CarDealerBuyingSecrets

The Benefits Of Gap Insurance: Why You Either Need It Or Not

2011-05-19T20:07:00.000-07:00

“Gap Insurance Doesn’t Cover Breakdowns”

Gap Insurance is sometimes often confused with extended service coverage. In other words, some people think that if they have Gap Insurance and their vehicle breaks down then the breakdown will be covered by the Gap Insurance; that is totally erroneous. Why? Because Gap Insurance doesn’t cover break downs, it covers the “Gap” between the loan amount and the actual cash value amount of a vehicle.

Let me give you an example of how Gap Insurance works: Let’s say that you’re trading your three year old car in for that brand new sparkling model that you’ve had your eyes on for the last several months. The loan amount on your trade-in is $12,000, but the car dealer gave you a trade-in amount of only $8,000 meaning you had $4,000 in negative equity.

This scenario is quite common when you trade a vehicle in that has a balance, and since you did comparison shopping you know that this was the best deal you could get. The new vehicle that you are buying has a MSRP of $23,990, but you negotiated a deal at invoice (you’re such a good negotiator) which was $21,600. Once you add your tax, title and any fees, your total balance to finance is about $27,000.

“But The Accident Wasn’t Even Your Fault”

Let’s say that six months down the road when you’ve only made 5 or 6 payments you get in an accident. You’re fine, but the vehicle is “totaled.” Your insurance company states that the replacement value of your vehicle is $16,000. Let’s say that your loan balance is now down to $26,000 which means you have a “Gap” of $10,000 between the insurance company’s replacement value and the current loan balance on the vehicle.

When you took the loan out on the new vehicle, you promised to pay (the contract you signed has “promise to pay” in the verbiage) the bank back in full. They said that upon full payment they would then send you the title to the vehicle, and release you from the lien.

“Now That My Car Is Totaled, I Guess That Means My Loan Is Satisfied…”
Not!!

Just because your vehicle was totaled doesn’t mean that your obligation to the bank is now terminated. The bad news is, you still owe the bank the balance of the loan and have a vehicle that you can’t even drive anymore. Not the kind of scenario you want, but many will face.
“Good News…Your Insurance Company Just Settled Your Loss…Bad News, It’s $10,000 Less Than The

Loan Balance Payoff On Your Loan”

Your insurance company cuts you a check for the replacement value of the vehicle for $16,000, but in order to pay the bank off you need another $10,000. Where are you going to get $10,000? And how would you feel if you had to come up with $10,000 to pay a car loan off on a vehicle that you can no longer drive? Not a good situation for anyone to have to deal with.

“Your Gap Insurance Purchase Scenario”

Now let’s say we started this example from scratch with one difference: When you purchased the vehicle, you also purchased Gap Insurance. So now when the insurance company writes you a check for the $16,000, the Gap Insurance will pay the difference between the $16,000 insurance claim check, and the $26,000 loan balance. In other words, the Gap Insurance Company will write a check to your bank for $10,000 to pay your loan off.

When you financed the vehicle six months ago, the Gap Insurance might have been around $600, but that was assuming that you would have paid the whole loan off since it was part of your payments and included in the total amount financed to the bank. Since the vehicle was totaled only six months down the road, you actual cost for the Gap Insurance was next to nothing. Not to mention that it just saved you having to come out of pocket $10,000. That could have been the smartest investment you ever made.

Do Your Need Gap Insurance?

So now the question is, “Do you need Gap Insurance?” Gap Insurance is like any insurance. You’re covering yourself from a potential catastrophic financial loss. Why do people buy life insurance? If the bread winner were to die, that would cause a catastrophic financial loss to the family in terms of living. Health insurance is no different in that if you get sick enough, the hospital bills could cause you a catastrophic financial loss.

You have to look at Gap Insurance like any other insurance which is simply, “What’s the risk?” In the above example, without the Gap Insurance your potential out of pocket loss was $10,000 (or more). With the Gap Insurance your out of pocket loss is next to nothing. Why would someone take a risk like that when the out of pocket expense for the Gap Insurance is next to nothing versus having the potential to come out of pocket a substantial amount of money that they probably don’t have?

If in the above example you put a $10,000 down payment down when you bought the vehicle, you would have only had a loan balance of $16,000 at the time of the loss. That being the case, you wouldn’t have owed the bank a dime. So do you need Gap Insurance or not? It depends on your situation. Remember, most new vehicle depreciate at least $4,000 the day you drive it off the lot.

