Why We Hate Salespeople "Financing, et al..."

More info to help you get a better deal with less hassle...

Published on April 3, 2004 By Sean Conners aka SConn1 In Consumer Issues

When considering financing, is it smarter to go with the dealer? Is it smarter to get your own? Pay cash? Lease? All of these questions come up when financing a car. A little understanding of the process may make the process a little less frustrating and help you get the best terms for you.

When the dealer quotes payments, it's usually at a "generic" interest rate. The rate will usually be a tier 1 rate, with about 2 points or so added for the dealer. They do this for a few reasons, and they aren't all so sinister. This will give them a little flexibility to work something into your budget. Despite what you think, the salesperson does want you to like what you are getting and paying and so forth. Remember, his job long term is based on referrals from people like you who feel they were treated right.

The bigger reason, however, is that they want to maximize the profit. Remember, the salesperson didn't give you the rate, the manager did. Where the salesperson is trying to make you happy and bring them more business, the sales manager is trying to figure out how to maximize each sale's profit. But not only to increase his own paycheck, but to cover his butt when cars lose money. And yes, cars do lose money sometimes. And it's not always because it's a lousy car. I've seen dealer's take "hits" on cars for thousands just because for whatever reason, the car didn't sell.

I once saw a 1 year old Ram pickup, set up nicely, with low miles, a long warranty and a clean history sit on a lot for almost 6 months. And this was a high traffic lot that specialized in Dodge trucks. The dealer ended up losing about 3000 just to get rid of it. The person who was lucky enough to find it and buy it literally stole it.

What does that mean to you? Probably nothing, exept maybe a little shock about a car dealer losing money on a car. We all assume every car is 99% profit for the dealer. It isn't. Sometimes a dealer hits a home run on a car and makes 5 grand. Mostof the time, he doesn't. To analogize, it's like when you hear strippers brag about making 500 a night. That means they made 500 on 1 unique night, or know someone who did. Most strippers don't get rich from lapdances. There are many more 8 dollar nights than 500 dollar ones. The same is true for car dealers. there are many more skinny deals where a dealer might gross 1000-1500 than those 5000 dollar home runs.

Again, what does this mean to you? again, not much, but understanding that let's you see it's not all about "ripping you off." It's a business, and like in every business, they try to be as profitable as possible. They have good days and bad. The yhave high margin sales and ones where they are trying to stop a loss. But all the while, the salesman who is quoting you these numbers is the object of your frustration.

If you took my advice in the 1st segment of this series, you would have gotten his manager involved already. This probably wouldn't get you a lower initial quote. Just like with the trade, they are going to feel out "how much they can get away with." If, when the manager initially met you, he felt you were a good credit customer, he would probably quote you a competitive rate, but not too competitive like I showed above. If he sees you as a so-so customer, he will hit you with a padded tier 2 or 3 level rate. If you seem like a "rat" to him or her, a term they reserve for people with low credit scores, They will quote you as high as the law allows in some cases.

If the manager has already been introduced to you, he may come over and give you the numbers themself. But probably not. Remember, the manager sees getting out of his chair as the equivalent of costing him money. He knows being face to face with the customer will result in concessions like higher trade numbers and lower rates.

By whatever means possible, at this point, after being quoted the "good for the dealership's long term health" numbers, get back to being face to face with the manager. If you have great credit, tell him so. Be blunt. Explain to him that you can borrow money from anyone and if the dealership wants another notch for the month, that you wnat the money at retention. Retention is a term he will know and understand. It means the rate the bank is lending the dealership the money for. The dealer's "buy rate" as it's commonly referred to. Insist on seeing the faxed approval with the rate. Or if it's all computer, the screen or a print out of the screen showing the buy rate.

