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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Three Ways To Finance Your College Education You are your own most valuable asset, and your education is the greatest investment you will ever make. But how will you pay for it? Based on statistics provided by the U.S. Department of Education, the average total cost of college attendance is about $15,014 per year for four-year public schools and $32,790 per year for private not-for-profit colleges. With the total cost of a four-year education ranging between $60,000 and $131,000, and with tuitions only expected to rise, planning for these expenses is more important than ever. As with any long-term savings plan, the best strategy is to start early and save often. Parents and students should consider all of the options available as part of the planning process. First on the list should be college savings or prepaid tuition plans, often referred to as Section 529 plans. If these savings aren't enough by the time the first college bill comes due, students should consider applying for various grants and scholarships. Taking out student loans should be the last option if there is still a shortfall. While it is ideal for the costs of college to be covered entirely by savings, and not financed by debt, families may find that the best plan for them is a combination of these methods. Section 529 Plans There are two types of Section 529 plans: prepaid tuition plans and college savings plans. In general, prepaid tuition plans enable parents to pay for future tuition costs at today's rates. When selecting a plan, however, parents should be aware that "today's rates" include an implied increase in college tuition expenses, resulting in payments that are higher than the current tuition costs in any given year. The advantage of this type of plan is that parents are guaranteed that a child's tuition expenses will be fully covered. And if their child decides not to attend college, parents can get a refund of their plan contributions. Prepaid tuition plans do have some drawbacks. Since they are "safer" investments, assets in the accounts are not expected to grow at the same rate they would if they were invested in a diversified portfolio. Also, if the sponsoring state of the prepaid plan can no longer afford to pay the promised tuition costs, parents may find themselves stuck with the bill after all. As an alternative, parents may want to strongly consider Section 529 college savings plans, which add a degree of flexibility and control. College savings plans allow individuals to contribute to an investment account, in which assets grow tax-free, for the purpose of paying the beneficiary's college expenses. When the beneficiary attends college, he or she can use the account to pay for tuition and fees, books, supplies, and room and board. Unlike prepaid plans, parents retain full control over the assets in the accounts, enabling them to select the right investment options for their financial goals. The accounts are also more flexible than prepaid plans, in that the account's beneficiary can easily be changed as long as the new beneficiary is a family member. This makes the accounts ideal for parents with multiple children. In many states, taxpayers may also receive a state tax deduction for contributions made to the account. When choosing a college savings plan, individuals should consider the associated expenses and the investment options available, and determine whether the plan fits their financial goals. Since the expenses are deducted from investment returns, it is important to minimize these costs. The plan should also offer flexible mutual fund investment options that will enable the account owner to broadly diversify across asset classes and geographic regions. The College Savings Plan Network website allows parents and plan sponsors to compare and contrast various college savings plans. Scholarships and Grants In cases where a Section 529 prepaid or college savings plan does not cover the full cost of a child's education expenses, or when a family's financial situation does not permit establishing these types of accounts, students may apply for federal grants and scholarships. The government offers a variety of aid for eligible students who fit certain criteria. The criteria can be based on a student's financial need, selected major, ethnicity or gender, among other factors. The most popular grant is the federal Pell Grant, which offers students a maximum of $5,500 per year based on financial need. Hundreds of private organizations and institutions offer scholarships. Students and their families can also search for local companies, schools or other organizations that offer scholarships. Students should generally use grants and scholarships to supplement existing financial plans for their secondary educations, as it is rare that these will cover significant portions of their expenses. Student Loans Student loans are the most widely used resource to fund higher educations. In 2011, outstanding student loans reached $1 trillion in the United States, and students borrowed $117 billion from the federal government during the year. Currently, the government offers three types of loans to individuals pursuing higher educations: Federal Perkins Loans, Direct Stafford Loans and Direct PLUS Loans. The Federal Perkins Loan is offered to undergraduate and graduate students based on their financial need. Students can receive $100 to $4,000 per year, and the loans have an annual interest rate of 5 percent, which begins to accumulate nine months after the students graduate. Direct Stafford Loans can be subsidized or unsubsidized. Eligibility for the subsidized Stafford Loan is based on financial need, which is not required for the unsubsidized version. Subsidized Stafford Loans charge undergraduates an annual interest rate of 3.4 percent, starting six months after graduation. Graduate students are permitted the same six-month grace period, but pay a 6.8 percent annual interest rate. Interest on the unsubsidized loans starts to accrue after the loan is first paid out, at a rate of 6.8 percent. The maximum amount dependent students can receive for Stafford Loans over four years is $31,000, with no more than $23,000 from the subsidized loans. There has been some controversy involving the subsidized version of Direct Stafford Loans. As this issue went to press the lower interest rate of 3.4 percent was set to expire and revert to 6.8 percent on July 1 of this year, meaning that students receiving subsidized Stafford Loans will have additional interest to pay after they graduate. While Congress may extend the lower rate, parents and students should conservatively assume that they will pay the higher one starting this fall. Parents or graduate students can apply for a federal Direct PLUS Loan. These loans have an annual interest rate of 7.8 percent, which starts to accrue as of the first distribution. Graduate students and parents can expect to receive support from these loans equal to the cost of tuition, less any financial aid already provided. For students who do not qualify for federal loans, private lenders provide an assortment of options. Private loans are becoming increasingly popular as a result of growing demand for secondary education over the last decade. Private loan interest rates are usually quoted as LIBOR (a benchmark short-term interest rate) plus a percentage. The best have interest rates of LIBOR plus 2 percent, and will usually require a creditworthy cosigner. Other loans can charge rates upward of LIBOR plus 9 percent. In general, the terms for private loans will not be available to review until after students submit their applications. The total amount of the loans and their rates can vary highly between applicants, depending on their financial situations. Loan applicants should also be aware of the fees banks charge for the loans, which can dramatically increase the total costs. As a rule of thumb, students should exhaust all of their federal loan options before applying for a private loan. From a financial planning perspective, taking on significant debt to finance a college education is not always wise. It's important to assess the future earnings potential students expect the education to provide. When considering schools with above-average costs, students should think about what income they expect to earn after graduation, based on their majors and career plans, as well as the quality of their degrees. Students should consider whether that income will be sufficient to satisfy the payments on the loan without overly hindering other financial goals, such as buying a house or car, or starting a family. There is no one-size-fits-all solution, so parents and students should carefully consider the options to pay for college. Section 529 college savings plans are often the best, but not all families have the ability to save enough to fully cover the growing costs of college. As with any financial goal, however, the longer your time for saving, the more successful you will be in meeting it.




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