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Auto dealerships in the USA
In the United States, a car dealership is a retailer that sells new and/or used cars. Used car dealerships carry cars from many different manufacturers, while new car dealerships are generally franchises associated with only one or two manufacturers. However, in some areas, dealerships have been consolidated and a single owner may control a chain of dealerships representing several different manufacturers. New car dealerships also sell used cars, as they take in trade-ins and/or purchase used vehicles at auction. Most dealerships also provide a series of additional services for car buyers and owners, which are sometimes more profitable than the core business of selling cars.
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Top 20 New Cars for 2008 |
Model year 2008 is upon us, and many manufacturers are debuting new models in order to entice more buyers to their dealerships. Here’s what Road and Track magazine considers the top 20 new cars for 2008.
(by the way, it’s not actually 20 cars… in the frenzy of making this list, they weren’t able to pick just 20 cars…)
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Most car dealerships display their inventory in a showroom and on a car lot. Under federal law, all new cars must carry a sticker showing the offering price and summarizing the vehicle's features. Typically, salespersons working on commission only, negotiate with buyers to determine a final sales price. In many cases, this includes negotiating the price of a trade-in — the dealer's purchase of the buyer's current automobile. Negotiations from the dealerhip's perspective is often referred to as "desking" a deal although different terms are used throughout regions and should be considered regional.
Profit margins on automobile sales are surprisingly low. A new car dealer may mark up a car by less than two percent over the manufacturer's invoice cost, and typically the car dealer borrows from the manufacturer for inventory and pays interest (called flooring or floorplaning). On the other hand, some manufacturers pay "hold-back" to improve the fiscal stability of dealers. Typically this is around 1% to 2% of the vehicles' wholesale price to the dealer. Hold-back is usually not a negotiable part of the price a consumer would pay for the vehicle. Hold back is designed to offset the cost the new car dealer has for paying interest on the money s/he is borrowing to keep the car in inventory.
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Regulation |
Most car dealers offer a variety of financing options for the purchase of cars, including loans and leases. Financing can be highly profitable for dealerships. There have been some scandals involving discriminatory or predatory lending practices, and as a result, vehicle financing is heavily regulated in many states. For example, in the U.S. state of California, there must be several signs prominently posted on the premises,and the contract must contain several prominent warnings, such as the words " THERE IS NO COOLING-OFF PERIOD". |
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Although the terms of installment contracts are negotiated by the dealer with the buyer, only a tiny number of dealers actually make loans directly to consumers. People within the business refer to such dealers as "buy here, pay here" dealerships. These stores are able to make loans directly to customers because they have some means of recovering the vehicle if the customer defaults on the loan. The means by which "buy here, pay here" dealers can recover a vehicle vary by state.
Most dealers, however, are indirect lenders. This means that the contracts are immediately "assigned" or "resold" to third-party finance companies, often an offshoot of the car's manufacturer such as GMAC, or banks, which pay the dealer and then recover the balance by collecting the monthly installment payments promised by the buyer. Sometimes the dealer has the option of marking up the interest rate of the contract and retaining a portion of that markup. For example, a bank may be give a wholesale money rate of 6.75% and the dealer may give the consumer an interest rate of 7.75%. The bank would then pay the dealer the difference or a portion thereof. This is a regular practice because the dealership is selling the contract to a bank just like it sold a car to the customer. Most banks or states strictly limit the amount a contract rate may be marked up (by giving a range of rates at which they will buy the contract). In many cases this amounts to little difference in the customers payment as the amount borrowed is small by comparison to a mortgage and the term shorter.
Customers may also find that a dealer can get them better rates than they can with their local bank or credit union. However, manufacturers often offer a low interest rate OR a cash rebate if the vehicle is not financed through the dealer. Depending upon the amount of the rebate, it is prudent for the consumer to check to see if applying a larger rebate results in a lower payment due to the fact that s/he is financing less of the purchase. For example, if a dealer has an interest rate offer of 7.9% financing OR a $2000.00 rebate and a consumer's credit union (or other lending source) offers 8.25% a consumer should compare at the credit union what payments and total interest paid would be if the consumer financed $2000.00 less at the credit union. The dealer can have their lending institution check a consumer's credit. A consumer can also allow his or her lending source to do the same and compare the results. Most financing available at new car dealerships is offered by the financing arm of the vehicle manufacturer or a local bank.
