Trogdor
02-07-2013, 01:10 PM
From time to time people ask for my advice about buying cars, how to get the best deal, what to watch for at negotiating dealers, and just general things about the car sales and finance industry. Since White Bear Mitsubishi is a Best Price dealer, I can expose (read call out) a lot of other dealers on the crap they try to pull! Here are come misconceptions, myths, and truths about the auto industry that you may not know.
On one of the biggest areas where people have misconceptions is on the financing end. So I'll give you guys the whole run down on that.
Say you submit an application on a particular car. The bank looks at a couple things; what's the car's model year and mileage, what is your credit score, what does the car book for, and how much is the buyer looking to finance.
Banks evaluate cars based on risk. That is, the risk that they will end up with the car when you default on the loan and they have to try to get rid of it. Banks view newer cars with fewer miles as less risk because they are easier to get rid of if you default on the loan. Then they take in to account your debt to income ratio. And finally your credit score itself, how likely you are to make those payments.
All of the these things are calculated to come up with interest rate, and what they call Loan to Value (LTV). LTV is generally between 80-125% of the cars book value. If you have very good credit, and it's a newer car, they may even let you go up to 130% of LTV. Meaning you can buy a car that is over book (privately sold, modded cars for example), or you can add accessories to your loan. However, the worse your credit, or higher your debt to income the lower your LTV might be. This means you may need to come up with money down to compensate for that.
Take Murlo's car for example. It books for about 27-28 (retail) based strictly on mileage and year. He was asking like 34k for it (correct me if I'm wrong). To educated buyer this may seem reasonable to ask for 4-6k more than book for the tens of thousands of dollars of work he's put in to it. But to a bank that's 121% LTV. You have to have very good credit to get an approval at 120% LTV, or a bunch of money down to offset that percentage that you are over the allowed LTV. So, if a bank will only allow someone to finance 90% LTV on Murlo's car, they have to come up with like 9k down to offset this.
Another common finance misconception is the notion that paying cash is somehow better, and you can negotiate a better deal by offering cash. Assuming you have decent (680+) credit, dealerships actually make more money when you finance with us. This happens one of two ways; traditional banks will allow dealers to add up to 2 -2.5% extra interest to your rate. This money goes to the dealer (and a small percentage of that to the finance manager). Sometimes, a dealer will "sign it out flat" meaning we give you the interest rate that the bank actually said they would take it at. In exchange the bank pays us a small flat fee. *BTW I try to make sure referrals, Style members, and friends are signed out flat whenever possible.*
Credit unions on the other hand do not allow dealers to do this. This is why their rates are often times better, and why people prefer to finance through them, over traditional banks. In exchange the credit unions pay the dealer a flat fee per deal (and some times a bonus for a certain goal). That's also why most dealerships (including ours) work with a bunch of credit unions.
If you don't have good credit, sometimes the bank will charge whats called a acquisition fee, or "acqu fee." Shady dealerships like Car Hop will charge you this extra fee. This is how a lot of people with bad credit end up WAY upsidedown on crappy car. Fair dealerships will eat this fee. Depending on the car you're looking at though, we may have an approval in place with an acqu fee that is too large for us to eat (Some times they are thousands of dollars) and you may end up getting turned down for a loan.
On to a different subject: Trade ins.
We're NEVER the most money you can get for a car! But we're the fastest and easiest way to get rid of a car. Some people feel this is worth not dealing with the hassle.
Remember, we're a business. That means a number of things. First and foremost is that we need to make money on your car when we sell it! Secondly is that we're a business that has to follow state/federal regulations and guidelines that you as a consumer aren't always aware of.
When we take in a trade we have to pay $600 in fees, and $300 to inspect the car, no matter what. So we're automatically out $900 even if your trade is 100% perfect. Secondly, if we have to do anything to the vehicle (brakes, tires, rotors, tie rods, bushings, cosmetic damage, etc). Then the car needs to get detailed (pay the detailer) and sold (pay the sales person).
Between fees, repairs, paying various employees, etc, by the time we turn a car around (assuming its a month or less) dealerships shoot for a net profit of $800-$1000 per vehicle. It's not the thousands of dollars you would think we make by taking a car in for $12,000 and selling it for $14,999.
