Car Loans (Part 1)

There are many factors that can effect a car loan. Some of these factors may seem obvious, but there are several others that the average consumer may not be aware of. Some of these include your personal risk factors, the length of the loan (referred to as the term), amount financed, vehicle risk factors, and loan to value. Each one of these factors can have a significant impact on your monthly payment. I will be posting seperate blog posts for different pieces of this to keep each post from getting dragged out too much. For this post I will start by explaining credit.

Obviously your own personal credit is the number one factor in determining whether you will get financed, how much you will get approved for, what rate you will recieve, etc. Even this can get complicated though. It is a no-brainer that the better credit you have, the better your rate will likely be. The interest rate that you are charged is dependent on how much risk the bank would be taking in loaning to you. It is like playing the stock market. The more volatile the stock, the higher the return can be or, conversely, the more you can lose. 

The same goes with the bank loaning you a vehicle. The bank is taking a chance on whether or not you will repay the debt and how consitent you will be in doing so. A bank is trying to determine whether or not you will pay your loan back monthly at a specified amount. This is not just about whether or not you will pay, but also how much effort they might have to exert to get you to pay, for example phone calls and letters. The bank will look at several factors. Initially, they will look at your credit report and determine whether you have paid other loans monthly at a specified amount. 

Often, people will get a small loan to start building their credit or get a credit card. While these loans will definitely help, it will not be as much as buying a car or buying a house. Your ability to pay matters, too. When looking at a loan, the banks and credit agencies will calculate your ability to pay compared to other people. Essentially the bank is asking, “How many people can afford to pay this $75 a month loan?” Obviously a higher percentage can afford this payment than a $400 a month payment. 

Banks will also be determining how much free cash flow you have a month. Although you may have an 850 score, you might only make $10 more than what your credit report shows you owe a month. This an exaggeration, because you will not have a perfect credit score if your debt to income (how much you owe compared to how much you earn) is too high. A credit report will estimate your debt to income without knowing your income, and it will effect your score, but it will not tell the whole story. 

The timing of your accrual of debt also matters. If you have not borrowed money very often, but you buy a house and a car back-to-back your credit will likely take a large, albeit temporary, hit. The credit companies will want to make sure that you have not lost your mind and decided to go on a massive spending spree (If you do decide to do that, just remember that I love you). That is one reason not to buy a vehicle right before, or in the process of, buying a house. The bank will want to see that you can afford a car itself before they will risk money on whether or not you can afford a car and a house at the same time.

Another fact concerns whether you are a nomad or not. Do you move from town to town? Are you a job hopper? Is this your first real job? If you cannot stay in one place or you are unable to hold down a steady job a bank might worry about your ability to pay for the periods that you are unemployed. If you are just getting your first big kid job they will likely be wary about letting you pay them $600 a month when you just started making $600 a month. You “millenials” scare the ever living crap out of banks (and me, too, sometimes).

There are many, many, many other factors that effect your score and your chances of getting a loan, but I am nearing unconsciousn…… ess from boredom just typing this. Off to more exciting stuff…

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Real Caring vs. Perceived Caring

I know where you think I am going with this. You think I am going to tell you how to tell how other dealers or other salespeople may act like they care when maybe they do not, but this post is a confession. I truly care. I want people to find the vehicle that best fits their wants and needs at a price that best fits their budget. I want people to be happy with their purchase. I am destroyed when I find out that a vehicle that a customer has purchased from me has caused them probems. But this is not a post about how great I am as a salesperson. It is about how I have failed to properly display how much I care at times.

Earlier today I was making calls to follow up with past customers. I was rolling right along thinking how awesome I was for actually making these follow up calls, because, as I am sure many of you have experienced, a lot of salespeople in the car business do not provide good follow up with sold customers. As I was making these calls though, I could tell something was off.

Some customers sounded very appreciative. Yet others actually seemed disappointed. I have had this feeling before, and I have always been unable to put my finger on the problem. That is when I heard a booming voice from on high. Ok, actually it was just Richie Tipton, our new car manager. If you know Richie, you will know why I use the term booming.

Richie asked me what the problem was with my call. I was beginning to think Richie was a mind reader, but he simply said, “You need to sloooooooow down.” That is when Richie pointed out the problem that had escaped me. I sounded scripted. I am scripted. Here is what I say:

Me: “Hi, this is Bill Vaughn from Kirksville Motor Company. You purchased a X from us X months/years ago and we just wanted to follow up and see how things were going.”

Customer: “We are doing just fine.”

Me: “Great! If you ever need anything from us, please do not hesitate to give us a call!”

