What's My Interest Rate? What's My Interest Rate?

Wow.  This week a customer nearly drove me nuts with this question.  Over and over and over again.

It's easy to understand why car buyers think the salesman knows what kind of loan they are gonna get.  But usually we don’t.  Here's why. 

THE DEPARTMENTS

To begin, remember that most new car dealerships have three separate but intertwined business units under one roof:

1)     New & Used Car Sales

2)     Financing 

3)     Service & Parts

The three businesses work with each other but are nevertheless separate. Each has its own distinct function.  Today we are concerned only with the first two.

NEW & USED CAR SALES.  This is my department.  When you come into my office we select a vehicle, agree upon the price, and, if you are going to finance with us, I take your credit application.  Because of that last act it is easy to understand why you might think my office gets your loan approval and knows what rate the lender(s) offers you.  But we do not.

When I create a purchase documents folder for you it includes a Purchase Agreement, your Credit Application form, and any required Accompanying Documents.  Our office also enters your credit application info into a credit processing system and then prints out your credit reports. (“Reports” plural as there are 3 major credit reporting agencies: Experian, Trans-Union and Equifax).  We then put all of these documents into the folder in order to have a complete purchase documents package.

At this stage I might be able to provide you with a payments estimate, based upon the information we have accumulated in the folder.  But this is only an estimate (more often than not a guesstimate), as I and my fellows in the Sales Department are not finance professionals.

There are exceptions.  For example, if your credit score is 790 or something like that and Volkswagen is offering 3.9% financing this month for all people with 700+ credit scores and you come in asking for the 3.9% rate then, yeah, I can tell you with near certainty that you are going to get that 3.9% rate long before we march on over to the Finance Office.  But few financed sales are that easy.  Most people’s credit situations are, um, shall we say, “complicated.”

FINANCING.  Now we take your purchase documents folder to the Finance Department.  This is the group that reviews your application, submits it to the lenders, and, in return, receives “call backs.”  A call back is a document in which a lender spells out the combination of term (loan length), interest rate and minimum down payment it will agree to do for you.

In an ideal world submissions would be easy, call backs would be instant, and every customer would enjoy a 0.9% interest rate.  But it’s not that easy.  Life is messy and so are peoples’ finances.  The lenders have many criteria to review before they can approve you for a loan.  The first job of our Finance Manager is to review your application and anticipate the questions that the lenders are going to ask - before they ask them. 

For example:

 - Is the car you want new or used?  5 years old or less?  75,000 miles or less?  Is it a Jeep, a truck, a station wagon, a sedan, a high performance car?

 - Has your credit history been established for more than 2 years?  Any previous or current car loans?  Any revolving or installment loans?

 - Are you self-employed?  A W-2 employee?  A 1099 contractor?

 - Is your debt-to-income ratio in order?  

 - Do you have negative equity in your trade-in?  

 - Do you have any down payment money?  

 - Are you a US citizen or are you authorized to be in the US for a length of time equal to that of the loan you are requesting? 

 - You say your ex-husband is responsible for making payments on the car loan that shows up on your credit report in your name only  - do you have this in writing as part of your divorce decree? 

 - Is this a second car you are trying to add to your debt load and, if so, who is this car for? 

 - And on, and on, and on…..

Many call backs pour out of the fax machine with the word "Declined" written across the top.  If the finance office just stopped there we wouldn't get many loans approved.  They try to find some way to turn that "No" into a 'Yes."  Oftentimes they get on the phone with the lender and try to negotiate a deal on your behalf.  (“If I can get the customer to do X, will you agree to do Y”?)  Remember that nobody at our dealership makes any money from your car purchase unless you are successful in getting a loan that you can live with.  So the Finance Department people are working on your behalf.  And it is real work.  

This is why only the Finance Department can tell you what your rate will be.


