Tag Archives: finance
So you’ve learned how to negotiate a new car and think that guarantees you a good deal. Well think again! Did you know a majority of a car dealer’s profit comes from add-ons in the Finance Office?
Dealerships want you to think the hard part is over and that it’s time to let your guard down. But as you’re getting ready to sign for your new car, the Finance Manager will smoothly convince you that you need expensive add-ons and accessories.
What are Dealer Added Options?
A dealer added option is any accessory that a car dealer installs on a vehicle after they receive it from the manufacturer. Examples include items such as floor mats, cargo covers, roof racks, VIN etching, and pin striping. The prices of these items are not listed on the car’s MSRP sticker, but instead a dealer will typically add a second “addendum” window sticker.
Dealers add these items because they have high profit margins and most people don’t try to negotiate them!
Average Car Dealer Profit for Add-on’s (Infographic)
The image below shows how much the Finance Department really makes off everything they sell you. Note: these high numbers aren’t even the total price you pay, they only represent dealer profit!
But not to worry, you don’t really need most of these items. Here’s a breakdown of what these items really cost the dealer and what you can do to save yourself money. When in doubt, google a specific option and see if it’s recommended or available outside the dealership at a lower price.
Common Dealer Add-ons & Accessories
Item Cost to Dealer Retail Price Dealer Profit Suggested Action
Fabric protection (scotch guarding) $5 $300 $295 Not necessary. If you want it, buy Scotch Gard for 9 bucks and apply yourself.
Paint protection $10 $325 $315 Not necessary. If you want it, buy sealant or wax for 15 bucks and apply it yourself.
Undercoating $200 $700 $500 Don't get it, most new cars come with warranties against rust and corrosion.
Rustproofing $50 $800 $750 Don't get it, most new cars come with warranties against rust and corrosion.
Pin striping $30 $300 $270 Not necessary. If you want it, look for an independent shop to do it after you buy.
Car alarm $300 $800 $500 Consider this, but it will be marked up significantly at the dealership. Go to an independent dealer and save money.
VIN etching $75 $200 $125 Not necessary. If you want it, buy a window etching kit and do it yourself for 20 bucks.
Lojack $325 $800 $475 Consider this, but get prices from an independent installer first.
Extended warranty $800 $1,800 $1,000 Not necessary, but can come in handy. Don't buy at the dealership without shopping around first. Read how to evaluate an extended warranty.
Gap insurance $200 $500 $300 Not necessary, but get competitive quotes outside the dealership if you are going to buy it. Read more about gap insurance.
Financing $0 n/a a lot! Dealers typically add 2-2.5% in APR to loans they provide. Find your own financing before heading to dealer. Ask if they can beat it.
Negotiating Dealer Add-Ons
Many of the add-ons you will be offered are unnecessary or can be purchased outside the dealership at a significantly lower price. There are two main tips for negotiating add-ons:
- You probably don’t need it, so don’t buy it.
If an item is not factory installed as part of an options package the dealer may be able to remove it from the deal. Consider whether you really need it, or if can you buy it elsewhere. In the majority of cases, if the item is optional then say NO.
- Negotiate the whole car deal, not individual items
Follow the advice on my website and get car prices from several dealers. Make sure each dealer gives you a total price that includes all options and add-ons. You should be able to find similarly equipped vehicles and then you can ask dealers to give you their best overall price (including add-ons) to win your business.
Consider using a pro to negotiate for you. I can genuinely recommend my partners at Your Auto Advocate. They will fight to get you the best possible deal because they work for you and not the dealers. (read my full review)
So you’ve got your eye on a shiny new Putt Putt Intimidator XE. It’s got all the features that you want; navigation, shiatsu massage seats, power-folding running boards, a bazillion horsepower. But there’s one problem; it cost an arm, a leg, a kidney, and you’ll have to sell one of your children just to afford the insurance.
Then one night, you see a TV ad proclaiming the new Putt Putt Intimidator to be just $299 per month, “for well qualified customers”. But how? The thing starts at $30k, which would put your payments on the north side of $700 per month. Oh crap, that must be a lease! But is that really such a bad thing?
Car Lease Explained
Leasing a car is just like renting one at the airport. You pay to use it for a set amount of time, then you return it, and fly back to Cleveland. Sure the details are slightly different, but that’s the gist of a car lease. Those details however, could make a lease look pretty good.
1. You don’t actually own the car – While this may seem disconcerting to some, it can actually save you money in the long run. During the lease, you’re not liable for repairs, and in some cases, maintenance is included too. Other common leasing terms include;
- Yearly mileage restrictions – The leasing company has to sell the car once your lease is over, and a bagillion miles would make your Putt Putt Intimidator virtually worthless.
- No modifications allowed – No 40-inch wheels. No bumble bee exhaust. No loud stereo equipment, or anything else that might void the car’s warranty.
Good news – At the end of the lease, you can turn in your Intimidator for the latest model, or you can buy the thing outright.
2. You’re not financing the price of the vehicle, you’re financing the depreciation – The reason that your payments are so low is because you’re financing a smaller number. For example; If your $30,000 Putt Putt Intimidator XE is expected to be worth $19,500 at the end of your 24 month lease, your payments will be based on the $10,500 in depreciation, plus interest and leasing fees.
Buying the Vehicle
If you actually purchase the Putt Putt Intimidator, you’re financing the entire $30k plus interest and finance charges. You’ll be free to install all of the chromed out chachka, and flame-throwing exhaust kits that you want. And you can drive as many miles as you want too. However, you’ll be liable for any out-of-warranty repairs. Plus, regular maintenance will be on your dime too.
Once you’ve paid the vehicle off, it’s yours to keep. By contrast, when your lease expires, you have to turn the vehicle in and get a new model. Or, you can buy the vehicle from the leasing company. In which case, your payments will continue.
If you’re the type of person that likes to drive a new vehicle every few years. And you value convenience over ownership, then leasing a car would make the most sense for you. However, if you’re the type of person that likes to modify your car, then drive it till it dies. Purchasing a vehicle would be your best bet.
According to the IRS, if you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. And commuting to your regular workplace is not considered business travel.
What car expenses can you deduct?
The IRS gives you two options to deduct the business use of your car:
- Deduct car expenses using the standard mileage rate. The standard business mileage rate in 2011 changed mid-year. The business mileage rate from January 1 – June 30, 2011 is 51 cents per mile. The business mileage rate from July 1 – December 30, 2011 is 55.5 cents per mile. This changes from year to year (and sometimes mid-year like 2011 and 2008) so be sure to check the IRS mileage rates. On top of the standard mileage rate, you can deduct tolls and parking.
- Deduct car expenses using actual expenses. Actual vehicle expenses include lease payments, gas, oil, depreciation, license and registration fees, insurance, repairs, tolls, and parking.
Lease payments can serve as one of your biggest tax deductions. In my opinion, if you can deduct business use lease payments, that is the only time that leasing makes good financial sense. Here’s more to help you decide whether to buy or lease a car.
And in order to qualify for either option you must also keep detailed records of your business use of the car in a mileage log showing the date, business purposes, and number of miles driven. Keep in mind the second option is considerably more difficult to document. And just because it is more challenging does not necessarily mean you’ll end up with a larger deduction. Before deciding, try to estimate your annual savings under both options or check with a tax professional.
For more details on deducting car expenses refer to the IRS website.