Dealers may also offer other services, typically through the Finance and Insurance office. These additional services can include:
- Service contracts: While any vehicle sold in the United States now comes standard with some degree of manufacturer's warranty coverage, customers have a wide range of choices to cover their vehicle from mechanical failure beyond that point. Service contracts may have the same terms of coverage as the vehicle's original manufacturer's warranty, but often they do not. Often service contracts carry a deductible as might any insurance contract. Because of the vast number of choices, it is important for consumers to be aware of the coverages before entering into an agreement. Usually these service contracts do NOT cover regular maintenance items such as brakes, fluids, or filters. In some states, such as Florida, the cost of such agreements are heavily regulated.
There are three main types of service contracts offered. The first is offered by the manufacturer through the dealership and is usually good at any dealership in the US that has that same franchise. When warranty repair work is required, the dealer submits a claim to the manufacturer and is reimbursed for the repair less the deductible paid by the consumer. Under this type of service agreement there is usually no incentive for the dealer to do anything but repair the car as reimbursement from the manufacturer is usually profitable.
The second service contract is usually a simple insurance policy that the dealer purchases wholesale and is administered through a third party working for the dealer. This "third party" can often be a major insurance company. This money collected by the dealer from the consumer is put in a "reserve" fund for the length and / or term of the service contract. When a repair is required the dealer authorizes the repair with the third party administrator, usually before the repair is done. The third party deducts the repair expense from the dealer's reserve fund. The fewer payments or deductions made on the service contract the greater the profit to the dealer as any unused portion of the "reserve" is given back to the original selling dealer less an administration fee when the service contract retires.
The third type of service contract can be purchased directly from a few automobile insurance companies. Check with your agent for information.
- GAP insurance: GAP insurance is protection for the loan in the event that the vehicle is lost as the result of an accident or theft. A GAP policy ensures that in the event of a total loss, the remaining payments are made on the loan so that a customer does not have to pay for a vehicle he or she no longer has. Many states regulate GAP insurance (New York, for example, does not allow dealerships to profit from the sale of GAP insurance).
- Credit/Life/Disability insurance: It is important to note that this kind of insurance is a profit center for the dealership working very much like the second type of service contract described above in this article and can not be required as a condition of the loan. Customers / Borrowers often have the option of purchasing protection for their loan should the borrower become disabled and unable to work for a period during the time the borrower is required to make payments. Often the coverage begins on the 31st or 32nd day of disability: Meaning the borrower has to be unable to work for a period greater then 30 days before a claim can be filed. Often the borrower is required to submit paperwork to validate a disability claim. Credit Life insurance will usually cover the entire remaining balance of a loan if the borrower dies within the term of the contract. While customers can often obtain this coverage from their own insurance companies, dealerships, depending on state regulations, can often offer comparable coverage while also offering the convenience of a "single stop purchase."
- Aftermarket accessories: Many dealerships offer accessories that are not offered by the manufacturer directly. Like Credit/Life/Disability insurance, there are many ways a consumer can purchase these options outside the dealership, but without the convenience factor.
- Maintenance agreements: Many dealerships that have their own service shops will offer pre-paid maintenance agreements. These are sometimes offered directly through the manufacturer (such as Saturn's Basic Care or Car Care programs) or by the dealership alone. Because of the vast differences in programs that can exist from dealership to dealership, it is important to know what gets covered under such a plan and what are the recommended service intervals (see below).
Car dealers also provide maintenance and in some cases, repair service for cars. New car dealerships are more likely to provide these services, since they usually stock and sell parts and process warranty claims for the manufacturers they represent. Maintenance represents a significant profit center for new car dealers, especially since it brings customers back into the showroom to see newer car models. |
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