Thursday, July 10, 2008

"Do I need Gap insurance?"

On various occasions throughout my career, customers would tell me sometime after walking out of the F&I(Finance and Insurane) office that they refused to buy anything the bussiness manager offered them. I would ask them if they at least purchased GAP insurance, and they would tell me no, that their own insurance company covers that sort of thing. Most of the time this is not the case.
What gap insurance does is cover the "gap" between what your car is worth and the amount of money owed to the finance company. If your vehicle is destroyed in an accident, most times your auto insurance company will pay you the "fair market value" of your car. 90% of the time this is a lot less money than what is owed to the finance company. For instance, say your car is destroyed, and the insurance company says it is worth 10,000 dollars and the amout of your remaining payments equals 14000 dollars.without gap insurance you are responsible for paying the balance of 4000 dollars to the finance company. If you think this is unfair I would tend to agree with you, but it doesn't change the fact that the bank will still call you relentlessly wanting you to come up with the payment.

Gap insurance usually costs about 500 dollars, and if you are buying a new car or truck it is worth the investment. (Not so much on previously owned vehicles)

Thursday, June 26, 2008

"Should I Buy or Lease?"

When I sold cars the manufactuer I worked for was really pushing us to sell three year leases, and sent many different executives to train us how to do so. At first they failed miserably. While the lease itself was a good deal, there was a factor that could not be overcome in most cases.
In the late 90's leasing was all the rage. The idea was that by leasing a vehicle you could lower your payment to ridiculous amounts. It was good for the manufactuer because when a customer brought a car back after three years they had a chance to earn your bussiness again. Then the non-manufactuer banks got into leasing and that is when the trouble started.
Leasing was designed to not go over 4 years, and how it worked was like this. Say after 4 years you want to turn your vehicle back into the bank. The value of the vehicles were predetermined at the time of signing. This was called the lease end value. This value was taken off the price of the car and you just made payments on the difference. When the mainstream banks got in on the action, they decided to take leases out as long as 72 months. This made fro a ridiculously low payment for the customer, but the problem was that people usually don't keep their car for 72 months. So when they went to trade the car in after a few years, the payoff was remaining payments + the lease end value. This caused the customer to be in a very bad equity position, so most of the time they could not trade, effectivly taking them out of the market.
When the banks lost millions of dollars due to inflated lease end values, most of them got out of the leasing bussiness. That is when the manufactuer's banks decided to give leasing another go and do it right this time. The problem is by this time most of the customers had either had a bad experience with leasing or heard horror stories from someone who did. So when a lease would brought up to them, they clammed up and said "don't talk to me about a lease." Not wanting to lose a sale, the salesmen complied.
So now that the leasing problem has been fixed, and you think it might be beneficial to you, take with you these tips.

1. Be prepared with some money down. This will help with initial fees such as taxes and first payment.

2. BE prepared to keep the vehicle the length of the lease. If you don't you are going to be in a very bad equity situation.

3. Do not lease if you put more than 15k miles per year on the vehicle. Manufactuers charge anywhere for 10 to 15 cents per mile over the pre-set limit at the time of return.

4. Do not lease if you plan on keeping the vehicle over 5 years. Yes you have an option to buy at the end of the lease, but doing this can be the same as taking out an 8 year lone on the vehicle.

That is not all there is to know about leasing, but it gives you a good start. If you have any questions post them here and I will do my best to answer them.

Monday, June 23, 2008

"What can I do About Negative Equity?"

Negative equity happens when you owe more on your vehicle than what it is worth. During my career i would say about 90% percent of my customers with a trade had negative equity.
There are several things that cause negative equity.

1. Large Rebates at new purchase time.

There were several times I would have a customer want to trade a vehicle within 6 months of them buying it new. Sometimes, the trade was so new there was no listing in the books for a used car price, so how we appraised was to find an invoice on a like vehicle, look up what the rebates were at the time of purchase, then subtract the rebates from the invoice. Then we would take that number and subtract 3500-4000 dollars. So even if you got an invoice deal minus rebates, you are still probably in the bucket 4000k. The lower the rebate at the time of purchase, the more you are going to be upside down.

2. No money down at time of purchase

A lot of folks don't put money down, or just put the rebates down. This is fine if you don't have the cash on hand, but the more you finance on a car, the more negative equity you will have.

3. High supply and low demand for your type vehicle

Have you seen an influx of SUV's on used car lots lately? Because of high gas prices, a lot of people are trading for more fuel efficient cars. When the supply goes up and the demand goes down, the price must come down. Unfortunately for customers trading their vehicles, the value of their trades go down as well.

