One of the most important steps in buying a car is the part where you sign your paper work.
This is where you finalize legal ownership of your brand new car and is often done in the business office of the dealership.
You should know as much as possible about this part of the deal "before" you plan on buying a car, as it is often the most confusing and overwhelming part of the experience for any customer.
What do all of the different lines on the paperwork mean? What are the fees? And how much money is the dealership making on your financing? In the Automotive Industry the ways to make money are changing.
The Internet has given people access to what the dealer pays for new and preowned vehicles.
In order to be competitive now, dealers must do a lot of online research to see where they sit with a vehicle regarding it's price.
With some vehicles the profit is great, and with other vehicles a dealer could lose money.
Hard to believe I know, but it's true! Shrinking profit margins on new cars and super competitive pricing on used cars means dealer aren't making as much money as they had in the past.
So if there's not any money to make on a vehicle, then where does the "profit" come from? Don't think that just because you found the best priced vehicle within 500 miles of your zip code and beat the guy up another $500, that dealer isn't going to have another shot at making up for this loss.
It's called the "back end" or financing.
Typically the way it unfolds is you sit down and get presented with some type of write-up or price work sheet like a 4-square.
Most places don't like to focus on the actual price of the car, since there's usually not anywhere to go, but rather they focus on the payment.
A smart dealership will try to work you based on the payment you are trying to obtain.
If they can get you "closed" on a certain payment, they are setting themselves up for a big "back end".
Let me explain what goes on in the business office.
When the deal begins the numbers are plugged into the computer and some calculations are figured up.
The Finance Manager will normally mark up your rate (usually a maximum of 2 ½ points), add in some extras, and fluff the monthly payment they tell you by $10 to $20 per month to allow some flexibility on their side.
If you don't have a payment calculator handy, you wouldn't know that this was taking place.
When the salesmen comes out and shows you the payments, he may have turned the tables on you and taken control.
Most salesmen are trained in working you a certain way that shows some flexibility, but don't be fooled.
They may knock the payment down $25 per month and you are now committed to your "monthly payment" and you start to relax.
As you sit there waiting to go into the business office, the business manager is hard at work getting forms and contracts ready to sign, among other things.
He's probably pricing out the perfect warranty in which the most profit is available and making sure that your interest rate is marked up as much as allowed by the bank.
So here's an example.
Every deal is different and so is every customer, dealership and salesperson, so you can't live or die by this example.
Let's say you're looking at a car and the payment you are shown is $400 per month for a 5 year (60 months) loan and the interest rate they show you is 5.
9%.
(Don't forget that these numbers are an example and may not add up correctly it's just to show you the structure of a deal.
) Your payment could have a $1799 warranty and $599 gap insurance.
These are typical "adds" that a dealer stands to profit from.
In addition to the adds, there might also be a rate mark up.
Your rate could be as low as 3.
5% and they call that your buy rate.
The amount of increase in your rate is variable.
The bank gives the dealer the buy rate and each bank allows their own rate to be marked up a certain amount.
The amount of rate the dealer adds is given to the dealership as profit.
The average rate markup is 1.
5% and the profit is derived from the amount of money that is financed.
So now your payment has an additional $50 a month in adds.
Now they add $10 of room to that payment so that they can try to close you with a warranty, gap insurance and a marked up rate much easier.
This way it's easier for the dealer and they call it having a leg to stand on.
When you start talking about the payment being too high, they simply act like they're working hard for you and they lower your payment what it takes to get you to commit to buying.
Lets say you said you'd buy the car if they could get down from $400 a month to $385.
They take the $10 fluff out and come up with the other $5 from either the rate or the warranty.
They might actually just try to close you at $390 and that shows them making an effort, when in reality they could be holding $1,500 in these adds and financing.
So the dealer in this case maybe only got to make $500 on the car they just sold you, but with the $1,500 profit in the "back end" they still made $2,000.
The defense? Just read my tips below and you are well on your way to getting a good deal on the back end as well as the front.
Tips 1.
Focus on Price not Payment "But know your monthly budget!" - Don't go to a dealership and negotiate on a $50,000 vehicle when you know you can't go over $500 a month...
It's not realistic and it's not fair to waste that much of the dealers time for nothing.
2.
Know what rate you qualify for prior to going to the dealer - Get online and call around to different banks and credit unions and get preapproved (because your rate varies greatly depending on your credit).
If you can get 4% somewhere else then don't finance with the dealer when they tell you 6% "You can use this rate to negotiate a dealers marked up rate, maybe they can beat it" 3.
Bring a payment calculator! Most of today's cell phones have access to apps that you can download.
Android Market, Apple Store, Blackberry App World and other online app stores are built right in.
Just search for "Car Loan Calculator" and several free and paid apps will pop up.
I've tried all of the free apps and some offer more features than others but they all work! Have the numbers in front of you and check that payment! If something doesn't add up correctly call them out on it! 4.
Know what additional products you "need" - If you are buying a car that is almost out of factory warranty or is out, you may want to protect your investment with a warranty.
Talk to the business manager about a warranty that fits your driving habits (Mileage, Length of Coverage).
You may drive 30,000 miles a year, in that case you'd want more mileage than years covered since you'll run out of miles before time.
5.
Keep cool! - If you have a negative attitude and you treat your salesmen disrespectfully, you probably won't get that person I talked about earlier that actually makes a living on "helping" people out.
A dealership is more likely to cut the profit down to satisfy a polite customer who will talk positively about the deal to friends and family! Please check out my site regularly for more car buying tips and advice.
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