BUSINESS ECONOMICS

All retail businesses exist to buy for $X and sell for $X+, right?  It is widely and easily understood that my department (sales) is going to sell the car to you for more than what we paid for it. Our Finance Department must do the same thing.  It's simple economics.  But this is where many buyers suddenly go mental and conclude that the Finance Department is ripping them off.  "6.9%?  That's robbery!  I saw 5.9% advertised on carloans.com.  You tell your finance guy I want 5.9% or I'm not buying!"  Oh what short memories we have.

Remember all that work the finance guy did for you in the examples above?  Shouldn't he be compensated for that?  Didn't he do a lot of work for you that you either did not want to do or did not know how to do?  Remember that he is a middle-man, acting as an agent for you, negotiating on your behalf with the lenders.  And the more complicated your situation, the more effort he must expend in order to secure a loan for you.  There should be some reward for labors, no?  So the Finance Office, just like the Sales Department, has every right to buy for $X and sell for $X+.  Only in this case, the item being sold is not a car, it is a loan.

Now, you can cut out the middle man and contact banks and credit unions directly for your car loan.  In fact, I encourage you to do so.  That way you will have your financing in place in advance of the purchase and I won't have to take your phone calls asking "What's My Interest Rate?  What's My Interest Rate?"  All kidding aside, as a representative of the Sales Department, I don't care where you get the funds to buy the car.  As long as it is legal, I am happy.

But, if you are like a lot of people, you will discover that getting a loan for yourself by yourself is hard and frustrating work.  If that happens, remember that there is a guy in our Finance Department who will be happy to get his hands dirty finding a loan for you.  Just say the word.

What's The Catch?

I was reminded again today of one of the paradoxes of retail automobile sales and it is this: most customers claim to hate the old school way of negotiating the price and wish dealers would instead take a simple, full disclosure sales approach. And yet, when dealers grant this wish customers often retreat because they think they are now paying too much!

The traditional approach to retailing a car goes like this; the salesman says “The price is $ X. Shall I draw up the paperwork?” Then the customer says, “Well no, you have to come off that a little bit.” (Or “No, you have to come off of that a lot” or “No, I’m willing pay $ Y and not a penny more” or something like that). The salesman then marches to the sales office and tells the manager the customer wants a discount or tells him what the customer wants to pay. The manager counteroffers and the salesman takes that new number back to the customer. The customer then either agrees with the new number or says “No” at which point the salesman trudges back to the sales office for a new counter offer, repeating this back-and-forth process as many times as necessary until either the parties agree to a price or the customer goes home without a new car.

Now, when you read the paragraph above the procedure looks very nonthreatening, doesn’t it? It’s a simple back-and-forth negotiation and not hard to understand. So why does it fill people with such dread?

We know the answer: it fills them with dread because they (the customers) know going in that they do not possess the knowledge that would put them on equal footing with the salesman. They don’t know what their trade-in is really worth (wholesale), and they don’t know the fair market retail price of the car they are trying to buy. Even though much of this info IS available to the consumer who wants to research in advance of his/her visit to the dealership, most do not do this homework. And many who have done the homework misunderstand the info and therefore come into the dealership with flawed expectations of what should take place.

One much trumpeted solution is for dealers to be liberal with their knowledge and information. We’ve all seen the slogan for Syms stores, “An educated consumer is our best customer.” Well, why can’t car dealers apply this same approach to car sales? The answer is they can; indeed, I sell this way and have for more than 10 years. But for some people full disclosure turns out to be not enough. No matter how much info the dealers gives them, and no matter how many invoices or interest rate charts he shows them, these people still have mistrust.

Since the customer in this example doesn’t possess the knowledge of the salesman, there is no way for him/her to know where the truth really lies. No matter how transparent the sales process, no matter how liberal the salesman is with info, this customer is convinced that there must be a catch! “Is that the real invoice he is showing me?” “Is he telling me the truth about my trade-in?” “Is he making a gazillion dollar profit off of me?” “Oh no,” they think, “I can’t figure out the catch – then (gasp) maybe that IS the catch? I’m in a trap!” The result of this downward spiraling logic? Paranoia.