4. Wear and Tear

Cars are a depreciating asset. It doesn't matter if you buy one from the showroom floor, have it hauled to your garage, and not drive it the next three years. It will never be worth what you paid for it. (Well, in dollars it might, but if that happens then the dollar doesn't have the same value as when you purchased the car.)

OK, so now you know about what causes negative equity, you might be asking yourself what you can do about it.

1. Ride it out.

Most people don't like this option, but unless you absolutely hate your vehicle sometimes it is the most sensible one.

2. Put a large amount of money down.

A lot of folks can't afford to do this, but if you can it is the best way to get out of negative equity.

3. Buy a new car with huge rebates.

This works for a lot of folks, but he problem is rebates are put on cars by manufacturers to help them sell. If you are interested in a model that doesn't need a rebate to sell, then this option is not for you.

4. Buy a car on a short term lease program.

A lot of the manufacturers in house financing companies will buy a lot of negative equity on a short term lease, because if you lease a vehicle for three years, when you turn it in the negative equity is over. Leasing is the best way to avoid negative equity in the first place, so long as you keep the vehicle for the entire term of the lease. Unfortunately this does not work for folks who put a lot of miles on their vehicles.

I hope this helps, if you have any questions let me know.

Friday, June 20, 2008

"What's my Trade Worth?"

The biggest deal breaker in the car business is the value of the trade. Have you ever wondered why one dealer would give you one price and another would give a different price that could be thousands of dollars more or less?
Let me tell you a story from early in my career, it happened around August of the year 2000. A gentlman was interested in a used late model Ford Taurus that had been on the lot for awhile, and was advertised in our local paper for a rock bottom price of $8995. His trade vehicle was a 1989 Mercury Cougar that had 180,000 miles on it. There was only about $100 dollars profit left on the front end of the Taurus, and the customer had stated that if were to buy the vehicle he would pay cash. I had no choice but to show him actual trade value for the Cougar. The car was a bit rusty and the transmission was slipping a bit. Our used car manager was only willing to put $50 bucks in the vehicle. I showed him the numbers, and I told him that we were only willing to give him $50 bucks for his trade. He became very offended, and he told me that a rival dealership was giving him $2000 dollars for his Cougar, and that he would rather buy there. I asked him what they were selling their Taurus for, and he told me it was a little more. I asked him how much more, and he told me the price of the rival dealers Taurus was $12,995. I then explained to him about the trade difference. I asked him to imagine for a second that the other dealer was only giving him $50 dollars for his car and discounting their car $2000. That left the trade difference at $10,945. Our trade difference was $8,945 which was a 2000 dollar difference. I then explained to him that is what the other dealership was doing, taking $2000 from the Taurus they were selling and showing it to him in trade value. While our Taurus was originally 12,995 before the ad price, we had already discounted it $4000 and thus could not show him $2000 for the Cougar without raising our price $2000, which we were willing to do, but it would be kind of pointless because it was the same amount of money. He could understand what I was saying, but he was still a little aprehensive because he thought his car was worth more than that. I told him if it would make him feel any better, he could go home and call every dealership in the area and try to find a 1989 Cougar for sale for $2000 dollars. If he couldn't then he would know I was right. He came back in the next day and paid cash for our Taurus, and he became a valued repeat customer years later.

So how can you find out what your trade is really worth when dealerships play these kind of games with the numbers? It is very easy if you have online access. My favorite site to use is A common mistake customers make when using this site is putting in their auto information using "excellent" condition. Most dealers will not give you excellent condition, because lets face it, no matter how good of a condition your car is in, chances are it has miles on it. If it has miles on it, it is a used car, so expect to get good condition value for it unless it is rough. If you have a printer, it would help you to print the page and show it to your salesman when the time for negotiations come. I liked it when customers did this because it made things easier.

Thursday, June 19, 2008

"Will I get a better deal if I pay cash?"

