Understanding the Car Buying Process

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So there you are.  You just stopped to look.  Now you find yourself across the desk from the Finance Manager and you’re asking yourself, “How did I get here?”  Does this sound familiar?  If this hasn’t happened to you, then I am sure that it has happened to someone you know.

Before I explain to you how to avoid such situations, let me qualify myself.  I am currently the General Manager of a motorcycle shop.  I have worked either in, or closely with, the automobile industry for over 14 years.  I have extensive experience in all aspects of automobile and motorcycle dealerships.

Now the reason that scenario up there took place is because you didn’t stop to just look.  In today’s connected age, a person can look and research whatever they want whenever they want with the greatest of ease.  Think about this for a second if you will.  Do you think that you broke your normal routine, drove to a dealership, got out of your car, walked the lot, and spoke to a salesperson just to look? The answer is no.  You were interested.  You wanted to see if you can get the car.  However in doing so, you walked into a machine.

The sales business, all of it, is designed to captivate and entice people to buy something.  The automobile business has honed and refined this process into a fine art.  The salespeople are trained on precisely what to say and when to say it.  Everything from the design of the building, to the color of the cars has been carefully thought out and researched.  Everything you touch, smell, see, and feel is developed to evoke an emotional response from you.  It really is akin to the moth and flame analogy.

Now that you know that you are at a disadvantage when you are at the dealership, we can concentrate on how to not fall in their trap.  The first step is education.  You, the customer, have all the tools you will ever need to thoroughly research any car you are interested in purchasing.  From models, to equipment packages, to discounts, to financing, the internet has all of the information at the ready.  A couple of great websites that I use frequently are Kelly Blue Book at www.kbb.com and Autobytel at www.autobytel.com.  The information found on these sites is accurate and very useful.

The next thing you need to consider is your budget.  There is a formula that the lending institutions use to calculate whether you can afford a note or not is called the discretionary income formula.  It is quite simple really.  The formula states that 26-30% of your gross monthly household income should be used for all financial obligations accept your mortgage.  I will use this example to illustrate the point.  A family has a household income of $60,000 per year.  The same family is looking at buying a new car and the monthly note will be $600.00.  Our family currently has another car note for $550.00 per month, a student loan for $225.00 per month, a boat loan note for $325.00 per month, and a few credit cards in which the minimum payments combined are $375.00 per month.

If we use our formula we see that $60,000 divided by 12 months gives us $5000 per month gross income.  Now simply take $5000 x 30% = $1500.00 per month discretionary income.  All you have to do now is add your current obligations and include the new note.  If it all fits neatly into our $1500.00 per month discretionary income then the lending institution will assume that you can financially handle the new note.  Some quick addition however reveals that all of the monthly obligations combined bring us to a total of $2075.00 per month.  If this is your situation, please walk away.  I implore you, walk away.

Assuming your budget is in order, you can now concentrate on the deal.  STOP! Automobile dealerships are not charitable organizations.  Please do not expect them to “give” you anything.  They will not sell you a car at a loss for them.  They will make some money off of your deal.  That is their job.  That is how they are programmed.  You cannot change it, nor should you want to.  A great number of salespeople will lie to you, and tell you that you bought that car under their cost just to protect your precious ego.  You didn’t.  There are a few, and I mean few, examples in which a dealership actually loses money, but I can assure you that it will not be on your deal.

If you are not comfortable with letting the dealership make a profit from you, then please save everyone involved a great deal of frustration and stay home.  How much profit you ask?  This is where being a savvy consumer comes into play.

Generally speaking, the dealership will give you a price that reflects all rebates and incentives subtracts from the MSRP.  You can negotiate a little better price.  If you get a price that is much lower, say $1500.00 or more, less than MSRP minus all rebates and incentives, then the dealership will not be making much of a profit.  Why should you care?  Because then they cannot afford to give you the level of service you deserve.  Yes, you will need service.  Eventually at some point in time you will need service.  A dealership that makes a fair profit can afford to have a superior service department.

Choosing the right dealership is also an important factor.  By and large, older dealerships are better.  The number one determining factor for judging a dealership is employee tenure.  Ask your salesperson how long they have been working there, and what the average tenure is for employees at that dealership.  If the dealership has good employee tenure, then it is safe to assume that they conduct reputable business transactions.  It is also safe to assume that you will be treated fairly.  Dealerships that have loud television and radio commercials where they slap the windshields, jump off of buildings, yell and scream, etc. are what is called podium dealerships.

A podium dealership is one where the upper management is in a mirrored glass elevated box type structure on the showroom floor.  That is the podium.  The salesperson has to get every single part of the deal approved from the manager.  This isn’t always a bad thing.  It does promote consistency as each price is reviewed by the same person(s), and you can be sure that you will get the same price as your neighbor for the same car.  Podium dealerships however, are famous for being high pressure dealerships.  Here is a quote that I bet you will recognize, “What can I do to get you to buy this car today?”  Just typing it makes my skin crawl.  I do not use this tactic in my dealership.  I give people more credit than that.  If a salesperson says that to you, or something similar, run away.

A good dealership wants to build an ongoing relationship with you.  I tell my customers daily that I don’t want to sell them this one motorcycle.  I want to sell them every motorcycle they ever buy.  I also want them to send their friends and family to my dealership.  The only way that is going to happen is if the customer recognizes value in the purchase, and has been treated fairly.

Lastly, we should consider the actual purchase and financing.  The signing of contracts and paperwork generally takes place in the Finance and Insurance (F&I) Manager’s office.  Tread lightly here my friends.  This is where more money can be made off of your deal.  First are points.  Financing points are when the finance manager charges you a different interest rate than the bank charges them.  It works like this.

Your credit application is sent to several lenders either by fax or via computer.  Let’s assume that the application is approved, and the bank tells the Finance Manager the interest rate for the loan is 5.99% for 60 months.  The Finance Manager tells you that he got you approved and the rate is 7.99% for 60 mos.  If you sign that contract then the dealership makes a 2.00% profit on the amount you financed.  In real money it equates to about $400.00 – $1000.00 per contract.  But those extra points are added interest for you.  It can cost you another $1000.00 – $2000.00 over the life of the loan.  It is best to get your own financing from the bank you do business with on a regular basis.  Do not allow the Finance Manager to increase the rate on your financing.

Extended warranties are all other sources of income for the dealership as well as the Finance Manager.  Extended warranties in general are basically an insurance policy.  If you think that your new car will not have any problems for five to seven years of ownership you are right.  You probably will not need an extended warranty, but you might.  In other words, you probably won’t need your life insurance policy for the next 20 years, but you have one don’t you?  Chances are that you won’t need the major medical portion of your health insurance anytime soon, but you have that too don’t you?  You get the point.  Extended warranties are for “what ifs”.  If you think you will not have the cash on hand for a repair, then you should consider buying an extended warranty.

The car buying process should not be a stressful process.  If you stay in control of the situation it will not become one.  Remember to research, ask questions, and take your time.  You do not have to purchase today, or tomorrow for that matter.  Remember to use good common sense.  There is an old saying which reads, “If it walks like a rat, looks like a rat, and smells like a rat, then it’s probably a rat.”  I couldn’t agree more.

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