More than Just Selling Cars
Most car dealers offer a variety of financing options for the purchase of cars, including loans and leases. Financing can be highly profitable for dealerships. There have been some scandals involving discriminatory or predatory lending practices, and as a result, vehicle financing is heavily regulated in many states.
Although the terms of installment contracts are negotiated by the dealer with the buyer, only a tiny number of dealers actually make loans directly to consumers. Automobile dealers who do make loans directly to their customers are referred to as "buy here, pay here" dealerships. These dealers are able to make loans directly to customers because they have some means of recovering the vehicle if the customer defaults on the loan. The means by which "buy here, pay here" dealers can recover a vehicle vary by state.
Most dealers, however, are indirect lenders. This means that the contracts are immediately "assigned" or "resold" to third-party finance companies or banks, which pay the dealer and then attempt to recover the balance by collecting the monthly installment payments promised by the buyer. Sometimes the dealer has the option of marking up the rate of the contract and retaining a portion of that markup. This is a regular practice because the dealership is selling the contract to a bank just like it sold a car to the customer. Most banks strictly limit the amount a contract rate may be marked up (by giving a range of rates that they will buy the contract at). In most cases this amounts to very little difference in the customer’s payment. Customers may also find that a dealer can get them better rates than they can with their local bank or credit union. Most financing available at new car dealerships is offered by the financing arm of the vehicle manufacturer.
Dealers may also offer other services, typically through the Finance and Insurance office. These additional services can include:
Service contracts. While any vehicle sold in the United States now comes standard with some degree of manufacturer's warranty coverage, customers have a wide range of choices to cover their vehicle from mechanical failure beyond that point. Service contracts may have the same terms of coverage as the vehicle's original manufacturer's warranty, but sometimes they do not. Because of the vast number of choices, it is important for consumers to be aware of the coverage before entering into an agreement.
GAP insurance is protection for the loan in the event that the vehicle is lost as the result of an accident or theft. A GAP policy ensures that in the event of a total loss, the remaining payments are made on the loan so that a customer does not have to pay for a vehicle he or she no longer has. Many states regulate GAP insurance so that dealerships are not allowed to profit from the sale of GAP insurance.
Credit/Life/Disability insurance. Customers often have the option of purchasing protection for their loan if anything unfortunate happens to the borrower. While customers can often obtain this coverage from their own insurance companies, dealerships, depending on state regulations, can often offer comparable coverage while also offering the convenience of a "single stop purchase."
Aftermarket accessories. Many dealerships offer accessories that are not offered by the manufacturer directly. Like Credit/Life/Disability insurance, there are many ways a consumer can purchase these options outside the dealership, but without the convenience factor.
Maintenance agreements. Many dealerships that have their own service shops will offer pre-paid maintenance agreements. These are sometimes offered directly through the manufacturer or by the dealership alone. An example of through the manufacturer is Saturn’s Basic Car Care program that includes (all per Saturn’s recommendations):
- Engine Oil And Oil Filter Changes
- Tire Rotation
- Chassis Lubrications
Because of the vast differences in programs that can exist from dealership to dealership, it is important to know what gets covered under such a plan and what the recommended service intervals are.
Car dealers also provide maintenance and in some cases, repair service for cars. New car dealerships are more likely to provide these services, since they usually stock and sell parts and process warranty claims for the manufacturers they represent. Maintenance represents a significant profit center for new car dealers, especially since it brings customers back into the showroom to see newer car models.