Back when I sold new homes we had a sales trainer who taught us “Remember, the day the customers first walk into your model home they are not looking for a house. They are looking for a salesperson who understands them.” Because once they sense that the salesperson genuinely cares about helping them they can let down their guard and enter to a bond of trust. Then, and only then, can they begin picking out a house. Or, in today’s example, a car.

So my advice to customers? Relax. Then find a salesperson whom you trust. The car part will take care of itself.

Alternative Car Shopping: Boardwalk Volkswagen Richardson

Cars are merchandise.

They are also, according to one’s individual tastes and opinions, unbelievably fun, a necessary evil, cool looking, a cause of global warming, status symbols, problematic, fast and powerful, overcrowding our cities and highways, exhilarating, dangerous, the objects of a seemingly unending American love affair and an indelible part of our culture.

They are still merchandise.

As is true with all merchandise, there is no one way of merchandising it. (Is the "Tuesday Morning" approach to retailing the same as "Bed Bath and Beyond"? Not at all - yet they both sell the same type of goods). Likewise, our approach to selling cars is not like that of the traditional car dealership. Here's a brief explanation of how we do it.

USED CARS

Our approach to moving used cars is much like that of some popular discount clothing stores you know. To start, we make certain to stock plenty of fresh, quality merchandise. (Indeed, we have so many recent year used Volkswagens in stock at all time that we are the #1 seller of Certified Pre-Owned Volkswagen cars in the nation). Secondly, our cars are sold using a prescribed, time sensitive procedure.

- Each car is placed into inventory clearly tagged with a fair market price. No price negotiations are necessary in order for you to get a good deal - each car as priced is already a good deal.

- If, after 30 days, a car remains in our inventory unsold it gets a mark down tag (assuming we have some room to discount). The already good deal just got better.

- If, after another 15 days, the car is still unsold it is marked down a second time (again, assuming we have room to discount). The already good deal just became unbelievable.

- If, after another 15 days, the car is yet unsold it is quickly removed from our lot and sold at auction. Fresh merchandise is brought in and the whole process begins again.

This prescribed pricing and time sensitive sales method means that you, the buyer, will always get a good deal on a quality Boardwalk used car (no agonizing hardball negotiating necessary), and, on occasion, you even might stumble upon an absolutely great deal because you walked in at the right time (like, day 46). What’s not to like?

All of our used Volkswagen vehicles are Volkswagen Certified Pre-Owned cars. Each has been thoroughly mechanically checked out and brought up to like-new condition. Plus the original manufacturer’s warranty has been extended 2 years/24K miles beyond its original mileage/date. So a car with, say, 15K miles on it that originally sold in June 2006 and therefore had a warranty end of 50K miles/June 2010 (whichever comes first) instead now has a warranty end date of 74K miles/June 2012! What a deal!

NEW CARS

The process here is very different. Dealers buy new cars direct from the factory at a fixed wholesale price and then are free to resell them at any price they deem profitable. Of course, the competitive marketplace pretty much determines what a dealer can and cannot expect to charge for his new cars.

All VW dealers pay the same price for new vehicles. There are slight regional differences (VW adds a regional advertising and port prep fee into each dealer invoice and the advertising fee varies slightly from region to region*), but otherwise all dealers in the US buy new cars from the factory at the same price.

Any astute shopper can go to Edmunds.com or ConsumerReports.com and see that margins on new cars are very slim; typically 3% - 5%... or less. So will we discount a new Volkswagen for you? Of course. But will you get $5,000 off MSRP? Heck no - the gap between MSRP and invoice on a Jetta SE (for example) might be $1,100 at best. So how do you get a "good deal" on a new Volkswagen?

The first way we can assure you of a good deal is by not making you work for it. I mean, do you really, really, really want to engage in the old "What's it gonna take to earn your business today?" negotiations dance? I thought not. So how about this?

