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.