How Car Dealership Finance Departments Work - Additional Add On Products Discussed
January 28th, 2010
Car dealership finance departments function very differently from what most people would expect. About the only people that actually know how they really work, are people that have worked in the car business. It is very different from what you see in banks and finance companies.
Many people think of a finance department as being similar to a loan officer’s office at a bank or normal finance company. It’s not and the primary difference is that the finance manager is more the salesman than a loan officer. In fact, finance managers and dealerships don’t actually approved anything. They do not approve your loan.
When the finance manager does is simply take your loan application and your information about the vehicle that you are wanting to purchase and submits that information to one or more finance companies for approval. The manager can make money once the loan is approved by additional finance products, which are discussed below.
Keep in mind, that it is illegal for anyone to be forced to buy any of these additional products, although many people that are trying to buy a car with bad credit, may find themselves feeling intimidated into purchasing them as a condition of their loan approval. While this is clearly unethical, it does take place everyday in dealerships all across the country.
Gap Insurance
Gap insurance is an insurance product that is usually underwritten by companies that specialize in auto insurance. If you are not putting any money down and do not have any equity in the vehicle that you are going to be financing, then there is a good chance that you will owe more money on the vehicle than it is actually worth.
In the event of a total loss, such as a stolen vehicle or a total collision, you will still owe the full balance on your auto loan, regardless of what the vehicle is actually worth. In cases in which the vehicle is worth less than what you owe, the insurance company is only going to cut a check for the actual cash value of the vehicle. This leaves you owing the remaining balance, with nothing to show for it. It is a total loss. What gap insurance does is covers that additional amount for you so that you do not have that out-of-pocket expense in the event of a total vehicle laws. Dealers make money from selling this insurance.
Extended Auto Warranties
Most extended auto warranties are not worth the paper that they are written on. However, they are still a very popular finance products sold in car dealerships across the country. As it is very confusing to most consumers as to what is covered and what is not, and the actual market value of a particular warranty policy, these types of products are frequently a good profit source for finance departments. Some extended auto warranties cover only the powertrain, while others cover everything, bumper to bumper.
Prices vary widely and you should definitely shop around if you want to make sure that you’re getting a good deal. Buying extended warranties direct can result in substantial savings. Many people think that the only time that they can actually purchase an extended warranty is when they are purchasing their car, but in contrast, an extended warranty can be purchased at any point in time. The only restriction is generally the most warranty companies will not offer repair insurance for a vehicle that is older than 15 years old.
Credit Life Insurance
Credit life insurance covers the balance on the car loan in the event that the borrower passes away. It only covers the amount owed and does not insure against total loss of the vehicle or the actual market value of the vehicle, either. It is usually an inexpensive addition to the loan contract and can protect the borrower’s family financially in the event of their death.
Dealer Add-On Rate
Add-on rates are the most common method of making money in the dealership finance department. Once a loan application has been submitted to a finance company and has been approved, the finance manager can then add additional points to the auto loan interest rate and these additional points resulted in a substantial profit for the dealership.
As commissions are at stake, and this is an easily concealable source of profit, you can expect that if your financing is arranged through a car dealership that your interest rate has been inflated at least one point or more.
Entry Filed under: Autos
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