In a time when the profit margins in most sales industries are decreasing there is an increased interest in other ways to improve the bottom line. One industry that has found a way to increase their margins is the used and new car industry.
The internet has leveled the playing field in many ways for the used and new car industry. Small car lots such as ours in a very small town can show their vehicles on-line next to the new car stores in large cities.
When we place our cars on-line and advertise our pricing it is seen next to the larger dealers and smaller ones depending on the search a customer chooses for locating a vehicle in their area, price range, and other criteria important to them. This provides us the opportunity to show our vehicles to an audience we didn’t have ten years ago.
Our car lot has a price advantage in some ways because we have low overhead compared to larger dealerships. We do not have a showroom of salespeople staring out the window or roaming the lot waiting for a customer to stop on the lot. We have one person responsible for buying and selling on our lot, my husband, who if not busy selling or buying cars, is busy fixing them. He is also a mechanic. Each of our employees are flexible in their abilities and job descriptions.
How in a difficult financial and very competitive time do you increase your profits when everyone is busy trying to undercut the competitor? The answer is the backend. In the used and new car industry the front end of the deal is the cost of the vehicle, transfer fees, document fees, and sales tax. This is pretty standard from lot to lot and state to state. It will vary between the sales tax rate in different states and the cost of registration from state to state.
After you think you have made your deal and you know all the up front costs for your vehicle you are generally sent to the F & I guy in the sales department. It is this person’s job to sell you more stuff. The salesperson did a great job of selling you on the car you are purchasing.
It is the F & I guy’s job to take your peace of mind that you had about purchasing your vehicle and take it a way one piece at a time. They will then try to sell your peace of mind back to you one piece at at time in the way of added stuff for your vehicle.
The Finance and Insurance guy will try to sell you glass protectant, fabric protectant, service contracts, gap insurance, extended warranties and rust protectant for your new or used vehicle. This is where the profit comes in. These are added on to your previously agreed upon price. They will try to sell you on it by saying it will only cost you so much per month on your car loan to add this or that to your purchase price. It doesn’t sound like much but over the life of a loan it can be a lot. We don’t sell any of this add-on stuff at our lot and don’t recommend you buy it.
Most of the things they want to sell you are unnecessary. Rarely will you be able to collect on a repair from a service contract because there are so many criteria that you must meet to collect or the company has gone out of business before you can collect. The dealer will get to keep a very large percentage of your service contract money right away so it is in their interest to sell the stuff whether you need it or not. It could be the item that will determine whether they will make a profit on the sale of the vehicle or not. The F & I guys are paid well to do their job and they are great at it.
A very important fact to keep in mind if you do buy all the add-on stuff for your car you could end up owing more than the car is worth right away. This might not be as important if you keep the car the entire time of your loan period and pay it off. If you end up trading the vehicle off before the end of your loan period or have an accident that totals out your vehicle before the end of your loan period, this is very important because you will be “Upside Down” in your vehicle. This means that you still owe more money on your loan than what a dealer, private party, or insurance company will give you for your vehicle.
The insurance company or dealer will give you only what your vehicle is worth not your remaining loan amount. You will have to come up with the difference to pay off your loan to the bank when the insurance company settles or you trade in your vehicle. This is the only time that gap insurance makes sense. If you have bought all the other add-ons offered by the F & I guy then you should buy the gap insurance unless you have money in your savings account to cover the difference.
The best thing to do is to not buy any of the add-ons offered by F & I guy, they are rarely worth it. You are money ahead to put something away in a savings account each month for car repairs than buying a service contract and find a trustworthy service garage. Putting aside money each month for maintenance is important. Rarely does $50.00 a month budget cover it in a year’s time but if that is all you have to put aside, do it. At least you will have a start and won’t have to put repairs and maintenance on a credit card. Just a set of tires for a car can set you back $500 or more and that wouldn’t be covered by a service contract.
Remember, when you made the deal for your vehicle you had peace of mind about your new purchase…Don’t get thrown under the bus by the F & I guys! Be smart!