Dealers are between a rock and hard place. The downturn in the economy has decimated their ranks and consumers are using the Internet to get great deals on the selling price of new cars. One way that dealers make up the lost profit is to work hard at increasing their profit margins at the many other profit points of a car deal.
The selling price of a car is the most obvious profit point for car dealers. Subtract the invoice cost from the selling price and you’re left with the dealer’s gross profit. The next profit point that consumers encounter has to do with financing options. We discovered yesterday that dealers can make a significant amount of money by tacking on additional points to the interest rate a buyer qualifies for. Anything over the “buy rate,” or the rate consumers qualify for, is profit to the dealer. This can help offset a selling price that has been discounted well below the Manufacturer’s Suggest Retail Price (MSRP).
Beware the Term of the Loan
The next area that dealers use to increase their profit margin is to get you to take your eye off the purchase price and move it onto monthly payments. This tactic can increase a buyer’s overall cost, yet lower their monthly payment.
How does it work? Let’s say you’ve negotiated the selling price of a car down to $15,000. You qualify for a buy rate of 5.99 percent and the dealer passes that rate onto you without padding it. After the numbers are run your monthly payment is $322.54. However, you are adamant that your budget will only allow you spend $300 a month on a car loan. You tell the dealer if they can’t get the payment below $300, you’ll have no choice but to look elsewhere.
A Neat Trick
What happens next is nothing short of sleight of hand, similar to a card trick. Your salesperson says he’ll talk to his manager to see if there is anything that can be done to lower your payment to meet your budget. A few minutes later the he comes back with a big smile on his face. He says, “You won’t believe what we were able to do. Your new monthly payment is just $294.91.” As he flips the contract around and hands you a pen, he says, “Sign here and we’ll start on the rest of the paperwork!”
At this point, most buyers are so happy to get a payment they can afford that they relax and don’t give the deal any more attention. What they missed was the fact that the dealer increased the term of the loan from 60 months to 72 months to lower the monthly payment. However, just doing that would have given a monthly payment of $276.48. Instead, the dealer took advantage of the situation by adding $1,000 to the purchase price. Changing the term of the loan from 60 months to 72 months not only absorbed this increased selling price, but still lowered the payment below $300.
The unsuspecting buyer is happy because the deal is affordable. The dealer is happy because they just made an extra $1,000 in profit. Yet, a savvy buyer would have caught the maneuver and made a decision to purchase the car based on the lesser price of $15,000. Beware the games that dealers play.