In the state of MN when you trade in a car, we take the net total of the car you're buying - the full value of your trade (even if you still owe money on it), then calculate tax from that net total. So if you trade in a car worth $10,000 on a car that is $20,000 you only pay 1/2 the sales tax that you would have otherwise paid with out a trade.
So, keep in mind if you decide to sell a car privately, add in the sales tax savings + whatever they trade offer was. That's your break even point.
*Thanks Goat Blower for reminding me about that one!
Here are some things that dealers might do, to be aware of.
Some dealers, like a particular Mitsu dealer in California known for advertising cars WAY below MSRP, will advertise their prices including 5 or 6 discounts that not everyone will qualify for such as Mitsubishi Owner Loyalty and active military. They also don't advertise the price including destination fees from Japan/Illinois. They also don't tell you that they have an $800 documentation fee.
Dealers aren't stupid, they're going to make money one way or another.
Dealers that negotiate will often times give you a huge discount on a car, then try to low ball your trade. Or give you a huge amount for your trade, then try to sell you the car for a lot more. ITS A TRAP! Again, dealers aren't stupid, we're going to make money one way or another.
So how do you get a fair deal? COME TO WHITE BEAR MITSUBISHI OF COURSE! No seriously though...
One of your best negotiation tools is to be present at the dealership with a deal on the table! We know you're serious about buying a car then. So don't just call up or email and say "My car is X, it has Y miles on it, and BKK says it's worth Z. What will you give me?"
Always get a final number including all fees! Dealers are allowed to charge whatever fees they want on the back end, we don't have to advertise them.
If the store negotiates, let them know you might finance with them if the rate they get you is good enough.
Always get a trade value in writing, with a managers signature. This will prevent the whole huge trade/smal discount thing. If the manager isn't willing to do this, you know something is shady.
And finally to clarify, how exactly do dealers make money?
We make money when you finance a car with us.
We make money when you buy products for your car. This includes dealer installed options, aftermarket accessories, extended warranty coverage, GAP insurance, etc.
We make money on service. An overwhelming majority of a dealerships profits come from it's service department. However, that is cyclical. Sales sells a car and if they do a good job we hope that customers come to us for service when they need it. When our service department does well, you're more likely to buy a car from us again.
We make money when we meet sales objectives. The money we use to discount the vehicles gets paid back to us by the manufacturer if/when we meet sales goals.
What we don't make buckets of money on is selling a car. In fact, if all we did was sell all of our cars for cash with no additional services/products, we would be hemorrhaging money!
On one of the biggest areas where people have misconceptions is on the financing end. So I'll give you guys the whole run down on that.
Say you submit an application on a particular car. The bank looks at a couple things; what's the car's model year and mileage, what is your credit score, what does the car book for, and how much is the buyer looking to finance.
Banks evaluate cars based on risk. That is, the risk that they will end up with the car when you default on the loan and they have to try to get rid of it. Banks view newer cars with fewer miles as less risk because they are easier to get rid of if you default on the loan. Then they take in to account your debt to income ratio. And finally your credit score itself, how likely you are to make those payments.
All of the these things are calculated to come up with interest rate, and what they call Loan to Value (LTV). LTV is generally between 80-125% of the cars book value. If you have very good credit, and it's a newer car, they may even let you go up to 130% of LTV. Meaning you can buy a car that is over book (privately sold, modded cars for example), or you can add accessories to your loan. However, the worse your credit, or higher your debt to income the lower your LTV might be. This means you may need to come up with money down to compensate for that.
Take Murlo's car for example. It books for about 27-28 (retail) based strictly on mileage and year. He was asking like 34k for it (correct me if I'm wrong). To educated buyer this may seem reasonable to ask for 4-6k more than book for the tens of thousands of dollars of work he's put in to it. But to a bank that's 121% LTV. You have to have very good credit to get an approval at 120% LTV, or a bunch of money down to offset that percentage that you are over the allowed LTV. So, if a bank will only allow someone to finance 90% LTV on Murlo's car, they have to come up with like 9k down to offset this.
Another common finance misconception is the notion that paying cash is somehow better, and you can negotiate a better deal by offering cash. Assuming you have decent (680+) credit, dealerships actually make more money when you finance with us. This happens one of two ways; traditional banks will allow dealers to add up to 2 -2.5% extra interest to your rate. This money goes to the dealer (and a small percentage of that to the finance manager). Sometimes, a dealer will "sign it out flat" meaning we give you the interest rate that the bank actually said they would take it at. In exchange the bank pays us a small flat fee. *BTW I try to make sure referrals, Style members, and friends are signed out flat whenever possible.*
Credit unions on the other hand do not allow dealers to do this. This is why their rates are often times better, and why people prefer to finance through them, over traditional banks. In exchange the credit unions pay the dealer a flat fee per deal (and some times a bonus for a certain goal). That's also why most dealerships (including ours) work with a bunch of credit unions.