Offhand reading that it probably does not sound so bad. Now imagine hearing someone say that who you might imagine has said it over and over again for the last year and a half. Guilty as charged.

What Richie pointed out to me was that it did not matter how sincere I feel in caring about the customer. If they do not feel that then it is not real. That resonated with me, because I am a believer in the idea that perception is reality. I am so used to saying my unintended script and hearing that everything is fine that I just blow right through it.

The problem is not that I do not care. It is that on these calls I sometimes do not seem like I really care. Frankly, it sucks realizing I have let those customers down rather than having made them feel even better about their purchase and where they bought their vehicle. Outside of addressing any potential issues, that is the entire point of the call.

Bravo to Richie. Richie did not tell me that I needed to work on this to sell more cars. He told me this because he wanted me to do a better job of showing customers that I care, and that means he cares. After all these years in this cutthroat business, that often gets drug through the mud, it still matters to Richie that customers feel cared for. And it means a lot to me that Richie took time out of his day to make me better.

What Is My Trade Worth

It is one of the first questions that customers ask, but it is the wrong question. What customers should be asking is, “What is my trade really worth.” Sounds like the same question, but one word can make a huge difference. It can be the difference between a customer getting a truly good deal and a customer being made to believe they are getting a better deal than they are. There are a few keywords and some jargon to listen out for such as “showing” and “ACV (aka: Actual Cash Value).”
 What is meant by “showing” is that the dealer wants to give a certain amount for a trade-in, but they want to show the customer they are giving more. As for actual cash value, it is the price a dealer might actually pay you in cash for your vehicle even if you do not buy anything from them. The difference is that at a best price store actual cash value is something said directly to you. At a negotiable price store, it is just jargon that would only be heard whispered in smoky back rooms.
Here is the math for 2 completely different deals:
Deal 1:
Sticker Price: $20,000
Actual Cash Value of Trade-In: $10,000
Difference: $10,000
Deal 2:
Sticker price: $22,000
Showing Value of Trade-In: $12,000
Difference: $10,000
If you look at only the botton line, these look like virtually the same deal. In each deal the customer is going to pay $10,000 after trading in their vehicle. The second might even look like a better deal, because it seems like the customer is actually getting a more expensive vehicle and getting more for their trade. If the vehicle in Deal 1 and Deal 2 are the same vehicle though, what gives?
There is a difference between sticker price and an actual sales price. In Deal 1, the sticker price is $20,000 and the actual sales price is also $20,000. In Deal 2, the sticker price is $22,000, but the dealer is willing to negotiate the sale price to $20,000. Instead of simply selling a customer the vehicle for $20,000, telling the customer they are getting an actual cash value of $10,000 for their trade, and leaving the difference at $10,000, someone at the dealership realizes that the customer believes their vehicle to be worth more than $10,000.
To mitigate this situation, the dealer continues to state the sale price at $22,000 and shows they are going to give the customer $12,000 for their trade. When a dealer states that all of their vehicles, both new and used, are at their very best price available they cannot show trade value. They can only give actual cash value, because there is a tighter profit margin. A negotiable dealer has a profit margin that fluctuates more due to how much they mark-up they may have in a vehicle above the best price they woud be willing to sell a vehicle at.
As I said in my last blog post, every dealer knows what their best price is. Some just hope you will pay a little more. The same goes for trade-in value. Every dealer knows what your trade is worth. Some just hope you will take a little less. Just one little word can mean a lot. How about you? Have you ever heard a dealer tell you they are “showing” you a value? Leave a comment if you have ever picked up on it.

Why Even a Best Price Can Sometimes Change

One of the comments often heard by both customers and competitors (and remember that I was one of them) is that the “best price” is not really the best because prices can still be lowered. Yes, you will hear that the best price is really the best price today which means that it might not be the best price next week or next month. There are a few reasons for this, none of which debunks the best price strategy. Long story short: things change.

The things that can change can be big or small. A small change can simply be the number of trade-ins on a specific make or model. For instance, Toyota customers are very loyal and trade for the newest version of a make and model with the frequency of a college student and an iPhone. If we get several Rav4’s traded in for new models we will want the oldest stock on the lot moved out to make room for the newer ones.

Another example of a minor change is how long a vehicle stays on the lot. As I mentioned in my last post, there is a random phenomena that occurs that can cause a vehicle to sit on a lot longer than expected. The longer that vehicle sits on the lot, the quicker that dealer will want that vehicle to move. New inventory keeps people excited and intersted. If you come to the lot several Sundays in a row (yeah, we know you’re avoiding us) and keep seeing the same inventory, you would not come back the next Sunday.

