trade.