If you don't have good credit, sometimes the bank will charge whats called a acquisition fee, or "acqu fee." Shady dealerships like Car Hop will charge you this extra fee. This is how a lot of people with bad credit end up WAY upsidedown on crappy car. Fair dealerships will eat this fee. Depending on the car you're looking at though, we may have an approval in place with an acqu fee that is too large for us to eat (Some times they are thousands of dollars) and you may end up getting turned down for a loan.
On to a different subject: Trade ins.
We're NEVER the most money you can get for a car! But we're the fastest and easiest way to get rid of a car. Some people feel this is worth not dealing with the hassle.
Remember, we're a business. That means a number of things. First and foremost is that we need to make money on your car when we sell it! Secondly is that we're a business that has to follow state/federal regulations and guidelines that you as a consumer aren't always aware of.
When we take in a trade we have to pay $600 in fees, and $300 to inspect the car, no matter what. So we're automatically out $900 even if your trade is 100% perfect. Secondly, if we have to do anything to the vehicle (brakes, tires, rotors, tie rods, bushings, cosmetic damage, etc). Then the car needs to get detailed (pay the detailer) and sold (pay the sales person).
Between fees, repairs, paying various employees, etc, by the time we turn a car around (assuming its a month or less) dealerships shoot for a net profit of $800-$1000 per vehicle. It's not the thousands of dollars you would think we make by taking a car in for $12,000 and selling it for $14,999.
In the state of MN when you trade in a car, we take the net total of the car you're buying - the full value of your trade (even if you still owe money on it), then calculate tax from that net total. So if you trade in a car worth $10,000 on a car that is $20,000 you only pay 1/2 the sales tax that you would have otherwise paid with out a trade.
So, keep in mind if you decide to sell a car privately, add in the sales tax savings + whatever they trade offer was. That's your break even point.
*Thanks Goat Blower for reminding me about that one!
Here are some things that dealers might do, to be aware of.
Some dealers, like a particular Mitsu dealer in California known for advertising cars WAY below MSRP, will advertise their prices including 5 or 6 discounts that not everyone will qualify for such as Mitsubishi Owner Loyalty and active military. They also don't advertise the price including destination fees from Japan/Illinois. They also don't tell you that they have an $800 documentation fee.
Dealers aren't stupid, they're going to make money one way or another.
Dealers that negotiate will often times give you a huge discount on a car, then try to low ball your trade. Or give you a huge amount for your trade, then try to sell you the car for a lot more. ITS A TRAP! Again, dealers aren't stupid, we're going to make money one way or another.
So how do you get a fair deal? COME TO WHITE BEAR MITSUBISHI OF COURSE! No seriously though...
One of your best negotiation tools is to be present at the dealership with a deal on the table! We know you're serious about buying a car then. So don't just call up or email and say "My car is X, it has Y miles on it, and BKK says it's worth Z. What will you give me?"
Always get a final number including all fees! Dealers are allowed to charge whatever fees they want on the back end, we don't have to advertise them.
If the store negotiates, let them know you might finance with them if the rate they get you is good enough.
Always get a trade value in writing, with a managers signature. This will prevent the whole huge trade/smal discount thing. If the manager isn't willing to do this, you know something is shady.
And finally to clarify, how exactly do dealers make money?
We make money when you finance a car with us.
We make money when you buy products for your car. This includes dealer installed options, aftermarket accessories, extended warranty coverage, GAP insurance, etc.
We make money on service. An overwhelming majority of a dealerships profits come from it's service department. However, that is cyclical. Sales sells a car and if they do a good job we hope that customers come to us for service when they need it. When our service department does well, you're more likely to buy a car from us again.
We make money when we meet sales objectives. The money we use to discount the vehicles gets paid back to us by the manufacturer if/when we meet sales goals.
What we don't make buckets of money on is selling a car. In fact, if all we did was sell all of our cars for cash with no additional services/products, we would be hemorrhaging money!