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Looks like the Cash for Clunkers band-aide didn’t work. The sales dropped after August. Now the manufactures are left wondering what to do. Did they learn how to run their business after the bailouts. Read this article to find out. After weak month Manufactures plan ad blitz Penske deal falls through. Saturn will be know more The industry is in a turmoil. Expect more to come. The deals are going to be harder to come by, with this in mind the need for a professional negotiator escalates. April Braswell brought up paying cash for a vehicle today. Lets look into that a little. Remember I am a car guy not a financial advisor, so this is just my opinion. Every situation is different. Paying cash for a used car can lead to the lowest overall cost, but keep these factors in mind.
Now a new car is total different. You would want to do a one pay lease. Imagine you have the following factors. Cadillac Escalade Purchase or Lease Price of $50,000 Residual Value of $25,000 making your depreciation $25,000 also The value of the vehicle right now at 3 years with 45,000 miles is about $18,000. Rate of retun on your investments is 6% You purchase the vehicle after 3 years you have $50,000 less the value of $18,000 which equals $32,000. You paid cash and you were at the mercy of the market. You leased the vehicle and your depreciation is $25,000 ($50,000 less the $25,000), you are already ahead $7000. Plus you had the other $25,000 earning 6% in your investments. Like I mentioned earlier, lease depreciating assets. In the last few years it was common for people to get a home equity loan to buy a car. All they cared about was writing off interest and their bankers said it was a great financial decision. I wonder how all those people feel now with lower home values, and there equity gone. I know the car business was huge in the Phoenix Metro area because of the housing market and home equity loans. Now the business is dead, and people are losing homes. Why tie up a depreciating asset with what should be an appreciating asset, defeats the purpose doesn’t it? “What is my interest rate?” That is a question are here all the time in car sales. To me it is a great question, meaning everything else in the deal must be fine. Used cars is where the question comes up most with all the incentivized rate on new cars. Let’s take a look and explain the situation on the dealer and consumer side of financing a car. Where does the interest rate come from? It comes from the lending instituion. Now let me clarify that statement. The dealer sends in a deal to the bank. The bank looks at the structure of the deal and sends back the “buy rate” to the dealer. The dealer can use the “buy rate” and get a flat fee for handling the paperwork, or mark up the rate. Flat fees depend on the total amount financed. A flat rate can be $100 up to $400 in some cases. Every bank has a different structure for this. The dealer has the option of not giving you the “buy rate” and marking the rate up 1%, 2% or maybe even 2.5% depending on the lending instituion and term of the contract. That mark up, or at least part of it is, is profit for the dealer called finance reserve. It is not uncommon to see finance reserve ranging from $500 to $2000. The higher the amount financed, the longer the term, and the larger the markup, the more the dealer profits with finance reserve. I understand finance reserve is profit for the dealer, and I do agree that the dealer is entitled to a flat fee for doing paperwork, but to make $1000 to $2000 for doing something so simple is ridiculous. What does a higher rate do for the customer? Absolutely nothing, there is no benefit. I believe in selling items to people that will benefit them. Higher rate mean payments are higher, takes longer to getting into an equity situation, and it ads no value. I would much rather see a customer put something of value, like a service agreement, and have a higher payment rather than having a high payment and getting nothing for it. A high percentage of consumers think you can give them a rate without getting any info from them. Not possible, you have to qualify. What kind of things determine an interest rate?
As you can see there are a lot of things to consider when getting a rate on your car. I will leave you with quick story about myself financing a vehicle. My wife and I were purchasing a used Expedition, and I wanted to keep within a certain budget. Being in the car business, I new there were some parameters for the year of vehicle and I could probably only finance for 48 months. I needed 60 months to make it work for me. I went to my bank and spoke with a lady and told her the situation. She wouldn’t give me the 60 months. I explained to her that I understood her parameters, but what if I gave her another point of interest to cover the risk so I could finance it an additional 12 months. She didn’t know what to say. She called one of the VP’s. He came down, and gave me a blank look. I told him all I was doing was negotiating term. I get the term I need they get a little more money and we are both happy, or I walk away and nobody gets what they want. The VP stood speechless for a few minutes, shook his head, and then gave me the extra 12 months at the original rate. My point is Interest Rates are negotiable, but I have even a better way for you to get the buy rate, and not have to negotiate it at all. A way to get buy rate and save you some money. You go to a dealership and look at a used vehicle and you wonder if you got a great deal or not. Does the dealership’s General Ledger Balance (GL Balance) mean anything to you the consumer? Let’s look at a scenario and let you decide for yourself, but first we need to setup what we are looking at. I am the dealer and I purchase a pickup for $18,000 at the auction. I need to consider the following cost to get the true cost of the vehicle, these will be estimates: • Buyer’s fee at the auction $ 250 • Transportation to the dealership $ 200 • Mechanical reconditioning $1200 • Wash, vac, shampoo, buff $ 150 We now have a GL Balance of $19,800. Let’s assume the vehicle has been on the dealership’ lot for 60 days, and for simplicity sake there are not any weird economic conditions to devaluate the vehicle. At 60 days, because of holding costs or finance costs, the dealer wants to sale the vehicle without taking it to the auction. Just like for the consumer, cars depreciate on the lot. A dealership would rather gain a customer than wholesale the vehicle at the auction to one of their competitors. The dealer looks at MMR, Manheim Market Report, to compare his vehicle to other like vehicles being sold through Manheim, the largest vehicle auction. He finds the vehicle is only worth $16,500. The dealer owns the vehicle for $19,800. What is it worth? It is worth $16,500. The dealer invested $16,500, but for some reason the vehicle is not selling, so it is time to cut his losses, and reinvest in another vehicle. What the dealer has in the vehicle has no bearing what the vehicle is valued at. You see cars are just like stocks. Imagine you invest money in a stock. You purchase 1000 shares at $25 per share today. Now 60 days later the stock drops in value. $18 a share is the price at 60 days. Is the value of the stock $25, the price you paid for it, or is it worth $18? Does that make sense? I will say it again, cars are just like stocks. As a consumer the only way you can negotiate this scenario correctly is to have the correct information. With the correct information you can negotiate with confidence, not pulling a number out of the air. Your “blue books” will be showing you info from about 60 days before so it is worthless in the evaluation. Soing it your self, you will pay less than the KBB retail; give the dealer a nice profit, costing yourself $3,000 maybe for $4000. That is a huge price to pay for not investing in the right information or hiring the right negotiator, wouldn’t you agree? So you know a couple of things, because you asked the right questions. You know how many days the vehicle has been in the dealers stock. You also know what MMR is because you had a professional appraiser evaluate your vehicle for you. With those two things you know the dealer is ready to take the vehicle to auction or sell it for a loss and gain a customer, a great time to take advantage of a great deal. Like a poker hand you know the hole cards. How easy is it to win if you know your opponents cards? With this simple scenario, and the use of valuable negotiation word tracks you are a winner. Don’t fall for the, “I own it for $19,800, and I can’t sell it for what I own it for.” A good business decision for the dealer just might be them selling it for $16,500. Remember they have to ship it back to the auction and pay seller’s fees, which could cost a total of $500. The dealer saved himself another $500 by selling it to you at the $16,500 instead of at the auction. I see another negotiation tactic there to get him to sell it to you for $16,000, hmm. Negotiate from the true value not the GL Balance, or KBB to get the great deal. A few of you have asked how much a professional car negotiator would cost? I will ask you what is the value to you? So please help me by taking this short survey below. Thank you. |
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