That means if you buy a new vehicle and don’t put any money down, you’re probably at least $6,000 “Upside Down” the day you drive it home. Gap Insurance would probably make a lot of sense in that case. It boils down to what’s the risk if the vehicle is deemed a total loss either by accident or theft.

Gap Insurance Guidelines

To go by the rule of “Better to be safe than sorry” I’d try to stay around 70% LTV (Loan to Value) of amount financed at time of purchase. In other words if the loan value on a used vehicle is $10,000 or the invoice on the new vehicle is $20,000, you’d need to have a total amount financed on the used vehicle of $7,000. On the new you’d want to have an amount financed at time of delivery of about $14,000.

“Cash is King”

When it comes to trying to buy your next vehicle at a 70% LTV, the only way to accomplish that feat is to put a sizeable down payment into the deal. The problem with that is, most people don’t have a sizeable down payment to put down on their next vehicle purchase.

If you drive off the lot and have a sizeable “Gap” between what your loan balance is versus the actual value of the vehicle, and you don’t get the gap insurance, you’re taking the risk of having to come out of pocket a sizeable amount of money if your vehicle is deemed a total loss.

“Your Promise To The Bank…”

Remember, you still owe the bank the balance of the finance agreement in the event of a total loss situation on your vehicle. If the insurance companies paid claim is less than your loan balance payoff, you’re still responsible for the difference.

That in itself could be a potential way to ruin your credit as the bank will report the deficiency to the credit reporting agencies. If a outstanding loan balance deficiency shows up on your credit report, then your credit score will take a major hit not to mention the fact that you will have an awful hard time getting another car loan if you can get one at all.

“Conclusion”

Follow the above guidelines on whether to get the Gap Insurance or not. If you’re not at 70% loan value on a used vehicle or Invoice on a new vehicle, then get the Gap Insurance. It could be the smartest insurance decision you’ve ever made.

Bad Credit Car Loans: Who Are The Go To Guys?

2011-05-15T17:34:00.000-07:00

Secondary Lending

With the recent economic down turn with people losing jobs, many have also lost their credit and or ability to qualify for an automobile loan. Everyone might have a little different scenario when it comes to being able to qualify for a car loan after a bankruptcy or a major hit on your credit report due to losing a job, but being able to qualify for a car loan will more than likely throw you into the secondary market.

The secondary market when it comes to car loans means a couple of things: First of all, it means it’s harder to qualify for a loan. Secondly it means if you do qualify, your interest rates will be higher. It also means that you will be required to have documentation on things like your income (current paycheck stub), proof of residence and a current phone bill.

Assuming that you can prove your income (W-2 status with a current paycheck stub is the best way), and you have all the other required documents getting a loan in the secondary market should be fairly easy; although there are some variables that could knock you out of getting a loan even in the secondary market.

Here’s Two Different Scenarios: Which One Are You?
Scenario #1

So let’s look at two different scenarios: Let’s say that a couple years ago life was good. You had a good paying job, a house with a mortgage, a car with a loan, and some credit cards with some balances. All a sudden, your good paying job was eliminated for one reason or another. The small savings account that you had (if you had any) will be gone in no time, and a financial hurricane is quickly moving on shore looking to obliterate your fortress.

After getting cash advances on your credit cards and then defaulting on them to try and keep your home, it’s only a matter of time until you lose everything. Your only option at this point is to declare a chapter 7 Bankruptcy to wipe the slate clean so you’ll have a new start.

Assuming that you lost everything (cars, house, and credit cards), your position of being able to get a car loan right now is slim to nil. Also assuming that your bankruptcy has been discharged (if you’re still in a bankruptcy it’s almost impossible to get a car loan).

Scenario #2

Scenario #2 is pretty much like the first one with one exception…You lost everything except you were able to either file a bankruptcy and keep your vehicle meaning all your other credit is shot, but your vehicle wasn’t repossessed. Or maybe you were able to pay your car loan off before the shit hit the fan, and or you didn’t have a car loan at the time of your bankruptcy.

If your credit score was above 700 before you lost everything, it will probably be in the low 500 range, but if you didn’t have a repossession you’ll have a much easier time getting a car loan. In either scenario you’ll have to settle for a secondary car loan which is better than no loan at all if you need to get a vehicle and you don’t have cash.

