Dealerships deserve shot at profitability

Dear Bruce: In the last few years, I’ve noticed that almost all car dealers add a “document fee” when buying a new or used car. It varies from $99 to $298. To me, this is 100 percent profit, and even if you bought the car at cost, they would make a profit. I usually try to negotiate this out of the deal, but I’m sometimes told that the fees are necessary to pay for handling the paperwork. Is this a nationwide trend? I remember in the 1980s that dealers added a prep fee of about $500, supposedly to get the car ready for sale. It appears the document fee has replaced this. – F.W. Hernando, Mo., via e-mail

Dear F.W.: You say this is 100 percent profit. There is no such thing as 100 percent profit. Overhead has to be deducted from the gross profit, and the money has to come from somewhere. Car dealers are getting their brains beaten out by people who shop like crazy, looking up the prices of the cars on the Internet, etc. The only way they are going to continue to show a profit is to sell extras and have extra fees. The public wants to believe they are buying the cars at cost. Think about it. If they sell it at cost, how do they keep their doors open? They are entitled to a profit. I am not in any way partial to automobile dealers, but people expect a dealer to sell a product that may cost upwards of $30,000 and walk away with a $300 or $400 gross profit. There is no way that can be done. With the shopping that is done by the public, they have to make it up someplace, and fees are how they are getting the job done. Frankly, I don’t think that’s wrong.

Dear Bruce: Oftentimes, it is necessary for us to rent a car. Every time we do, we wonder if we should sign up for all of the insurance offered by the agency, which we usually waive. We are a bit nervous, because I keep hearing tales where someone actually had a wreck and it cost them a ton of money. What are your thoughts? – Reader in Michigan

Dear Reader: My advice is to first check your credit card to find out what it offers in the way of collision insurance. It may be that if you charge all of your expenses on that card, the collision insurance would be paid for. Secondly, check with your own insurance broker to see what coverages go along with your driver’s license. In most cases, collision, comprehensive and liability apply to any car that you drive. Finally, if you’re nervous about this, and you only rent a car once a year, take the coverage. This may not be the best advice, but for the few extra dollars once a year, why not go with the peace of mind?

Dear Bruce: I began a new job that provides a car allowance of $450 and a gas card instead of a company car. I pay for the car, insurance and maintenance. As a salesman, I’ll drive about 25,000 miles a year. Should I buy a new car, a used car or lease one? Please give me your thoughts. – W.S., via e-mail

Dear W.S.: If owning a new car is not important to you, a late-model, low-mileage used car will probably be your best bet. And the most economical thing would be to run it into the ground. Another consideration: You are starting a new job, and what if this job goes away? It does happen. If you have purchased a brand-new car, you may be stuck with high payments that are difficult to handle.

Dear Bruce: In response to J.D. of Saginaw, Mich., you said that one should never finance a car for more than three years because of becoming upside down in the value-to-debt equation. Is that true if you get a zero percent loan? I don’t think so. Here’s why. Three years ago, we had two vehicles, each of which was between 10 and 12 years old. The expenses on them were eating us out of house and home. So we traded them in (trade-in value virtually nil) toward two new vehicles from the same dealer. We had the money to pay cash for them. The dealer did not have a cash discount. He did have a zero percent loan available, with an early payoff penalty. We put the minimum down (one month’s payment) and are paying that off in 60 equal monthly payments. We took half the money we had for the cars and put it in a two-year certificate of deposit earning 5.5 percent. The other half we put in a savings account starting at 3 percent (though that rate has steadily declined to about 1 percent now). Not great returns, true, but we’re making some money while using the dealer’s. In three years, we’ve made more than $2,000 with no interest paid. I know we are way ahead having done this, but I think anyone who gets a zero-percent loan would be better off, too, because they aren’t paying interest. Therefore, their vehicle would technically be paid off at an accelerated rate. Am I missing something? – S.M., Madison, Ohio

Dear S.M.: Yes, my friend, there are a couple of things that you are missing. One is that when you pay cash, ordinarily there are substantial discounts that can run upwards of $3,000 and $4,000. That discount, in essence, represents the interest that you are not paying on a zero percent deal. The fulcrum here is how much your money can earn. You are obviously extremely conservative, investing in CDs, and so you are destined to minuscule returns. With just a modicum of risk, you could have put that same money into corporate bonds where the return may have outpaced the extra $3,000 or $4,000 per car you paid, (I used the word extra because for cash you could have bought it for less). Nothing is for nothing. Unhappily, many people are attracted to the so-called zero percent loans. In reality, they are seldom zero percent.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.[[In-content Ad]]