I thought I’d take a quick break from the series to review a few things about car dealerships before we get into Part III - The Test Drive.

Let’s review how you might have wound up at a particular dealership in the first place. As you know, car dealers spend an enormous amount of money on advertising - radio, television, and newspaper. They also use a lot of billboards and online advertising. Under “newspaper”, I’m including the little auto trade magazines you see at fast food restaurants, Walmart, etc.

Perhaps a more accurate way of stating this would be to say that you, the car-buying consumer spend a lot more money on your car due to this increased cost of advertising by the dealership. Dealers rarely give us any informative advertisements. Their manufacturers often do when they introduce new models. Some people might claim car dealerships use deceptive advertising. Let’s say this much - their ads aren’t scrutinized very well by consumers, better business bureaus, or even attorney generals.

Radio ads is where car dealerships use the greatest amount of deception. As we all know, each radio ad has a disclaimer, which is usually spoken quickly and in hushed tones right before the fanfare begins. Still, dealers are apt to use catch phrases like “everyone approved”, “this weekend only”, “best savings in our history”, and “we’ll beat any price”. Each of these phrases is not only deceptive, but the exact opposite is usually true. You might think that in the interest of becoming a decent business around town, or to attract a more upscale clientele that dealers would come up with a better campaign than to sell on bottom-line price and promises of credit approval. But you’d be wrong. The ads are doing exactly what the dealers want - bringing in the schlep of the city. Dealers actually want and desire people with tarnished credit, poor income, and a near worthless trade. As you’ll see when we get into the Finance Room later in this series, these are the customers that, if sold, bring the dealer the largest profits.

Now, some might ask, “Come on, Lawrence, do you expect me to believe that a dealer would rather have a 22-year old kid come in with his live-in girlfriend driving a beat up old Toyota Corolla who he’d like to trade for a late model Camry or minivan - that a dealer would rather have that kid than a 45-year old businessman with a platinum American Express card who is coming in to test drive the new Toyota Land Cruiser?” and I’d have to say… YES!

Let’s review where the markup is for a dealership. Used cars net far higher markups than new. New is such a defined standard. They are easy to compare and the average manufacturer’s retail suggested price of a new vehicle is somewhere around 3-4 thousand above “invoice” (although we’ll talk more about why invoice price is hardly anywhere near the cost the dealer actually paid). Once they “let” you bargain them down (”Wow! I saved $2,100!!!” - sure you did), they have nowhere near the profit they would have had if you had bought a 2-year old used vehicle that was likely stickered at about $6000 to $8000 above what they took it in for. Then, we have to remember that dealership gets paid for every credit app they procure. Usually, besides a small fee (maybe $75 - $125), they get paid also for the overall profit of the credit contract. A 45-year old businessman is not going to bring Toyota Motor Credit much money when they have to give him 1.9% financing (or better), if he even bothers to come to the dealership for his financing to begin with (and if he listened to me, he would not have).

But the youngin’ with the smokin’ Corolla? Ripe for the picking. He’s more likely to be “turned” or swayed to the dealer’s way of thinking. He’s more likely to believe his car truly is junk - as we’ll see in the Trade In feature later. And he’s far more likely to garner the dealership a 19% APR or higher.

There is some question - depending on how bad the lead (or “up”) is - as to when you’ve reached a point of no return. Granted, dealerships don’t want crack addicts who live under bridges to come in looking to buy a car. But they’d rather sound more open and accepting of everyone and walk a few bad leads, than to use advertising that might scare away someone who already thinks they probably can’t afford a new car. Dealers would go out of business if they failed to convince some percentage of the population each month that even though they “know” they can’t afford to buy a new car, that maybe they should just wander on to a car lot and check it out. After all, the radio said everyone was approved.

People always ask me how they can say everyone is approved if, in reality, some will be turned away. Remember: a dealer’s job (actually any good salesperson’s job) is to never say no and to let the prospect be the one to decline. That’s why you’ll see ridiculous qualifications like “make at least $300 a week” and “be employed for at least 3 months”. Even a convicted felon who got out of prison three months ago and is working at the local convenience store qualifies - and he feels good about the fact that he met some standard. He deserves a new car, right?

The dealer advertisements never say what you are approved on. Let’s say I’m a 30-year old public school teacher (single) making $27,000 year and I’d like a new Toyota 4Runner. The ad said “everyone was approved” and besides, I’m far more qualified than their standards specify. I’ve been at my job for four years and my college vehicle (a 1982 Honda Civic) is about to be swallowed up by the earth. My old college buddy and I met last week and he had a 4Runner and I loved it…. So it’s off to the Toyota dealership. (I’m not picking on Toyota here. This is common anywhere. I’ll change manufacturers over the course of the series to keep it fair - although I probably won’t pick on Ferrari. I just love Ferrari too much).

So, after I pick out a lovely 1-year old 4Runner with 17,000 miles on it, the payments will only be $429 (after a half-day’s haggling, test driving, etc), and the dealership is even going to give me $1200 on my sinking Civic. I’m thrilled even though the payments are a bit steeper than I thought. But, like the salesman said (after coming down from $485/month eventually), I’ll get almost as good gas mileage - maybe better since it uses newer technology and is in far better shape, I’ll probably get some savings on my insurance since I’ll have anti-lock brakes, air bags, child safety features, etc. True, I don’t have a child, and those words “almost” and “probably” don’t seem to be legally binding, but I’m happy with the car. Plus, to top it off, due to my stable job history, they only want $1800 down. It was supposed to be $3000 but they are crediting me $1200 for the Civic.