And don't feel bad for the dealer. Your tier 1 financing contract earns the Finance manager a nice little spiff. Usually between 150 and 250 bucks. If you would have signed at the "asking price" they would have also netted a kickback on the points above the buy rate. Banks usually limit this to 3 or less points, and dealers like to get every bit of it if they can. Getting the signature at this kind of rate would net the managers a few hundred more bucks. If your credit is excellent, let them hit their homerun somewhere else.

If you are a mid level customer, shopping around might do you better. tThe dealership will most likely be forced to put you in a mid tier which usually means a high single digit rate these days or a low dowuble digit one on a used car. Keep in mind, unless there is a special waiver from the bank, they cannot just give you a rate that you don't qualify for. Many times a credit union or an online lender will lend you the money at a better rate. Finance managers hate this, as this equates to a "cash deal" to them meaning no spiff from the bank since it isn't one of their lenders. In other words, unless the dealer is paying a salary or a flat fee to process each contract, the Finance manager gets nothing, unless you buy a warranty, which we will discuss in another segment. Many times also, some online lenders charge a fee to process the transaction. Usually, the dealership eats that fee. These types of transactions hurt an F&I guy's job stability.

If your credit is bad, pay cash. That sounds harsh, but the fact is that borrowing is just not a good move when the interest rate is 24%. And the dealer is usually doing this at retention to get a payment to a level that you feel is doable. If you can get a qualified co signer (meaning someone with excellent credit and a long credit history, not your boy who has a $500 limit secured mastercard) do so. But odds are no one will lend you money at this point. People don't get bad credit ratings because they pay their bills on time or at all. And paying 1 bill to Household Finance while you burn everyone else does not give you "good credit with them." Burning 1 creditor is the same as burning em all essentially.

People with bad credit should especially be wary of putting applications in all over town thinking "someone will bite." Truth is, everyone will see everyone else's inquiry along with your poor score and deny you a loan. If you are forced into borrowing at a high rate, find a car that you can afford. Do everything humanly possible to come up with at least 1000 bucks for a down payment. You need to be able to show lenders that you can come up with money to get an approval at all. At the very least, you should have enough down payment in cash to cover a month's payment and insurance. If you can't do that, then why would someone lend you money when they know you can't come up with the payments now? Don't work out payments at 3.9% if you know you will be paying 19.5%. That way you will have a reasonable expectation of what you can afford.

Also, don't try to finance an 8 year old, high mile car for 5 years. Banks don't do long term loans to bad risks on worthless assets. To finance a car for 5 years, it will need to be under 5 years old generally, and have under 60,000 miles. there are exceptions, but on the whole, only look at cars that hit these parameters. You probably won't get to finance that hot Mustang 5.0 for 200 a month but you may find an economical Neon or Focus that will meet your needs while you rebuild your credit.

Let's review. If you are a good credit customer, know that you get whatever the best is out there. Insist on it from the dealer. And on that note, if they are a 1/2 point or some small amount away from what you feel is the best rate or the retention rate, let it go. Odds are your time is more valuable than the money saved. Think of it as a tip, like you'd give a waiter for a really great dining experience. Especially if you feel you have been treated well and with respect in general. And most dealerships should do that, or at least convincingly appear to do that. If you feel you can do significantly better, shop around. But making clear your knowledge of your own credit should help out to avoid that hassle.

If you are a mid level customer, shop around. And the fact is, more people fall into this and the next category than care to admit it. Before going to dealers, check out your credit union and online sources. Also, look for occasional specials that give tier 2 and rarely tier 3 customers a tier 1 type rate.

If you are a bad credit customer, unfortunately, the world is not your oyster. You will pretty much have to take whatever you can get. Being smart about the decisions and having some down payment money will help tho.Also, in some cases, online sources and credit unions can help too. But before you start sending out credit applications, find a car that you can live with and afford. And don't set your expectations too high, as that will only lead to dissapointment or getting ripped off.

Also, you are always better off going with a bank to establish credit. Some credit unions don't pay to report deliquencies, which may sound good if you plan on burning them, but if you are trying to re-establish credit, it will do nothing for you. Simply asking if they report will find this out from the union.

