Purchasing a car is life altering decision so it comes as no surprise that many people do extensive research before ever stepping into a dealership.
In fact, 94% of car-shoppers use the internet for research prior to making a car buying decision and the average time spent researching used cars online is over 15 hours. Through this research many are able to decide between a new or used car, which vehicle is right for them, and what price and finance terms are within their budget.
So after all of this work, why are there so many surprises when we finally enter a dealership? Why does the average car buyer spend 4.3 hours there? And why is the cost to purchase a car never what you thought it would be?
Because car buyers are able to come into the dealership more informed—usually about vehicle pricing, dealerships have adjusted where they earn profit. They now utilize certain tactics and opportunities outside of the car’s pricing to squeeze profits from car-buyers, which we call profit pockets.
In this series we’ll identify three main profit pockets in which to be wary of when purchasing from a dealer and how to avoid them.
With car-buyers being more informed on price and preferring a no-haggle price point, dealerships have shifted focus from putting high margins on the car’s price to encouraging car-buyers to purchase more and more add-on products that have extremely high margins. In fact, based on a public filing from AutoNation, dealerships make 5.6x more profit on add-on products than the actual car itself.
What to do: Know what each add-on entails and if you want them before entering a high-pressure sales situation. Also, when going through the car-buying process, don’t feel pressured into saying yes.
Because financing is one of the top four frustrations in car buying, many dealerships use this as an opportunity to reap additional profits. In fact, according to CNW, the percentage of dealership profits coming from the Finance & Insurance department has gone from 28% – 56% from 1992-2012. One example is the dealership offering you an above market interest rate that doesn’t seem like a huge difference per month but is definitely a hit to the wallet over the life of the loan.
What to do: Ensure that you’re familiar with your financing situation and remember that you don’t have to finance through the dealership. Shop around to make sure you get the best loan.
The “Processing” Fee
It’s known by many names: processing fee, documentation fee, administration fee, electronic filing fee, etc. Dealer Documentation fees cover dealer administrative costs involved with processing the title, registration, or any other paperwork, filing, or various clerical tasks. However, these fees are largely unregulated and can range as high as $998. The southeast region of the United States tend to have the highest documentation fee, with Georgia topping the list with an average fee of $519. Over $500 to file paperwork? We think not.
What to do: This fee is almost impossible to avoid. While it is not illegal to negotiate these fees, waiving or lowering it for one customer could open a class-action lawsuit for discrimination. What you can do, however, is ask for an equivalent reduction in the price of the car.