One last problem crops up when they run my credit in the Finance office… a few late payments two years ago when I was going through a tough time. Okay… but I’m still approved, right? “Well”, the finance officer says, “let me see if I can get Jimmy to show you something different that you’ll like just as well”. Jimmy takes you out back and shows you brand new 4Runner. Sure, it looks nice, but there’s got to be a catch, right? After a bunch of time passes, I finally learn that the new 4Runner is going to require $4000 down (actually $5200 but still crediting you $1200 for the Civic), but the payments will be a little less… $408/month, a savings of $21/month, unless I remembered that the first offer was a 60-month loan and the new one is a 72-month loan.

Why the change? My credit made the finance company on the first loan a little shaky. They wanted $7500 cash down. The finance guy knew enough about sales to know they’d never resell me on that down payment after I was looking at writing a check for $1800 - even if I had the money, and seeing my credit and income history, they doubted I, or anyone in my family did. They needed to turn me to a new car that offered a more extended payment plan so they could roll that down payment over the course of the loan. This let the finance company raise the interest a few points, double the cash down, and make the loan “doable”.

Now, I like the idea of going brand spanking new. I really do. The salesman is going on and on about the warranty and the newer features in this year’s model versus last years. The dealer isn’t going to make as big of a profit on this car since it is brand new, which is one reason the bank likes it a bit better - more value in the car (in case of a repo) and less value at the dealership. And I even like the lower payments, but the extra $2200? I’m having a tough time figuring out how I can come up with it. I only have $2600 in the bank (although I wisely haven’t told my salesman this).

He says my first payment won’t be due for about 45 days. What if the dealership floated me the extra grand and I paid $3000. After some small talk, we agree on $2600 down (although all the paperwork will show $4000) and I’ll come by in two weeks with $700 and then $700 more in about 4 more weeks. He says I can probably get away with paying the first payment a bit late - just claim I didn’t get the first statement (happens all the time Jimmy says). I do some quick math and figure that if I pay my mortgage payment late a few weeks, I should be able to pull this off. Plus, Jimmy had already taken me by my workplace on the test drive in the old 4Runner and Sarah, the new intern in school waved high to me. Won’t she be surprised to see me in even a newer one tomorrow?

So, that’s how it happens. Dirty, but done. A car sale is born. And why did I go to this dealership? It might not have been a particular radio ad that day or that week. But in general, I’ve been hearing the ads for a long while and it seemed they must have a pretty good thing going - else they couldn’t advertise that “everyone was approved”, right?

I could tell you a much worse-case scenario, but I’ll save it for later. The point is that you’ll get approved - it just may not be an approval you want. If you say no, you can’t say they didn’t approve you.

How does a dealership enforce the $1400 loan he gave me? There are dozens of ways - all off the books. But, the most common is to tell me that I’ll get my “copies” of the deal when I’ve paid my $1400 back. No $1400? No paperwork. It just disappears and they have the front desk call you and tell you that it appears they made a mistake, but they must have left a vehicle in your care for an extended test drive and they just realized it and would you mind returning it before they call the cops? You were never there as far as they were concerned. There’s variations on this theme (less criminal ones), but this is my favorite. To see a client return a car after three weeks with 1200 miles on it and protest that he owns it and never got a bill and didn’t agree to such. The dealership shrugs and says we don’t know what he’s smoking but we never sold this to him. We agreed to let him take it home for the weekend for a $700 deposit. All that paperwork was contingent upon him buying the car and we’re happy to go through with it if he has $4000 down to purchase the vehicle, else we’d like our car back. It was our fault that we didn’t realize it was missing until now, so we’re willing to drop any charges and the $700 deposit which he never paid and just get our car back. We don’t want to lose any goodwill among the community. And after thinking about it, the client will realize that they don’t have a leg to stand on and maybe those car payments were going to be too high anyway, and he’s being given a chance to undo the whole thing. And so it goes.

As far as advertising goes, you’d think an innovative dealership would have new customer testimonials in each weeks ads from real people around town - like Kelly Tindale of Satellite Beach (not John S. from Miami) in which they talk about how happy they were with the deal. The average dealership in my area sells 25-30 cars a day. You’d think each week they could find someone who wasn’t frustrated as all get out by the time they left. Of course, testimonials are a tricky thing in any business. You want them to be unsolicited and non-compensatory for them to be genuine. But, I’m still looking forward to the dealership that starts putting on commercials that advertise their Happy Customer of the Week, what they bought, who their salesperson was, how long it took, etc. I’d actually watch those and maybe start to fall for the whole game myself after a while. But I’m not holding my breath.

Next, we’ll get into the Test Drive and about what to do and what not to do. In the meantime, I came across an interesting resource that seems to also have some good advice about buying a car from a dealership. It is by another ex-car salesman and it is called “Beat the Salesman”. Michael Royce is a pretty popular guy and his website has some very good tips. Although I don’t agree with his overall end conclusions, I think you can definitely get some good stuff on his site. I haven’t read all of it yet, and maybe I’ll comment more on it later, but for now, if you can’t wait for my next article in this series, head over to http://www.beatthecarsalesman.com and check out his advice.

Technorati : buying a car, car sales, saving money

Posted in: Saving Money