1). Actual vehicle invoice, +

2). $1.00 (it's symbolic, yeah, I know), -

3). Any factory incentives that may be in place (usually there are no cash incentives from VW, but from time to time that changes) =

4). Your Sale Price.

Invoice + $1.00.** Simple as that.

Now, can you get a new VW for cheaper? Yeah, honestly, you can. If you want to spend days going from dealership to dealership, spend hours fielding phone calls from one salesperson after another, spend additional hours pitting one dealership against another going back and forth, back and forth, all in the quest of getting "a better deal" you will eventually find a dealer who caves and knocks off an additional few hundred dollars. Really. But that's it. There's no big margins in these cars so VW dealers really have no ability to deep discount them. Anything below invoice comes directly out of the dealer’s pocket, so if you grind him down (or he craters and takes himself down) to a below invoice price it's a loser sale that barely makes enough to cover the salesman's commission. We have to ask ourselves, what's the point?

The second way you get a "good deal" is by buying a Volkswagen. No kidding. I realize they are not perfect; VWs are machines and so occasionally they develop problems. And every now and then a less-than-stellar copy gets out of the factory, but, really, that is not the norm. From annual appearances on the IIHS "Top Safety Picks" list (in every vehicle category, too) and Kelly Blue Book's "Best Resale Value" awards, to Edmunds.com owner reviews of 9+ on a scale of ten, the list of awards and recognitions given to Volkswagen in just the past 3 years alone is staggering. If you have not yet driven a Volkswagen, check it out.

*In the DFW region the total advertising, port and prep fees is $407. This is added into every invoice. If you go to Edmunds.com to look up the MSRP and invoice prices of new Volkswagens simply add $407 to the invoice amount shown and you will have the true amount dealers in this region pay for that car.

** We make an exception to the “Invoice plus a buck” pricing formula on the diesel TDI models. We sell the Jetta and Golf TDI models at MSRP. Believe it or not, this is also a “good deal” since dealers in other parts of the country (and in Texas) sell these cars for MSRP plus a premium of anywhere from $2,000 - $4,000.

"I Might Be A Little 'Upside Down' In My Car...."

The news has reached everyone by now; full sized trucks and SUVs and other thirsty vehicles are taking a bloody beating in the resale markets. If you have recently taken your Navigator, Tahoe, Hummer, F-250 or pretty much anything with an engine bigger than 3.5 liters to a dealer and inquired about its trade-in value you have undoubtedly been disappointed.

Many people now face a tough dilemma: they can’t afford to drive their guzzler any longer, and no dealer or individual will buy it from them at a price needed in order to pay off the vehicle's loan.

However, before the current market upheaval it was already estimated that as many as 60% of Americans were driving cars on which they owed more money than the car was worth - wholesale, or even retail. How high do you think that number is now?

Why do people get “upside down” in their cars so easily today? Well, as cars have gotten better (and they really are much better today than were their predecessors 20, or even 10 years ago) they have gotten more expensive. As cars get more expensive the only way to keep payments affordable is to extend the term of the loans. In the last twenty five years the average car loan term has jumped from 3.5 years to 6. And while stretching out loans keeps payments down, it also means that it takes a long, long time before a five or six year loan is paid down to the point where the owner has enough equity that the car can be taken to a dealer and traded in for a new one.

If you determine that you want or (absolutely, positively) need to trade in your car before you reach the equity stage, you face a dilemma. Dealers are offering you $ X for your car as a trade-in, but the loan payoff on it is $ X+Y. You owe more than the car is worth. Not only do you have no cash value (equity) in the car, you have negative equity. Your only options are to write the lender a big check for $ Y, or, ask the selling dealer to add $ Y into the purchase price of your new car. (Called “rolling in” or “burying” your negative equity).

A lot of people still assume that they can bury their negative equity into a new car loan easily and without consequence. It can still be done, although the lenders are now more particular about the negative equity absorbing loans they will approve.