Your Two Best Choices For A Secondary Car Loan

As a finance manager in a car dealership for several years, I came across two sources for the above scenarios. The first one is Road Loans and the second one is Drive. Again there are several variables that could affect getting a loan or not, but in my opinion if you fall in either of the above credit situations the go to either www.roadloans.com or www.driveTime.com.

If you are unable to get a loan with either one of those two sources, then you’ll probably have to go to a car dealership that specializes in secondary credit and more than likely they will be able to help, just be prepared to pay an extra high interest rate. Good luck.

The Art of Negotiating

2011-04-09T19:20:00.000-07:00

The Art of Negotiating

Don't Listen To The "So Called Car Buying Experts." If You Want that Once In A Life Time Deal, Buy Your Next Vehicle Based On Payments!"

2008-08-02T10:54:00.000-07:00

All the so called car buying experts say “never buy a new or used vehicle based on payments.” Most franchised car dealerships will attempt to work their deals based on payments because they know that if they can get the customer to focus on a payment that they will make more money on the deal.

Payment buyers always pay more money for their vehicle of choice. Well almost always. There are exceptions to the rules and if you follow my lead here you can get that once in a life time deal. First of all you have to do a little homework on the vehicle that you’re looking to purchase whether it’s a new or used vehicle.
Second, you’ll need an amortization calculator in order to figure a car payment. Thirdly, you need to know what interest rate you can qualify for. And lastly you’ll need a little patients to play the back and fourth game. When it comes to homework, you need to know what “triple net” (dead cost) is on the vehicle that you’re looking to purchase.

I’m going to assume that you know how to figure out what dead cost (triple net) is on the vehicle that you’re looking to purchase. With the knowledge of knowing what the triple net (dead cost) figure is on the vehicle you want to purchase and your amortization calculator this is how you buy your next vehicle and get that once in a life time deal.

First of all, if triple net on the vehicle you want to purchase is $20,000, the MSRP is probably somewhere around $23,000. When you sit down to negotiate your deal, the first set of payment figures you’ll see will be inflated. They might hit you with a $699 payment on that $20,000 vehicle!

Your goal is to buy the vehicle $2,000 back of triple net. Depending on the vehicle that you’re looking to buy, $2,000 back of dead cost could be adjusted up or down but that’s a good place to start on most vehicles in the current depressed car market. Assuming you can qualify for a 7% interest rate this is how you figure your deal: Remember, your goal is 2K back of triple net or dead cost.

So on your first offer you need to make the offer based on 3K back of the $20,000 figure. If you take a figure of $17,000 (3K back of triple net) and add your sales tax that will put you somewhere around $18,000. If you can get 7% on 60 months financing your payment will be in the 350 range.

When you negotiate your deal, you negotiate strictly on the payment and the term. Your first offer to buy on this deal should be $350 a month at 60 months. That would equate to about 3K under triple net. The sales manager working the deal at this point is going to start crunching numbers to see how far apart they are.

More than likely he will take that triple net figure and see what kind of payment he can get to. At 72 months he can get down to about $375 a month so he’ll think there’s a deal that can be put together. You’ll get a counter offer of somewhere in the 4-5 hundred dollar range depending on how “strong” the sales manger is.

On your next offer, you can make a $15 increase to $365 per month on 60 months And you tell the salesperson that if they can’t do that then you’re leaving. When the salesperson goes back to the sales manager, stand up as if you’re ready to leave. Seeing that you’re on your way out the door, the sales manager is going to get involved which will “cut to the chase.”

If you were able to buy the vehicle 1K back of triple net your payment would be in the low $400 range on 60 months. The sales manager is going to try and make a few hundred dollars at this point so his payment will be in the mid 4’s which will put you pretty close to a deal. Let’s say that his best number is $439 per month at 60 months.

You could tell him that the most you can pay is $385 and hold firm on that number. You’re $54 a month away which would equate to about 3K so you’re probably not going to get that deal. But the way dealers are hurting to move units right now, that’s a deal that could possibly go down depending a few variables. You could say that if you can get the deal for under $400 a month you’ll sign up.

The sales manager is going to think that you’ll close at $399 which means they will make another payment concession to get even closer. If they went $500 back of triple net, you’d have a $425 payment. So now your only $26 a month apart from making your deal. At this point it’s all about “splitting hairs.” You’ve got a deal it’s just a matter of how much more you want to play with them.