An example of a major change is higher rebates. Once the newest model year is released the manufacturer will increase rebates on the previous model year which can make them cheaper and not significantly more expensive than the pre-owned models. If a customer is looking at a pre-owned GMC Terrain and it is $21,500, but they can get a new one for $24,000 (only about $45 a month more) there is a good chance they will go with the newer model, so the only way to keep the pre-owned inventory fluctuating is to lower the price.

There is also this funny little thing called Capitalism. It is all about what the market will bear. If the entire market, and not just a specific dealer, gets flooded with inventory dealers will start lowering their prices to keep their inventory moving to compete with other dealers. The same build up of inventory can occur if you do not keep up with your competitors.

Our dealership is always striving to give you the best price it can offer considering all market conditions. What this means is that even if our price is X amount of dollars lower than our competitors today it may not be that way next week if we are not careful, so we have to keep up with the market to keep offering you a significant discount over everyone else. Conversely, our competitors know their “best price” too. They are just hoping that you pay a little more.

Ultimately then, it is our duty to keep track of the market and continue to keep our promise to our customers; even if it means the best price for you is not the best price for us.

My First Week at a Best Price Store

After 15 months of working at a dealership with negotiable prices and commissioned salespeople I recently moved to a store that offers their best price right up front and who has non-commissioned salespeople. It is hard to understand how massive of a change this is to someone outside of the business, but believe me it is an enormous change. I will delve into the differences between the two in a later post, but I decided to make this post more about me experiencing the change, breaking down my old perceptions, and working for an entirely different company with different perspectives.

I will be honest from the start. I was bred to believe that the “best price” story was a false narrative and gimmicky. Although in theory I felt the dealership’s way of doing business fit my approach best I was worried that I might be making a mistake and falling for a marketing ploy. That is not because my previous employer (who was great to me and whom I have great respect for) had negative things to say and brainwashed me to think this way. Frankly, it is just what you have to convince yourself when the store you are working at is selling 40-ish cars and the guys up the street are selling 100+. At the same time, anyone who has asked me how I felt about the “best price” concept will tell you though that I have always done my best to stay neutral. I have always simply shrugged it off with a casual, “Well, everyone has a different way of doing business” or “They both have their benefits.” Now that I have seen the other side though…. I still say they both have their benefits. You thought I was going to go on an epic bashing spree there didn’t you?

The truth is, they do both have their benefits. Here it is: You can possibly get a better deal at a negotiable dealer. (Boss, if you’re reading this, bear with me). You might be able to get a better if you are a hardcore negotiator, if you catch the negotiable dealer at the end of a bad month, or if you happen to like the vehicle that dealer hasn’t been able to get rid of for 6 months. I should note on that last one that I’m still not bashing here. I’ve seen very good vehicles sit on the lot for an unreasonable amount of time. If I could figure out why that happens I’d be rich, but it does. All dealers struggle with this phenomenon. Even a best price store will lower the price of a vehicle if it sits on the lot too long (why a lowered price does not throw a rod into the best price concept will come at a later date). 

What this all comes down to is a preference. If you like to negotiate, you know that negotiable dealers are easier to deal with at the end of the month, and you like the vehicle that has been on the lot for 6 months you should go for it! I have come to realize though that a best price dealer does not necessarily think they are going to get every single car deal. The concept is based on the idea that on a consistent basis you can count on being able to get a fair deal on a vehicle without having to negotiate and find the right car on a Tuesday at the end of the month where a dealer is having a bad month and needs to get rid of a car and the wind is blowing out of the east and there is a 60% chance of rain and they broke a mirror the night before while walking under a ladder and…. you get the point.

As I have said, having worked at a negotiable dealer I thought this was all hippie stuff. I even thought for certain that it would not take long before the salespeople and managers were telling me behind closed doors, “Yeah, this best price stuff is hogwash and the owners are screwing us.” I am not even exaggerating. I was shocked to find that the staff really felt good about what they did. They truly bought into the process; even the people who were there before the store changed their approach. Anyone who has ever been through such a huge organizational change can attest to how difficult this is to accomplish. I even took the top salesperson out to lunch fully expecting them to tell me that the story was a crock, that they felt like they were getting taken, or that they did not even adhere to the company’s practices, and that they were a rogue vigilante who still did things their own way. Nope.

I have found quickly that not only do the employees and managers feel this way, but that our owner, Dan Anderson and his wife Stephanie, truly believe in what we are doing. And after my first week at a best price store, I can rest easy now having the confidence that I believe it too.