To illustrate, let’s say you have -$6,000 negative equity in your trade-in, and you want to buy a new car worth $21,000. The new car, after tax, title and license might be $22,500. When you add in $6,000 you get a financed total of approx. $28,500. You've just increased the price of your new car by 29%!

There are two big problems here:
1) You are asking the lender to finance $28,000 on a product that is worth $21,000. If, god forbid, you should ever default on this loan the lender is stuck with a bad car loan amount far greater than the value of the car used as the loan collateral.
2) Because the contract amount is now huge the only way you can afford the payments is to stretch out the loan to 6 years. Which means you can never, ever trade in this car before it’s paid off or you will encounter a negative equity situation all over again – only worse.

If your credit score is medium to high you can usually bury a couple thousand dollars worth of negative equity into a new car purchase without too much difficulty. But if you are $6,000 - $8,000 upside down and need to bury it all you might be out of luck. Lenders are fleeing big negative equity loans like Galveston residents fleeing an impending Hurricane Ike.

So, if you owe way more today on your car than it is worth you likely have the same choices that the gulf coast people did with the storm: either ride it out to the end or pay to get out now.

"How Much Is The Dawn Payment On That Car?"

I get credit applications all the time from people who, it turns out, have only a vague understanding of how automobile financing works. For example, they want to buy a $35,000 R32 with no money down, but then are disappointed when I tell them the payment can't be $350 per month. Or they want to buy a 10 year old /100,000 miles-on-the-odometer used car on our lot but don't understand why it can't be financed. These are just two examples. So allow me to elucidate a little bit in the hopes that this random information will be helpful.

DOWN PAYMENT AND PAYMENTS. Every week I get at least one email inquiry that reads like this, "How much will the payments be on that car and how much down payment is required?" The correct answer is that there is no one fixed amount of down payment required of all people. The amount of down payment required is directly affected by your income and your credit score. For example, if you have a crappy credit score you are seen as a great risk by the lending company. They are therefore going to require a large down payment in order to minimize their risk. Likewise, if you have a super high credit score you can pay a minimum amount down if you want 'cause the lender knows you are going to pay the loan on time.

These factors affect interest rate also. If you are high risk they are going to raise the interest rate in order to try to get as much of their money back upfront as possible. If you are low risk you will get the lowest rates.

Therefore it is very difficult for me to tell you what kind of down payment and payment are required without first seeing a credit report and loan application.

USED CARS. The major automobile lenders want to finance cars that are 5 model years old or less and have 75,000 miles or less. They also want to make loans that are $7,500 and greater. Therefore (for example) a 1999 Beetle with 130,000 miles and selling for $5,995 does not qualify for financing. Now, this is not to say that you cannot under any circumstances finance this car; your local bank or credit union, one with whom you have a strong personal relationship, might be very happy to lend on this car. But not Volkswagen Motor Credit, Capital One, USAA or any of the other major lenders.

NEW CARS. That 0% for 72 months offer you just saw on television? It's not actually 0%. It just looks that way. I'll explain. If you have ever gotten a mortgage to purchase a house you are already familiar with the concept of "buy downs." You know, the actual mortgage interest rate is X% but if you want to give the lender a couple of percentage points worth of cash up front they will reduce the mortgage interest rate to X% - 2% (or something like that). Same thing here. When Ford or Chevy or Chrysler or Toyota or whoever tells you that you can have 0% for 60 or 72 months it is highly unlikely that they are actually giving you 0% money. Money isn't free, right? Instead, the buy down cost has been buried in the price you are paying for the car. Next time you are negotiating on the price of one of these cars ask the dealer if the price will change if you agree to take a normal interest rate loan. If you stick to your guns it will. And if you then do the math both ways (current selling price financed at 0% versus new reduced selling price financed at current market %) you might discover that your monthly payments are actually lower at the current market rate!

