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Throughout The Car Industry



Financing Your Car

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On: Tue, Sep 13, 2011 at 9:05AM | By: Peter C Sessler


Financing Your Car

Most dealers literally give their cars away these days—at least they don’t make the profits they used to on the sale of a car. There’s much more awareness today of what the cars cost and so the consumer is able to bargain more effectively. At the same time, the manufacturers have cut the dealer’s profit margin. It’s hard to believe, but the gross profit on a base is only a few hundred dollars!

Of course, dealers still do quite well with used cars because it’s practically impossible to find out what their cost is. In fact, with many dealerships, it’s their used car operations that keep them going.

With “front-end” profit margins (profit made from the sale of the car) shrinking, dealers have focused more and more with their Finance or Business office to make money—this is known as the “back-end” profit. By getting the customers financed, they are able to earn “reserve,” and this is where they sell extended warranties and accessories—commonly known as ”aftersell”.

RESERVE: When you fill out a credit application, the dealer submits it to a bank. When the loan is approved, the bank sets a certain interest rate, known as the “buy rate”. The dealer can add 2–3 percent on top of that rate (this figure is now limited by law), and the difference over the life of the loan is a pretty big chunk of money. This difference is called “reserve,” and when the deal gets “funded” (that’s when the bank pays the dealer) the bank also gives the dealer the reserve amount. So, in essence, the dealer can make $100 on the sale of the car, plus $2500 on the reserve end.

On the other hand, many people would have never been approved if they had gone to their local bank and applied for a loan. A good finance manager can “work” the banks because that is how he is paid—by getting deals approved.

Still, it makes good sense to find out beforehand what current interest rates are and what your credit rating score is. If you’ve got good credit, you can negotiate the interest rate down. However, you can’t negotiate a special incentive low rate that the manufacturer offers—and most of them do these days. Dealers aren’t typically allowed to add to these rates and they do not earn reserve.

EXTENDED WARRANTIES: There are varying opinions on their worth, but they are like any other kind of insurance—you hope you never need to use it, but are glad when you’ve got it. These are covered in greater detail in the Extended Warranty article, but the bottom line here is to negotiate the price down as much as you can.

AFTERSELL: This is where “Rust and Dust” is sold. Rust and Dust is what dealers call rustproofing and paint sealers. Cars these days definitely do not need rustproofing—every car uses galvanized steel, and paint sealers are usually way overpriced and worthless. In fact, some car manufacturers will void your factory corrosion warranty if you apply undercoating and any additional rustproofing. Still, some people continue to fall for the spiel.

Aftersell also includes accessories such as high-powered stereos, running boards, fancy wheels, and the like. These are typically way overpriced and you’re better off getting these on your own after purchasing the car. However, some people don’t have the cash to buy them outright so it’s easier for them to throw it in with the financing.

As said before, everything that is sold in the dealership is negotiable, so negotiate!




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