The Howling Dog and the Nursing Home

Have you ever went to a nursing home? Have you ever heard the way the staff talks to the folks that live there? If you have, you should already know how to avoid the wrong salesperson. Have you ever heard of a dog whistle? The pitch is so loud that, although humans can’t hear it, the sound can make a poor dog howl. Don’t be the human that can’t hear the sound.

If you go into a nursing home, or even just a doctor’s office, you’ll notice that the staff talks to the older patients with a really high pitched voice completely different than the one they use when they talk to younger people. I think it is the result of people trying to be sweeter to old folks and good on em’ I say! But the staff of a nursing home or doctor’s office just can’t be that chipper all day. They are on their feet all day going from patient to patient as fast they can and they see some pretty bad stuff.

So that means sometimes they have to fake it. And that’s what that voice you hear is. It’s perfectly fine and innocent in that environment (even a bit heroic considering the effort they have to put in), but if that’s the way your car salesperson is talking to you, especially if you are younger, you have a problem! If you hear your salesperson talking to you in that high, dogs are howling voice, it means they are faking it. It means they are putting on a show for you. They are sweet talking you. They are desperate for you to like them and want you to think “Gosh, this salesperson is swell!” They want you to trust them, but trust me, you cannot.

Listen to the other salespeople in the dealership. Every salesperson wants you to like them, but are they using that high pitched voice? Even listen to the way your salesperson talks to other people at the dealership. Are they talking to them differently than they are talking to you? Uh oh… you have THAT salesperson then. The salesperson that wants you hanging on their words and thinking you’re just the sweetest person ever and then BAM! you’re paying window sticker price or negotiating $200 when other people are negotiating $1,000.

So if you’re ever on a car lot and a salesperson comes out using the nursing home voice and all of the dogs in the neighborhood start howling run for your lives!

Seriously though, here is my tip: If you ever run into that salesperson, just say, “Well, I have talked to another salesperson out here before. I would like to keep working with them. I don’t remember their name though. Can you name some?” Then, whoever’s name they say first just tell them that’s them and ask if they can come out and help. If they are busy with another customer, just remember the name and come back later and ask for them again. Either way, that salesperson has probably talked to dozens of people on the lot that week and it’s hard to remember everyone, so they will just go with it thinking they might not have remembered you.

Best Time To Buy

One of the questions I am asked the most in the car business is when they best time to buy might be. This question is usually in regards to the best time of the month or the best time of the year, but it’s more complicated than that. You will often hear the best time of both the month and the year is the end of each. There are some factors at play and it can be dependent on whether we are talking new or used and whether you need to buy or you just want to buy.

For a given month, there is some truth to the idea that the end of the month is the best time. There are often bonuses for certain number of cars sold for the salesperson, the sales manager, or even the dealership from the manufacturer in a given month. If any of these targets are either achieved or unachievable with only a few days left, then the end the month is irrelevant. Typically, it will be the salesperson that needs a sale most before the end of the month and they have the least control over the price if they have any at all. On the other hand, a dealer may want to get a good start to a month if the previous month was a bad one. The same can be true with the middle of the month. If everyone is behind target for end of month goals in the middle of the month they may be willing to deal too.

There are factors related to new vehicles that impact this as well. Rebates regularly end at the beginning of each month. So even if the sales targets for the folks at the dealership are irrelevant, you might lose out on $500-$1,000 if you do not get a deal done before the end of a month. For instance, for the last few months Ford has been giving us a few thousand dollars at $1,000 increments to apply to certain vehicles. They decided monthly whether to continue them and kept them for about 3 months, but they ended yesterday. Your $19,000 car might have just become a $20,000 car. This might be only relevant if you are really ready to, or need to, buy a car right now.

Another factor (also related to rebates) is when certain model years are released. For instance, F-150’s typically come out at the end of the year while the new Escape model has been out about 2 months already. So a 2017 Escape actually comes out in Spring of 2016 while the F-150 comes out closer to year end. Rebates will begin to really increase leading up to the new model year for each specific vehicle, and especially once they start finding their way to the lots. The manufacturers want those old models off of the lot, so they will increase the discounts to help dealers move them. I’ll tell you why you should beware of waiting too long for those rebates in my next blog post.

Lastly, the end of year question. Yes, there are some extra rebates and yes there are some year end goals, but they are not nearly as strong as what is believed. I believe there used to be more truth to this and it might even be more true at larger dealers who have a lot of volume, but I do not think it is so.

In the end, I’ll call the “end of month deals” mostly true and the “year end deals” mostly false, but as you can see there is a lot more to it!

If you have any questions feel free to comment, call me or text me at 660-342-3715, or just come see me at 1801 N Elson!