How does a dealer make money: Part II
- Aftersale products add to bottom line
- GAP insurance worth a look
- Extended warranties and protection plans not so much
- Do you really need all those accessories?
Once the purchase price for a new vehicle is negotiated at a dealership, the deal is far from done. The salesman or finance and insurance manager will attempt to sell a wide range of what dealers call “products.” The purpose, of course, is to make more money on the deal.
Either the salesman or the F&I guy, maybe both at the same time, will pitch such products as a tire hazard package, exterior coating to protect the vehicle’s paint, maybe an extended warranty that covers nearly every problem for 100,000 miles of worry-free ownership. Every product is listed on what dealers call a menu.
One important thing to keep in mind when reading this story and later shopping for a new vehicle: The prices listed below differ by brand and dealership. Luxury brands and their dealerships generally tend have higher prices than mass market, mainstream brands such as Ford, Nissan and Toyota. Of course, every dealer has its profit target per vehicle so practice saying “no.”
Listed below are many of the products new car and truck dealers sell. The purpose of this story is to explain the products and show how dealers increase their profit per new vehicle.
You may have heard the term GAP or seen it on a dealer website. It’s a popular automotive industry acronym that stands for “guaranteed auto protection.” Essentially it is an insurance policy that covers the difference between the cash value of a vehicle and the balance owed on the loan or lease if the vehicle is totaled.
“Let’s say he owes $20,000 on the vehicle, he totals it, and the insurance company is only going to give him $18,000. GAP insurance will pay the difference,” said a Midwest Chevrolet dealer who asked not to be identified.
The consumer’s cost for GAP is based on the vehicle’s list price, how much the buyer is financing and the term of the loan, for example, 3 years, 4, 5, etc.
At this Midwestern Chevrolet dealership, for example, the buyer of a new 2018 Equinox with a $20,000 loan over five years would pay about $400 for GAP insurance. The dealer’s cost is $350; the dealer’s net profit is $50. On a $40,000 loan the customer would pay about $800; the dealer would make $100. The cost of GAP rises as the loan increases. If the term is less than in this example, the cost to the buyer is reduced because the exposure is less. The GAP cost is built into the monthly loan or lease payment.
Two last thoughts about GAP. Many new car leases automatically include GAP insurance in the monthly lease payment. There is no need to purchase GAP separately. Check with the dealer and read the lease contract to determine if GAP is already included.
Second, like an insurance policy GAP can be canceled at any time. For example, if a 60-month loan is paid off in 48 months, GAP insurance is terminated, and a refund is issued.
Simply, this is a big profit center. Dealers say it is difficult to sell accessories to car, crossover and sports utility buyers and lessees. But pickup drivers are big on personalization. They gravitate to tonneau covers, decal and stripe packages, black or chrome door handles, splash guards, assist steps, bed liners and much more.
“The pickup customer will beat you up over everything in the world, but all of a sudden after the sale is done, buy everything at list price, all the accessories. You don’t want to bring it up during the sale because otherwise they will try to bring that up as part of the negotiations,” the dealer said.
Dealers may make 5 to 20 percent on each accessory, sometimes much, much more. “It’s easy to sell when you say, sir, you can have all these accessories for only $10 or $15 more per month,” he said.
The buyer should check several banks and credit unions to determine the prevailing interest rate for a new vehicle loan before walking into the dealership. Figure out in advance the amount that likely will be borrowed and the monthly payment that feels comfortable, 48 months, 60 months, 72 months, etc.
After the deal is negotiated the dealer will offer two or three financial institutions that can handle the buyer’s loan. Keep in mind, the dealer’s financial resources may be able to undercut the rates of local banks and credit unions. The dealer wants the buyer to use one of his financial sources because he can make a point or so on the loan. For example, one point on a $30,000 loan is $300 for the dealer.
Once the deal is complete, the salesman or the F&I manager will try to sell what some dealers call protection packages. The package generally consists of three parts: an exterior, hand-applied coating over the paint to protect the finish from acid rain, bird droppings and other nasty stuff; an interior protective coating that is sprayed over the fabric or leather, and rust proofing the vehicle’s undercarriage. Standard warranties include guarantees on paint and rust issues, so read the fine print on your vehicle’s manufacturer coverage before signing onto any protection packages.
“We will sell the package for $1,000 and make $350-$400,” the dealer said.
If a buyer is looking for worry-free ownership, the dealer will offer a bumper-to-bumper warranty. The warranty covers things that break but not things that wear out. For example, tires and brake pads wear out so they are not covered. The entertainment system ceases to function, the engine’s timing chain breaks or air conditioning compressor fails to provide cold air, all are covered.
“Most people are buying bumper-to-bumper now because of the electronics, they are so expensive,” the dealer said. “The engines don’t go south anymore.”
The bumper-to-bumper warranty covers repairs and labor after the manufacturer’s new car warranty expires. The selling price to the buyer (as well as the dealer) is complicated, based on a wide range of variables, among them whether the buyer selects a $0, $50, $100, $150 or $200 deductible; miles of coverage (48,000, 60,000 miles, etc.) and the length of the extended warranty, 4 years, 5, 6, or more.
Other factors that determine the extended warranty’s cost is whether the vehicle has 4-wheel drive, a turbocharged engine, specific options, as well as if the vehicle is a luxury model or sports car. The higher the sticker price, the higher the cost to purchase an extended warranty.
How much will an extended warranty cost the consumer? Prices are all over the place because there are so many variables. In addition, the dealer said automakers and dealers have different prices for similar warranties, as do the outside companies that offer warranties.
Using the 2018 Equinox as an example, his price to the buyer for a 5-year/60,000-mile, zero deductible extended warranty is $1,330, the Chevrolet dealer said. The dealer would make $200 on the warranty sale. Of course, the price could be higher or lower at another Chevrolet dealer for the warranty, accessories and GAP.
For a lower price an extended warranty that only provides powertrain coverage also is available.
Road hazard coverage
This package covers tires and wheels damaged by such things as potholes, glass and nails, usually for the duration of the loan or leases. The Chevy dealer sells the coverage to the buyer/lessee for $350; the dealer makes $50.
Dents up to one-quarter inch in diameter will be removed if the buyer purchases this coverage. The package is sold for $400; this Chevy dealer makes $50.
Finally, many of the products mentioned are practical and appealing. However, before accepting any products consider your needs and the costs. If you finance any optional products as part of your loan, your monthly payment will be higher. The question to ask is can I really afford these products?