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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How to Manage Your Finances and Eventually Feel Financial Freedom
People often believe that in order to achieve financial freedom it is all about making more and more money. Once you have made some mysterious number instantly all will be better and you will; have all you ever wanted and everything will be right with the world. Unfortunately just making more money isn't enough to truly become financial freedom. Financial freedom is about more than income, it is about changing how you think about money and more importantly, how you manage your money.
What I am going to share with you I learned from T Harv Eker, Author of the New York Times Bestselling book "Secrets of the Millionaire Mind." I say this because it is important that I give credit to where the wisdom comes from. Although I have tweaked this slightly to work for me, the basic concepts are thanks to him.
I am a firm believe that it is important that we look and at understand more than just how to make money. We have to know how to manage that money in order to be successful. The effective money management system that works for me and has worked for thousands of others is called the jar system, and it is a simple tool to implement. What you need are six jars (or even easier, one checking account and 5 savings accounts at the same bank). Once these 6 accounts have been set up you will divide your income into these six categories every time new money comes in, and you will only use these monies in the manner the account allows.
Account #1: Necessities (50% of income)
You will take 50% of all of your income and place it into this account. This account covers exactly what it says, your necessities. This would covers such expenses as rent/mortgage, car payments, insurance, food, etc. These are the monthly expenses you have to pay.
I recognize that currently you may have necessary expenses that exceed 50% of your income on a monthly basis. This is ok, the idea is to eventually get down to the 50% amount and keep it at that way. In order to get down to the 50% you have two choices, to make more income or to simplify.
Often simplifying is the most overlooked and easiest answer. Look at your monthly expenses and look for things that you consider needed but really is not. Some of the best examples are cable (do you NEED cable or do you just LIKE tv), eating out (do you eat out often and can you save money by cooking at home more? This can both save money and improve home life), etc. Be honest with yourself and look for those expenses that you like but you do not HAVE to have.
Account #2: Financial Freedom (10% of income)
This is the single most important account, and often can be the toughest account to create and maintain. This is 10% of your income and you can never touch or spend this money. This is the money you are putting aside for your long term financial freedom. This is the money that can only be used to create more income, but the key here is that it can only be used to create PASSIVE income. Eventually you want to replace all of your income with passive income, income that comes in whether you work or not. If you do not understand what passive income is, then just leave this money in this account and do NOT touch it until you understand passive income. This money is investment in your long term financial freedom, so guard it very carefully.
Account #3: Education (10% of income)
This is the second most important account next to your financial freedom account. If you are not learning you are dying, so keep growing and becoming better by investing in your education. Once we start working hard on education we get addicted to the learning and growth and want to do more and more and more of it. This is why this account exists, it honors and funds your learning, but also helps to give you guidance on how much you are allowed to use for your growth.
So make sure you are getting consistent education, just make cure you have it under control when you are doing it. This can be doing personal development courses, or learning new ways to invest money, to make your financial freedom account grow, etc. These courses should be anything that helps you become a better person and helps to move your towards financial freedom.
Account #4: Long Term Savings for Spending (10% of your income)
Sometimes we have a larger priced item that we want to get, like a new flat screen tv, a new car, etc. Instead of just running out, buying it with a credit card, and spending a lot of time paying off these larger ticket items, this account exists. You put money into this account and let it grow over time until you can pay for that larger ticket item. If you want to take the family to Disney for a week, you need to figure out how much that will cost and then put the money aside for this into the account. Once you have enough money in this account to cover the full cost of the trip, then you can go on the trip. Often these large ticket items are what kill our budget and this account helps us learn to be more responsible.
Account #5: Give (10% of your income)
For Christians this will make sense as the tithing account. It is the idea that in order to learn to receive great wealth and financial freedom we must remember that we are not alone here and that we must always be giving back to others. All giving and all receiving requires two people and we must become skilled at both sides of that duality. The Universe/God/Spirit (whatever your term for it) wants to give us everything we desire but only after we have proven we can be both a good receiver and an excellent giver. So take 10% of your income and always give it to those who have less than you, those in need. A good habit to get into at the very least.
Account #6: Play (10% of your income)
I kept this account for last because I believe it is be the most important one to get good at and also know it is the most counter intuitive account. This account is 10% of your income and you MUST blow this money every month on something you would not spend money on usually. This is the money to spoil yourself and do the thing you think you cannot do because you "cannot afford it". This is the account to be used on the limo to and from the airport, or on the fancy dinner at the best restaurant in town, or ordering a bottle of wine without looking at the prices etc. This is the account to train you to think and act like a millionaire. I know it seems counter intuitive to blow 10% of your money on things that may seem frivolous, but trust me, if you get this part of the jar system down, it will change your life.
I have known people who have signed recording contracts because they spent their play jar on a first class ticket which led to them sitting next to a producer, etc. This is common place for people who use their play jar to dine out at a fine restaurant and get seated next to a major player in their city who was looking to fund the exact project they were looking for funding on. Honor the power of this jar and it will pay you back many fold.
Now I understand that not everyone is in the place to do this program exactly as outlined here. You finances may require you to spend 85% of your income on necessities right now. That is fine, make sure you are getting your bills paid, but also look for ways to simplify to get that percentage down. While you are doing that, divide the extra 15% evenly between the other 5 jars and start managing your money this way. As the necessities percentage continues to get closer to 50% increase the amounts into the other jars until you can match the percentages here. Implementing this simple money management system you will start to feel financially free.
Sean is an internet entrepreneur who specializes in helping people to identify their passion and find a way to turn that passion into a monetized website that makes sustainable passive income.