Throughout my career I was asked this question at least once a week. I would always answer it in a non-direct way by saying something like "cash is good" or "we accept cash". The truth is paying cash may help you get a "better deal", but it probably is not going to affect the price of the vehicle in a positive way for you.
A huge part of the auto industry is what the call "back end money". You may have heard that term thrown around if you have ever wandered around a dealership. There are two parts of money a dealer makes on a car deal, the first one is "front end money", that is the money that is made on the markup of the car itself. Back end money is the money that is made in the finance office. Sometimes the back end can be the most profitable part of the deal for a dealer. Dealers most generally be paid "2 percent reserve" on the interest rate. This means that if a dealer signs you up at an 8 percent rate, the dealer is getting paid 2 percent from the bank. Does this mean the dealer could sign you up at a rate 2 percent lower? Yes! Exceptions to this would be "special interest rates" somtimes thrown out by the manufactuer. In these deals the dealer is usually paid a small flat fee from the manufactuers inhouse finance company. I once worked at an unscrupulous dealer who refused to sign up customers through Ford Motor Credit in order to maximize profits.
Things like extended warranties and gap insurance may be things you would like to have for your vehicle, but there is markup in them. You can save money by negotiating the price of everything you buy in the finance office.
So when you pay cash for an automobile, you don't pay an interest rate, and most of the time warranties and insurance aren't even pitched to you, so you pay less money overall for the vehicle. But if the dealer knows up front that you are paying cash, they will try to save as much profit as possible on the front end of the deal, which could result in you paying more for the price of the automobile then if you had financed. If you are paying cash for a vehicle, don't tell the dealer until you have negotiated the price on the vehicle.

Tuesday, June 17, 2008

What is "The Best Deal?"

Have you ever went into a dealership with a car already picked out and told the salesman to give you his "best deal", only to take it to another dealership and have it beat by a significant amount? Chances are, you paid too much. Everytime a customer made this demand of me, my sales manager would give me a deal with a good bit of money still in it. I have also been on the recieving end where a customer would come in with an offer from another dealership and I would make good money every single time.
If you really want the best deal, and you don't want to have to pack a lunch to the dealership to get it, I am going to use my 8 years experience to give you a little advice for free.
1. Make sure it's the car you want. If you get a rock bottome deal on a Ford Focus but you really wanted a Mustang GT, then what does it matter if you got a great deal on it? Keep in mind, the salesman wants you to be happy, but he also wants to maximize his profits. In order to do this he wants you to drive the car and get excited about it. When this happens, sometimes the emotions take over in the negotiating process, and you are leaving money on the table. I am not saying don't test drive, it is important to test drive. Just don't let the salesperson know how excited you are and don't let the excitement take over your good judgement.
2. Research. Chances are, if you have found this blog that is what you are doing right now. Know what the rebates are before you leave the house. Some dealerships do stunts like advertise $100 below invoice, $1000 below invoice and so on. This confuses the customer. Say you buy a car at $100 below invoice, but the rebate was 2k, and the rebate goes to the dealer. If the car only has $900 dollars mark up, the dealership just made $900 on your deal. A better deal would be invoice - rebate.
3. Negotiate price, not payments. If your salesperson comes down with a payment, send him back to get a price. Payments can have a ballooned interest rate, gap insurance, extended warranty and things of that nature loaded into them without being disclosed to you while you are at the salesman's desk. After you agree on a price (invoice minus rebate would be good), then ask what the payment is, and what all it includes. They have to disclose it to you.
That's all I have for you today, in the next few days I will be going over things like the finance office, interest rates, and dealer holdback so stay tuned!

Saturday, June 14, 2008

Hold the Fork for me!

