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.
Terpaksa Mengemis Sebab Perasan Diri "Terlalu Cantik Untuk Berkerja"
Fire Truck Financing - How to Protect Yourself From the Manufacturer's Bad Financial Situation
Do you know how to protect yourself from a financial problem with your fire truck manufacturer?
There has been lots of bad news for the fire apparatus manufacturers lately. One large manufacturer went bankrupt and closed its main factory. Another was sold for pennies on the dollar. The largest has its credit rating downgraded further into "junk bond" status. Several smaller manufacturers have just vanished - with the horror story of departments who pre-paid hundreds of thousand of dollars left behind with nothing to show.
With the economy today is such shaky condition, it's unlikely that that the fire apparatus manufacturers will turn around quickly.
So, what can you do to protect yourself from a financial disaster with your manufacturer?
Here are the basic steps to protect yourself when making this large financial and important purchase.
Be prepared that, no matter what, you can lose money if your manufacturer fails during construction of your new truck.
Analyze deeply before you pre-pay for a truck or chassis prior to delivery.
Analyze very deeply before you enter into a complicated financial transaction such as a trade-in or turn-in lease with a manufacturer.
Take firm and "bullet-proof" steps to protect your money.
We'll look at each of these in more detail below.
Be prepared that, no matter what, you can lose money if your manufacturer fails during construction of your new truck
If your manufacturer fails during construction of your truck, you will lose money. The reason is that you'll be forced to sign a contract a year or later than when you first selected and budgeted for the truck. Most certainly, the cost of the replacement truck will be much higher. Today, the average price of the average truck goes up about $18,000 each year. So, you may be forced to buy a replacement truck that is $18,000 or more higher.
If you paid for the chassis upon delivery and the manufacturer fails, you own the chassis and will have to negotiate with another manufacturer to build on that chassis. They will charge you more since those situations always have manufacturing problems. The new manufacturer will charge you more because building on someone else's chassis is always a hassle.
Your chances at losing money increase greatly if you enter into a complex financial transaction with the manufacturer. The following two points discuss what to do in these situations.
Analyze deeply before you pre-pay for a truck or chassis prior to delivery
When you give money to a manufacturer before you take delivery of your truck, you are lending money to the manufacturer. No matter what you call it. You are giving them money with the promise they will give you something back later. That is what lending money is.
It's easy to get swayed by a discount worth tens of thousands of dollars. It seems simple and easy. You pay a lower price for the truck. But you must measure what you are giving up to get that discount. Is your money in a saving account? Or will you have to borrow money to pre-pay the truck? Either way, you are losing interest or paying interest to gain that discount. The formula is to understand if what you lose or pay is more or less than what you gain.
Second, if you pre-pay your truck and your manufacturer fails (such as files bankruptcy), you become a General Unsecured Creditor in the bankruptcy. That is the last person to get paid. So, you must measure your risk and your tolerance for that risk. That's a fancy way of saying "How much money am I willing to lose?"
The key here is to understand exactly what is the worse that can happen and then if you can afford the worse.
Analyze very deeply before you enter into a complicated financial transaction such as a trade-in or turn-in lease with a manufacturer
The popular trade-in or turn-in lease is a very complicated financial transaction with lots of fine print and clauses that can cost you a ton of money if you don't understand them. These risks can be even higher if the manufacturer you are contracting with is on shaky financial ground.
The key question is "What happens if the manufacturer is not around in 5 or 7 years to trade my truck back?". There are several other questions to ask:
What are my options if I can't turn my truck back?
How much must I pay if I want the truck?
Who will I negotiate with at the end of the lease term?
When you enter into a contract like this, you are getting more financially intertwined with the manufacturer than just buying the truck and depending on them for warranty and service. Your use and ownership of the truck can be thrust into bankruptcy if the manufacturer fails.
Take firm and "bullet-proof" steps to protect your money
The best way to protect yourself is to require the manufacturer to bond the contract and their performance. All financially solvent manufacturers should be able to provide bonds to cover your financial risk in doing business with them.
If you want to know how one manufacturer financially stacks up against another, request each manufacturer's performance bond costs. The higher the cost, the higher the risk.
The manufacturer will charge you, whether you see the specific charge or not, for this bonding. This is a small cost to prevent a large financial problem later on. It's always easy to know that you needed more insurance after the fire. The key is to properly protect yourself before the tragedy happens.
Also, unless you can shoulder a higher cost for another manufacturer to build your replacement truck, get a bond amount that covers the replacement cost of the truck. That's because you'll be pricing a replacement truck a year or sometimes even later than when you first budgeted. The price will go up.
Or, if you paid for a chassis, make sure you get ownership information for the chassis. This document is called a Certificate of Origin (C of O) and is issued by the manufacturer of the chassis.. If you pay for the chassis, insist on receiving this very shortly after you pay. If the manufacturer gives you the C of O, that means they have paid their bills - in this case, the chassis manufacturer. You won't get in the middle of any payment disputes between the chassis builder and the manufacturer.
It also means that, in the bankruptcy, you have proof to show the bankruptcy court that you are the legal owner of the chassis and you won't have a complex legal fight to get the chassis you paid for.
In Summary
Don't let the current financial environment scare you into delaying an important apparatus purchase for your department. If you understand what risks you are potentially taking and taking active steps to protect yourself, you should navigate these financial rapids without undue risk or stress.
Stay safe! John Hill, Apparatus Budgeting Consultant