Life Traps: Car Financing

I am a sucker for trying novel and new ways to do things. For example if I see some cool new crossover brand of cereal at the supermarket like ‘cinnamon Pop-tart oreo cookie crunch’,  I’m one of the early adopters who picks it up.  Why not?  I like Cinnamon Pop Tarts, and I like Oreo cookies, so cereal based on a combination of the two has to be awesome, doesn’t it?  At the very least it’s got to be worth the $3.95 cost to find out.  

It’s the same thing with technology, I have a tendency to be an early adopter of different things that have buttons and have the potential for great promise. I know this is foolish because it makes sense to wait for a product to reach mass acceptance before it is ever truly useful.  Take for instance the Wii U which will never have a good library of games (that do not come from Nintendo). In the smartphone world, I chose Windows Phone.. truly a better OS than iOS or Android, and truly a failure if measured by market share or app catalog.  

So in this spirit, I chose to consign my car with a local car dealer.  I purchase my vehicles outright, usually from private sellers and so I have a tendency to have a vehicle that I need to sell after its replacement has already been acquired. Generally I’ve sold them myself but life has gotten so complicated I didn’t have the time or the bandwidth to do it and I figured what the heck, I should try consigning it.  I know at the very least I will get more money than if I just dropped the car off at CarMax.  I know a local dealer who does this and I brought my old mini-van to him.  Interestingly this local dealer has gone nuts cleaning my car and getting all of the different aspects of it ready for sale including inspections, replacing the tires, making sure all the little mechanical fixes were done, etcetera.  That’s not a really big deal except that he’s making a paltry sum compared to the amount of work that he’s putting into this project. So I got to thinking if the man is only making a few hundred dollars off of me, then why jump through all these hoops to get the vehicle into sellable condition when he has such large inventory?  There had to be other reasons for it.  

So I did a little digging and I came to the conclusion that it’s not the actual transaction where he’s going to get his money.  That is only about ⅓ of his money.  The other money to be made, or more specifically the savings to be had, is that it’s not costing him a penny to have the card on the lot.   He’s a small dealer so there is no floor plan payments he has to make unlike the cars he gets from the auction.  Then there is the real cash cow: the financing. There is a great article on Edmunds about how the F&I office is where all the money is made in the car dealership.

And in that is the moment when not only did the idea for this  post come about, but also the idea of a series of articles.  This blog, and the work for my long form writing project isn’t really about the business world.  If you want 100% business commentary, go to Forbes, they do a better job than I do.  It’s really about the collision between business and life.  I write quite about about the challenges associated with the business world but there are also challenges in life.  Many of those challenges relate to things we need, or are expected to have if we are to be perceived as Professionals.  Sometimes there are traps associated with them.

Why is this a trap?  

The problem as I have outlined above is getting rid of the old vehicle (usually with payments still attached) while we buy the new vehicle is a complicated process.  A process that’s even more complicated by the limited bandwidth professionals have when you consider the requirements of our jobs and the modern always connected work environment.  When you add in the demands of our families and other aspects of our non-work life in the few hours a day we are off from work and a complex project like buying and selling a vehicle becomes a huge issue. This almost guarantees us to be trapped by the dealer F&I services.  

The idea that we need reliable transportation for our job is a real need.  The idea that we need a car payment may be a need depending on your income and desired vehicle. In some instances with traveling professionals there are requirements of a minimum allowable vehicle age and miles which almost guarantees a car payment considering the rising cost of transportation.   The result of all this becomes the belief that it’s normal to get our financing through the car dealer, and this is clearly a trap.  It’s been sold to us for so long, and so hard, and made so frictionless by the dealers, it becomes the norm.  It’s a trap because of the seductive nature of it, and because we aren’t really getting the value from it, not commensurately with the amount of money the dealer is making.  

What can be done to fix it?

Well the first and best thing is to simply not own a car.  You give up maintenance headaches, you eliminate a huge cost to your budget, and you don’t have another contract in your life.  This is really only a possibility today if you live in a big city with tremendous transportation infrastructure.  It is technically possible in rural areas, but it’s not possible to rely on spotty rural public transportation and be an effective professional.  The midterm to long-term future may be different, but not owning a vehicle is simply not a reality for today’s PIC.  This is especially true when we  are expected to have reliable and decent looking transportation parked in front of the office or to transport clients.  

The next best thing to avoid this trap is simply not having financing.  You don’t have to deal with the F&I manager, the credit union, the bank, the extended warranties, etc..  You walk in, get a bill of sale, transfer the cash, and your done.   But we live in an era where the skyrocketing costs of new vehicles is keeping used vehicle prices high, so most people simply don’t pay cash for a car. The numbers bear this out: if your buying a 4 year old vehicle or newer, only about 20% of people actually use cash.  That means 80% use financing.

The final option is to secure financing independently of the dealership.  You avoid the traps, get a better rate, but you won’t be seen as much as a desirable client.  If you tell the dealer you are a cash buyer then the price of the vehicle may not come down as quickly as it would if they are thinking that you are going to get a good vehicle.

Transportation in general is one of the big demands and big struggles in life.  If you go the easy route with dealer financing, then you will get sucked into the trap of paying way too much and being under contract for too long.  

LIFE TRAPS – Life traps are those seemingly little things in life that can turn into a big headache for the Professional.  They exist all around us and should always be avoided if at all possible.