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.
Subhanallah! Sel Kanser Takut Dengan 3 Sayur Ini. Pastikan Selalu Ada Dalam Masakan Kita
11 Ways to Take Control of Your Finances
1. Spend Less
No matter how much you are currently earning, create the habit of spending less. As is often encouraged by Financial Planning experts - spend less than your income. To stay within your means you must discipline yourself NEVER to create debt.
Stay away from credit cards and bank loans. The compound interest on such credit is astounding and will enslave you for years to come. (I will discuss the inner workings of compound interest in a future article). The same applies to credit at clothing and retail stores. If you cannot pay for it with cash, do without it!
Keeping up with the Joneses will bankrupt you and bring on years of torment. As Dave Ramsey says, "The Joneses are Broke."
2. Financial Goals
If we do not have a plan for the future, we will fail financially and as a result in every other area of life, including relationships. You simply cannot live in the moment, no matter how averse you are to goal setting philosophy.
A dream of long-term financial security or greater income is not possible without planning. Set goals and action steps for Investments, providing for your family, saving for a large purchase item, planning for your retirement or even a holiday.
Take control of your financial future. Create worthy goals which prioritize and direct your spending and investment decisions to achieve a successful outcome.
3. Create a budget
After you have set your financial goals, develop a budget. Few people work with a budget; it will require decision and commitment for the purpose of your long-term goals. When you take control of your finances through goal setting, planning, and budgeting, the results far outweigh the stresses and disappointments which result from overspending and not being able to meet your financial commitments.
Create your budget, work with it and stick to it!
"If you do not name your money, it will leave you!" In other words, if you do not allocate where your money must go, it will simply disappear from your life and bear no fruit.
4. Get Rid of Debt
You are wealthy when you have no debt! Your home loan should ideally be your only current debt, however, home loans can be paid off in as little as 7 years when you understand how compound interest works and you get rid of all other debts.
Pay off all debt; include this in your financial goals. A simple process - though not easy - is to begin paying off your smallest debts first. As each of the smaller debts are eliminated, do not spend the newly freed up money which results from fewer debts, add this new extra amount to the next debt, in so doing eliminate each debt until you become debt free. The sense of freedom in not having any debt will change your life, health and how you face each new day.
5. Build an Emergency Fund
There are many views on how this should be achieved. Some planners believe the emergency fund is step one in your financial planning, even before paying off debts. A recommended amount of savings in this fund is to begin with R10, 000. If you are already in debt then this is a difficult amount to achieve however you do need to build an emergency fund even if it is a smaller amount starting out.
Keep building the fund and DO NOT tap into it under any circumstances except for an emergency. The idea behind an Emergency Fund is to not bankrupt yourself if an emergency arises which cannot be accommodated within your budget. One also needs to understand what constitutes an emergency. Emergencies are incidents such as being retrenched from your job. You need to be able to sustain yourself and your family whilst finding a new job.
The following are NOT emergencies:
New Appliances
The latest Album from your favorite performer
Dining Out, Take outs
New Clothes (included in your budget)
A new book from your favorite author
Groceries (included in your budget)
Holidays, weekends away
Sporting events
Movies
Christmas Presents
Car repairs (included in your budget)
Items on sale
6. Income Replacement Insurance
If you were to sustain an injury which rendered you unable to work and earn a living, the financial consequences to your family could be catastrophic. Income would cease, and expenses could rise due to the costs of treatment, or even long-term care.
Whether you are self- employed, or an employee of a company it is more than wise to purchase disability cover. Employee group disability cover is seldom sufficient and frequently has loopholes in favour of the employer. Carefully consider supplementing or including disability cover with an independent Registered Financial Planner.
7. Life Insurance
Most people consider Life Insurance a grudge purchase. Few people would ever drive their cars without vehicle insurance or not insure their home and contents, yet so many consider Life Insurance a waste of money.
I have often encountered a client who would rather purchase an investment, wrongly believing that this is a better purchase than Life Cover. An investment would take years to grow, but as an example, Life Insurance of say, R2, 000.000 would be paid out to spouse and family immediately on death. An investment may only have grown to a few thousand Rand over a period of time and your family would lose your income and even their home. As was once said, "Wives might not believe in Life Insurance, but widows do!"
8. Medical Aid
It is a great risk to live without Medical Aid Cover. In the case of illness or an accident, you could either not afford treatment or even die without the correct treatment.
Surgery and medical costs are very high. Medical Aid ensures that you and your family are well taken care of. Without Medical Aid your income could be exhausted and lead to consequences such as needing to sell your home to cover medical costs.
9. Severe Illness/Dread Disease Cover
40% of all South Africans are diagnosed with a Dread Illness. These include cancer, heart attacks, multiple sclerosis, strokes and so many more. The cost of treatment will usually not be completely covered by medical aid. You could also exhaust your medical aid benefits if the illness is too severe or prolonged.
Besides the cost of treatment, you may not be able to perform your job due to the illness and lose your income. Severe Illness Cover therefore will enable you to carry the medical expenses and perhaps even help prolong your life. A serious Illness could have a serious impact on your income and leave your family unable to pay the medical bills. No one can be without Dread Disease cover; the expenses could cause you to lose everything, leaving your family destitute.
10. Investing
Saving is good for creating an emergency fund in the short term, but saving is not the most effective plan for future income. On fixed deposit banking accounts, after costs you may only earn a return of approximately 2.9% An investment such as a good Unit Trust or even an Endowment linked to a good fund such as the Allan Gray Balanced fund or Coronation Top 20 fund is sure to bring you higher returns.
11. An Up-to-Date Will
70% of people die without a will. This is an astounding statistic. If you die without a Will, the state will decide how your assets are distributed. Estate planning is critical for your family. All assets, including life insurance, your investments, your home and everything of value must be included in your will. Your Will determines the future of your spouse and your children. Estate planning is for everyone, not just the wealthy. Don't leave it too late, do it now! Your Financial Planner is able to assist you with a will or direct you to the right lawyer.
In Conclusion
The above points, I believe are essential, they are however certainly not the final word on Financial Planning. Effective Financial Planning is partnering with a good Financial Planner, together you analyze your financial situation, on a long term basis you create a Life Plan which holistically encompasses and plans for the financial success of your entire life. Beginning now, to retirement and for your spouse and children after you have gone.
If you require medical attention, you seek out a doctor, legal advice requires a good lawyer, yet so many people never seek out professional financial advice with the attention of a Financial Planner. A Registered Financial Planner will address your concerns and help you create a Life Plan for both you and your family's financial well being.
Some of the areas a Financial Planner will assist you in:
Minimizing the Risk for you and your family
Debt Elimination
How much you will need for retirement
Planning for your children's education, and the best ways to fund it
Investment Advice - for Short, Medium and Long Term investments
Wills and Estate Planning
Deon Silva is a Financial Planning Expert in Johannesburg, South Africa.
Do you have a Life Plan? Do you have anyone in your life to assist you with your Life Plan?
An holistic view of financial planning includes the areas of Wealth Protection, Wealth Planning and creating your very own unique Road Map for your secure financial future. To find out more about Life Planning visit here Financial Planning.