Since You Asked

Imagine that you negotiated in good faith to buy a computer, or a television.  You and the seller agreed to a price, then when you got to the register to pay, the cashier informed you that she is adding a “fee” for the privilege of buying from them.  You’d balk, right?  Why is it, then, that so many people never even blink when informed that they must pay a 200-500 dollar “Doc” fee when buying a car?

Here’s a brief breakdown of the used car business:  The dealer gets a car, either through an auction, or a wholesaler, or from a trade-in.  Let’s say that the car costs the dealer 5000 dollars.  Most of the time, the car is run through the shop to ensure that it is road worthy, that is, the brakes, the lights, the signals, etc are all in good working order.  Maybe they will change the oil.  So, lets add 200 dollars to the cost.  5200.  The car is now parked on the lot for sale.

The salesperson who helps you on the lot is paid on gross profit.  Let that sink in a minute.  Unless you are buying the car from Carmax, (they don’t pay their people the same way), the chances are that you will pay far more than is necessary to own that car.  (Carmax isn’t much different, except they don’t pay commission in exactly the same way) Here’s why:

The $5200 car is now “packed”, that is, the dealership adds a set amount to each vehicle to offset the costs of acquiring the car, paying the interest on the loan (floor-plan) to buy the cars in the first place, transporting the car, washing it, advertising it for sale.  Let’s say the “pack” is 600 dollars.  Now, the car’s cost is $5800.   In the old days, most salespeople knew the cost of the car.  So, if I am the salesman, I know that the car costs 5800.  Remember, I am paid on gross profit.  I will receieve approximately 25% of the gross profit.  If you agree to pay 7800 dollars for that car, I am paid 500 dollars, since we made a 2000 dollar gross profit.  I am never working “for you”.  I may only sell one or two cars that week, so I need to make all I can on every deal.

Ok, you are happy with the price.  $7800.  You go sit down, and I bring you a buyer’s order, and, on the bottom of that form, I list a “doc fee” of $399.  (That is an actual doc fee listed in the buyers order of a Toyota dealership in Clarkesville.  God bless our troops)  When it is all said and done, the amount you are paying for that car is now $8200.  (I rounded up a buck) Never mind that there is no reason for that extra fee to be there.  It is pure profit, and the salesperson sees none of it in his pocket.  Next, add roughly 9.25% for State sales tax, and the total rises to 8958.50 (If you buy in metro Nashville, you get to pay an additional “Metro Tax” as well.  I don’t know what that is, so I am not including it.

You do not have 8200 dollars cash.  You have 1000 dollars to put down.  Ok, now you go see the Business Manager.  His job is to extract every dollar he can from you.  He will do everything he can to get you to focus on the payment, not the actual cost of the vehicle.  He will include in his first quote everything he can, like a warranty for the car, and various forms of insurance (except that none of those products actually has anything to do with insuring the car) and then the actual financing.  He too is paid based on gross profit.

He has of course looked over your credit, and he has already in his possession the “buy” rate from certain banks.  You decided to buy the warranty, and it costs 800 dollars.  You bought the “gap” insurance, and it costs 300 dollars. (Oh, these are taxed too) So let’s add 1100 to the car, now we are paying $10,058 total.  You think.  Let’s assume that he has a bid from a bank that will buy this sales contract at 5% interest for 60 months.  He tells you he can offer 8% interest for 60 months.  You put the 1000 dollars down, so you are financing 9,058 for 60 months.  The Business Manager has earned a commission on the warranty, the “insurance” and on the rate.  He has earned approximately 400 dollars in 45 minutes.

Your payment is 183.69, for 60 payments.  That comes to 11,021.  Plus, you put a grand down, so that 5000 dollar car costs you roughly $12,021.  The figures get much worse when you consider that most people don’t buy 5000 dollar cars, don’t put down any money, and many extend their payment term to 72 months.  It’s staggering.

Yes, there are ways to get an edge, but the process is designed to extract every dollar from you, and you had better do your homework before ever setting foot on a dealership lot.

I offered this today because some of my friends asked me recently about buying cars.  It’s harsh, but there ya go.


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17 responses to “Since You Asked

  1. nm

    We bought a car about a year ago. Our old one was totalled by an oblivious uninsured kid. We wanted to put all the insurance money towards the price of the new (used) car, and only finance the last $2,000 or so. We knew what we could afford to pay per month, so we asked to have the payments that amount for, oh, it would have been 3 years or so. They wouldn’t do it–they wouldn’t take a big downpayment, so we had to finance almost the entire amount. The loan guy at least worked with us to get a loan with no penalty for early pay-off, so we turned around and put the rest of what would have been the downpayment towards the principal right away. I never did figure out what was in it for them to try to make our loan larger and longer than it needed to be.

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  3. This is why I have never bought a car from anyone but a private seller, and all but one of those cars was from a friend or acquaintance.

  4. NM, wow. I wasn’t aware that Rule of 78 loans were even still available. Usually, in the car business, down payment is very desireable. Most people have no financial literacy, so they put money down, and don’t realize it hasn’t affected their payments. Simple interest is always the way to go.

  5. Chris, when possible, I always suggest that. However, trades become an issue, particularly if there is negative equity involved. (70% of car deals, btw)

  6. Yeah, I always have to hold that advice since I know it’s not always practical .. for whatever reason I’ve always managed to find someone I know looking to ditch a car right at the exact moment I needed one.

    I am on the car gods’ favor, I guess.

  7. W

    put money down, and don’t realize it hasn’t affected their payments.
    How does that work Mack? Can you elaborate? I would have thought more down would mean lower payments, unless you adjust the length of the loan.

  8. Good article. How is it for new cars? I would assume every part except how they acquire the vehicle. Just curious.

  9. my father owns a used car lot and only charges $29.00 for DOC. fees tha is for the paper and trips to the county clerk …he says the high fees are pure profite for everyone. he is soo right

  10. nm

    Mack, what on earth is a Rule of 78 loan?

  11. This website is a godsend for anyone trying to buy a new car: Don’t leave home without it… in fact, you don’t even need to leave home at all to get the best price on a car.

  12. nm

    Never mind, I googled it.

    As far as I can figure, that kind of loan was presented to us as the standard, and we had to insist on a no-penalty loan instead.

    Possibly the problem was the relatively small amount we wanted to finance (the car we bought had been a trade-in at a BMW dealership, and I’m sure they are used to financing much higher amounts there as a rule). They didn’t seem to know what to do with such a small number.

  13. MDave- It’s roughly the same, but there is “hidden money” in a new car. Now, I don’t always think the buyer is entitled to that, but if a car is somewhat market-soft, then by all means, ask away, you never know.

    W-yes, putting money down would normally reduce your payments, but never offer it until you KNOW what amount you will ultimately finance. The Business Manager will typically “load’ things into your payment, and their favorite question is…”how much payment can you afford?” Never answer that.

  14. NM, the don’t make much money on a small loan. The minimum is around 5000 dollars. That ain’t much “back-end” money as it is known.

    They absolutely hate it when you pay cash, or arrange your own financing.

  15. ronj

    I started to walk at the “doc” fee and they cut the price of the car by the amount of the “doc” fee. The business manager at least stated he knew when he was fixing to lose a sale over $399. And it worked exactly the way you ran it down. Made memo to self to never buy from a small lot again…

  16. Excellent info, I liked it.

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