Also, 0% and "buy down rate" deals are sometimes good, sometimes bad. Always compare and ask for side by side numbers comparing the rebate with the 0% or buy down option. It will be easier to tell which option is better. It will be the one with the lower numbers.

Keep in mind, that the salesperson is trying to make your experience a good one where you will refer more business to him. The sales manager is trying to maximize the profit. We will cover how they each make their money in future segments. For now, just know that whatever kickbacks are coming into anyone's posession, it primarily won't be in the salesman's pocket. That is why getting the manager face to face will speed up and help the process of cutting thru negotiations and getting the rate you deserve with less hassle. This conflict of interests between the salesperson and the manager are not your concern. But they are the cause of your frustration more often than not. Bringing in the manager and working face to face withthem will eliminate alot of hassle.

There is an old strategy in negotiations. Customers use it all the time. It's the "keep the decision maker at a distance" strategy. That's how husbands get out of dealerships without buying. Just claim they have to talk to their wife and claim she is unreachable at the present time. Of course, dealers will always offer anything to get that person in the process. They will offer their phone for you to call. Sometimes they will offer to let you take the car to them at work, or even overnight.

The latter technique is called "puppy-dogging." What puppy-dogging entails is the psycological influence actually having the car in your posession like you own it does. The theory goes that once you park it in your driveway or are experiencing it with your spouse outside of the sales world (there is no one standing over you and the product sells itself) that you will not want to give it up.

And it works. It works for dealers but some are still sometimes hesitant to do this. That is because of liability and the potential cost of a wrecked car in their ownership. More than a few cars have been stolen this way too. And while they will be insured, the deductables will be high and come straight off of the manager's balance sheet. Along with higher premiums in the future. But if they have good info on you and your credit is good, they will usually take the chance because 90% of the time, it is a sale.

But in sending the salesperson in with the news and keeping the manager away, they retain a certain control and ability to be cold. By bringing in the manager as early as possible and often as possible, you can cut thru some of the coldness and get to your best price much quicker. Going back to the negotiating technique, it is keeping the real decision maker, the manager, out of the direct process. The same way the customer keeps their spouse away to avoid commitments.

Having the manager be face to face changes the conversion from asking someone to ask someone else if something can be done to bringing right to the decision maker tight there. And never let a sales manager play dumb or powerless with you. Owners give full power to theirmanager short of returning a car or something extremely major like that. They have full power to authorize most things you would want. A new car sales manager can authorize a rate. The F&I manager is not the only one. In fact, most new and used car sales managers were promoted from F&I and more often than not have the skills to process the papaerwork if they weren't so lazy.

Next time we will look at negotiating smarter...not harder.

Stay tuned...

For more inside info into the world of sales,,,go here and check out more of my "Why We Hate Salespeople" series....

Link

Comments

whosyurdaddy0417

on Apr 03, 2004

You and I are going to be friends. I am the sales manager of an auto auction. Do we have shit in common or what?

Hellion

on Apr 03, 2004

Argh! Whoever got that truck did not "Literally steal it." If they had literally stolen it, it would mean they snuck in there and made off with the truck without paying anything, and are now wanted by the police for grand theft. I hate it when "literally" is misused like that.

Otherwise, great series!

Sean Conners aka SConn1

on Apr 03, 2004

lol daddy,,,i hope you are enjoying my thoughts on the subject,,,these are all still a little fough, but i am trying to organize some of this,,,i see alot of bad and impractical advice out there.

Sean Conners aka SConn1

on Apr 03, 2004

thanks for the comments hellion,,,literally was hyperbolic, yes,,,sorry to offend ya, but in my mind, it was stolen..it may not have been a 15000 theft of the whole truck, but it was a 3000 theft, if ya know what i mean.

again, thanks for the comments:)

i will think harder before using that term again, lol:)

take care:)

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