As some of you may know, I have been in the automotive sales industry for 8 years. For the last year and a half, I have been working in what some dealerships would refer to as a "call center", a place where all the sales calls for the dealership are routed through. My responsibilities during that time included answering the phone and calling people who had either missed an appointment or inquired about a vehicle online. I took great pride in the performance of these duties, as I believed I was very good at what I did. I also enjoyed working in an office setting, and the friendships I had developed there.
On one occasion, my supervisor had to leave the room for a moment, and before he left he uttered the words "hold the fort for me while I am gone." All expressions have a story behind them. While some are lost to history, others are easily researchable. That is the case for this one. An article in the New York times, dated February 3 1882 tells the story. A Captain Judge Mckenzie of the union army during the civil war was dispatched by General Corse to take a dangerous mission to answer a message from General Sherman. The message the General had sent simply read, "Hold the Fort, I am coming." Corse's response was "I am short a cheekbone and one ear, but I can whip the hell out of them yet."
Being something of a class clown, when I had to leave the office later in the day to take care of some business in another building, I produced a plastic fork that was left over from my lunch and handed it to a co-worker. I told him to "Hold the fork while I am gone." In puzzled astonishment, he grabbed the fork and said "ok Eddie", and the other co-workers began to laugh. It became something of an inner office joke, whenever someone left the office they would pass along the fork.
There is a man who works at the dealership who you want to talk with only once, because if you talk with him twice more often than not a negative experience. Of course I am speaking of the human resources director. He is in charge of hiring people for the dealership, and he is in charge of letting people go. He is the Alpha and the Omega, the beginning and the end. To see him in your department usually meant that someone was going to be taking a permanent vacation very soon. Amongst ourselves In the office we jokingly referred to him as the Angel of Death.
A few days ago, there were three of us in the office, and we spied the Angel of Death speaking with the head honcho of our department. They were inside small office with glass doors. We knew then the Angel of Death was about to spread his wings, and someone was going to be leaving the company very soon. We were hoping the phone inside our office would not ring, but ring it did. With a small twinge of apprehension I picked up the receiver. I was not prepared for what I heard.
"Thank you for calling 1(company name), this is Ed speaking, how may I assist you?"
"I am looking for a Henway."
"What options and equipment are important to you on your next vehicle?"
"Do you have a Henway or not?"
"I am sorry sir, what exactly is a Henway?"
"About three pounds." At this point, I realized it was the head honcho, who was speaking with the Angel of Death. "Is Don there?"
"Yes he is, would you like to speak with him?"
I put the call through to Don.(Not his real name) Don is a somewhat soft spoken middle aged man with grey hair and glasses. A retired Army veteran, Don was also a supervisor in my department. As he placed the receiver down, he looked over at me and said, "I have to go see the Angel of death, hold the fork for me."
As I saw them in the glass office, I thought "That's a shame. I didn't always agree with Don, but I hate to see anyone get the axe so close the holidays. Oh well, at least its not me."
When Don had returned, his face was red and I could tell he was upset. He looked at me and said "They want to speak with you now Ed." I got up from my computer console and began the journey across the hallway to the glass office, or if you prefer the "Walk through the Valley of the Shadow of Death." I grabbed the cold steel handle of the glass door, pulled it back, and walked inside.
"Ed, have a seat. The reason we have called you in here is to inform you that Mr. Owner has decided to shut down the department where you work."
"At last" I thought. "Now they will offer me the promotion to sales manager after my exemplary performance in my department and my five years of loyal service to the company."
"We are offering you the position of Product Specialist." The sales department in my former place of employment operates like a pyramid scheme. At the bottom of the pyramid you have the product specialists, then the sales managers, then the tower directors, then the general sales managers, then the owner. The higher up the pyramid you are, the more money you will make. I had been a Product Specialist before, and I had no interest in being one again.
"No thank you, I am not interested in doing that again." I replied.
The head honcho looked stunned. "I know you must feel like you were just hit with a ton of bricks. If you want to take a couple of days to think about it, you can."
I looked over and stared directly into the face of the Angel of Death, who had been silent until this time. His eyes were cold and uncaring, and his face was like stone. When he opened his mouth to speak, I expected an echo that would crack open the Earth and swallow me into the depths of Hell. What I heard was a calm and soft spoken voice. "Why do you not wish to accept the position we have offered you?"
It was not the voice of a demon from the pits of Hell, the Angel of Death was just a man after all. "Because I have done that before, and it didn't work out the first time. And it is less money and more hours." The Head Honcho then gave his sales pitch, but by this time I really wasn't listening to what he was saying, I was deep in thought on what I wanted to do next. They needed someone to work the next couple of days, to tie up loose ends in the office, and this I did agree to do.
The next day, there were only two people in the office, myself and another supervisor who was staying with the company. The atmosphere of the office was like a morgue. The phones had stopped ringing, the chatter and laughing voiced had been silenced. I took this time to reflect on my situation. I had faced the Angel of Death, yet I was still alive. More than alive, I was free. I thought about the sad chapter of history in the United States where slavery was legal. It still is in a way, as I had been a slave to the time clock, to my supervisors, and to my company. I remembered a story about a group of slaves freed after the Civil War was over who did not wish to leave the plantation. "How will we eat?", they must have thought. "How will we survive?" I now know how they must have felt. But as a wise man, Benjamin Franklin once said, "Those who sacrifice freedom for security deserve neither."
As the day wound to a close, I shook the hand of my friend and supervisor and told him it was great working with him, and that I would miss him. I then turned to walk out of the office for the last time. As I was heading out the door I remembered something, something that seemed important. I walked back up to where my friend was sitting, reached in my pocket and pulled out a small plastic fork, and extended it towards him. "Hold the fork for me while I am gone."
With a tear in his eye, he grabbed it and said, "You got it." I then walked out the door a free man.

"Writer's note." I wrote that story 6 months ago. I am still free.