A lot of times people come to us with a 2 -3 year old trade-in that they financed at 0% assuming that, because they are paying no interest, there is no way they can be upside down in the car. Not true. They may have gotten 0% financing but they paid too much for the car in the process, so, they are no better off than the guy who got regular financing.

Remember what your grandfather said; "There is no free lunch."

HOW MUCH IS MY PAYMENT? Let's do some simple math. Let's say the car you want is $25,000 after TT&L. And you want a payment of $299 per month. With zero down. Can it be done?

If $25,000 is the loan amount, and you finance it for 6 years (usually the maximum term) and the interest rate is, say, 6.9% (could be higher, could be lower, it all depends upon your income-to-debt ratio and your FICO score) you end up with a monthly payment of $425. It's simple math.

Obviously then, to get a $299 monthly payment you are going to need some down payment money. How much? That's easy to figure too - we'll just find the gap and then work the formula backwards.

Take $425 (the actual payment in this example) minus $299 (your target payment) = $126 gap. Doing the loan formula again but doing it backwards this time we enter $126 as the payment, financed for 6 years again, at 6.9% interest again, and we end up with an amount of $7,411. So there is your required down payment: $7,411. That will get you the $299 monthly payment you want.

Note: you can try this yourself with any online payment calculator. Here's a link to the one on the Edmunds.com website.

So... What DO You Think It's Worth?

Here is a paraphrased recounting of an actual price negotiations exchange a couple of months ago between me and a customer who was attempting to buy a used Volkswagen Jetta that we had for sale.

Customer: “Is $ZZ,ZZZ your best price?”
Me: “Yes, it is. The car has already been marked down twice. This is as low as we can go.”
Customer: “Hmmm, well, I don’t think it’s worth quite that.”
Me : “Oh-kay…, well, I'm sorry you feel that way. We put the car on the market for $XX,XXX, which was at market value. After 30 days we marked it down. And then just last week we marked it down again. So now it is priced well below market and is a heck of a good deal. Um, just curious, then, what do you think it’s worth?”
Customer: “How should I know? You’re the dealer!”

He bought the car for $ZZ,ZZZ.

What? No $5,000 Rebate?

Sometimes people ask me, "Why doesn't Volkswagen advertise big cash rebates plus '0% financing for 72 Months' plus other deep discount promotions like many rival brands do?"

That's a good question and one I am happy to answer. Let's start with a story:

Recently a customer came to me to trade-in a luxury brand American car that he had purchased only two years before. When we did the appraisal we discovered that the car's trade-in value was only 1/3 the original MSRP of $36,000. He was disappointed to say the least, but when you consider that when he purchased this car new he received
1). a $4,000 "Employee Pricing" discount, plus
2). a $3,000 dealer discount, plus
3). a $2,000 factory rebate, plus
4). low rate financing, it becomes obvious that his $36,000 car was really a $26,000 car with $10,000 worth of "fluff" added into its MSRP by the manufacturer.

By contrast, a quality European or Japanese car (including VW) with a similar $36,000 MSRP will sell retail for $34,000-$35,000. There is no "fluff" added into the MSRP - the car is really worth the asking price. The quality of the engineering, the quality of the materials used, and the quality of the customer service attached to the brand combine to assure buyers that, not only does the car have a high value in the marketplace today, it will also have a high resale value in the future.

Think about it; if you knew you could buy a new $36,000 Mercedes (or Lexus or whatever) today for $26,000 after all discounts were applied, would you still view Mercedes as a high quality high value luxury brand car? Or would you feel that Mercedes' brand image had been cheapened?

The practice of motiviating buyers with exhorbitant discounts/rebates/low rate financing incentives is one of the major reasons big American carmakers are in the trouble they are in today. High quality, high value cars like VW begin with a reasonable MSRP, sell at a fair market price, then strive to continually deliver high value after the sale. That seems to be all the "incentive" most customers are looking for when buying a new Volkswagen. :-D