But here's the "Bottom Line" on why buying on payments can get you a better deal. When you're focus is on payments and not on price, your perception by the dealer is much different. If you're all about price and keep trying to beat them up over price, they are more apt to throw you out of the store.

But when you're focused on payments, the dealer will be more willing to work with you to get you the vehicle. They will cut their deal even further than they would normally sell the vehicle for knowing that you're buying on payments and will finance the vehicle with them.

Buying at the end of the month. "It's not always the best time to buy that new vehicle."

2008-08-02T10:49:00.000-07:00

All the information on and off the net say’s that buying at the end of the month is the best time to buy that new vehicle that you’ve had your eye one. And for the most part, that’s true. But if you’re like most people, you want the best possible deal and don’t want to buy that dream vehicle and then find out that you could have gotten it cheaper.

That’s why you’re reading this right? Or that’s why you’ve been on several web sites looking for the best way to get the best possible deal. And they’ve all told you that buying at the end of the month is the best time to buy.
That’s when all the dealers are looking to hit their quotas. Lets look at the exception to the rule of buying at the end of the month and if you can tap into this type of information (and none of the information that you’ve researched so far talks about this) you have to potential to save an extra $1,000 to 3,000 dollars off of the best possible deal you thought you could get.

Several manufactures participate in what’s called retroactive or stair step special incentive money. In fact on Edmunds.com they classify this information as clearly dealer only access. You can get the invoice amounts and you can get the rebate amounts from several web sites but you can’t get the information on any of the retro or stair step programs the manufactures participate in.

So what is it and how does it work and more importantly how can you benefit from this incentive and why would this make the end of the month not the best time to buy? First let’s look at a couple of examples of what the incentive is and how it works: Lets’ say that you are looking at purchasing a vehicle and the manufacture has a current stair step program in place.

The program could have different percentage amounts but this is the long and the short of how the program works: The manufacture sets a goal for the dealer to sell “X” number of units. If the dealer hits that number, the manufacture will give the dealer “X” number of dollars for hitting that number.

The incentive in real numbers would look like this: Sell 100 units and get $700 per unit sold. Sell 70% (of 100 units of 70 units) and get $ 200 per unit sold. Sell 80% and get $400 per unit sold. Sell 115% (of 100 or 115 units) and get $900 per unit sold. If the dealer will receive from the manufacture the amount of money in direct proportion to the number of units sold and delivered for the month.

In the example above, if the store sold and delivered 100 units they’d get a check from the manufacture for $70,000! What that really means is that the cost of the vehicle to the dealer was $700 less per unit. So if you did a good job on researching your dream vehicle and found the invoice amount you’d be $700 off on what the true and actual cost is on that particular vehicle. But the bigger picture is this:

Let’s say it’s the last day of the month and the dealer is five units away from hitting their 100th unit. If they don’t sell another unit for the month they’ve already hit their 80% level which would mean that they are going to receive $38,000 (95 units times $400 per unit) from the manufacture. However, they have $32,000 sitting on the table if they sell another five units.

So how aggressive could they be to sell five more units for the month and get that extra $32,000. If you strolled in and knew in advance where they were for the month and what was on the line how much better of a deal do you think you could get? If triple net dead cost on a vehicle was $15,000 and you made an offer of $10,000 do you think you could get the deal?

If it meant losing $5,000 to make $32,000 I think you know the answer to that. So let’s go back to the beginning of all this and answer the question of why the last day of the month isn’t always the best time to buy. Using the above stair step example, let’s say it’s the 25th of the month and the dealer just sold and delivered number 115!

First of all, the dealership just made a whole lot of money just from the incentive. But more importantly, what incentive does the dealer have to sell cars for the rest of the month? Not as much as they did before they hit their number. In fact, what they can do at this point is hold back all their remaining sales for the month and report them for the following month to give them a head start for that month’s incentive.

Sandbagging is a way to jump start the next month but what it ultimately does for the current month is that instead of going real deep on a deal, they are more apt to try and get as much money as possible.

So if the last day of the month rolls around and you come into this store that hit their number back on the 25th you won’t get much of a deal. There just isn’t the same motivation to make a great deal. So the “Bottom Line” is this……Knowing what manufactures are participating in this type of incentive program can have a huge effect on the type of deal you can get. And having a way of knowing where they stand for the month as far as hitting their number will save you a ton of money.