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.