Informal reports are emerging that a growing number of car dealerships are starting to scale back their markups on aftermarket insurance and financing. The dealer finance markup, as well as dealer insurance markup, can be pretty steep as often as not.
Cutting back dealer finance markup an act of self preservation
The sticky wicket about self-interest is that one must balance long-term with short term. For instance, bacon is delicious but too much results in a heart attack. Likewise, car dealerships have to talk customers into paying more than invoice and buying add-ons but can’t be too greedy. Word gets around and they’ll lose business or worse, attract the federales.
Hence why AutoBlog reports a number of dealerships told the Automotive News they were scaling back dealer finance markup and dealer insurance markup. Many already cap the markup, meaning they only charge so much, but the idea is reigning it in will avoid attracting regulators and driving away customers.
Why a markup?
Believe it or not, according to Forbes, dealerships don’t make much from car sales. Services like repairs and maintenance, finance and insurance are where the big dollars are at. It isn’t too dissimilar from movie theaters; theaters hardly make money from ticket sales – box office goes straight to Hollywood – and mark up concessions to keep the lights on and employees paid, which is why a popcorn costs so damn much.
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Likewise, dealer finance markup is part of how dealers make money though they can go too far at times.
Depends on the dealership
One part is the finder’s fee, of sorts. According to BankRate, a “dealer reserve” or “dealer participation” fee is often included, charged by the finance and insurance, or “F&I,” service division, for finding or even lending a loan. Fees of $952 to $1,587 per hour are somewhat common.
The Federal Trade Commission found in hearings that “indirect loans,” which customers get from third parties through dealerships were often at lower rates than direct loans from car dealers. The Automotive News, according to the Chicago Automotive Trade Association, was told 2.5 percent was common as of 2010 – that’s the rate of the loan, plus an extra 2.5 percent APR paid to the dealership. This is why it’s recommended a person get a car loan from their bank as, say, BB&T car loans, can come with less interest than through the dealership.
Bells and whistles
Aside from dealer finance markup, there are also dealer insurance products, such as extended warranties, LoJack and GAP coverage or guaranteed asset protection, which pays the difference between the car’s value and the loan balance in case a car is totaled or stolen.
There isn’t a lot of data on how much money this all represents, but Forbes reports that among the six publicly-traded auto dealership chains, F&I services were worth $1,100 per vehicle sold. One, Asbury Automotive, reported F&I services were 3 percent of income in 2011, yet 20 percent of profits.
Service stations are also a moneymaker for dealerships; Forbes reports parts and services were 13 percent of revenue but 44 percent of profits for Penske Automotive in 2011; the parts and services departments at Penske reaped a 57 percent profit that year compared to 8 percent on car sales.
In short, these are part of how a dealership keeps the doors open, but also part of how they can gouge customers. It isn’t that they aren’t trustworthy but remember – everything is negotiable. Don’t be afraid to play hardball.
Chicago Automotive Trade Association: http://www.cata.info/automotive_news_25_becoming_standard_dealer_finance_markup/