Debt loan negotiation student

Unless you play your cards right, you can lose your hard-earned savings in the F&I office.

Don't let your guard down once you and the sales manager settle on the price of a car. You may be most at risk of losing money when you're ushered into the dealership's finance and insurance (F&I) department to close the deal.

Sales of unnecessary extended warranties, rustproofing treatments or insurance produce big profits for dealers. And the stakes are high: Without the profits from the F&I department, many dealerships would not survive, according to the National Automobile Dealers Association.

"I worked at a dealership that sold cars at cost, figuring if they gave a little on the 'front end,' they'd make more money at the 'back end' in F&I," says Michael Royce, a former salesman and author of Beat the Car Salesman (Powersource Press, $5.99). The fat profits in F&I come from pushing loans, extended warranties, security systems, insurance, undercoating, fabric protection, rustproofing, burglar alarms and gold emblems.

"Dealerships put their most cunning people in F&I, and a base truck with a sticker price of $11,500 can go out the door with a payment twice what it should be," says a former regional sales manager for a Japanese carmaker. "F&I might charge 12% to 13% interest when the rate should be 8% or 9%, then turn around and sell an extended warranty, insurance, undercoating and pinstriping." F&I managers are often the second-highest-paid employees in the dealership--after sales managers.

Dealerships consider it a point of pride to have "strong closers," but car manufacturers would like to see an end to the practice of "slam-dunking" customers because it creates such lousy public relations for the industry. (Members of the Association of Finance & Insurance Professionals, an organization which provides college-level training and certification for in-dealership F&I practitioners, are required to abide by a published code of conduct.)

Protecting your good deal

After spending hours setting up a sale, the last thing the dealer wants is for the deal to blow up in F&I. That means you, as the buyer, have a strong hand and should be willing to play it.

You must be just as prepared to close the deal as you were to negotiate the price of the car. Check interest rates for car loans from banks and credit unions so you'll know whether financing offered by the dealership is a good deal. Use the table on page 81 to calculate your monthly payments yourself.

Be prepared for serious arm-twisting if you want to pay cash. The profit in auto loans makes cash a four-letter word at many dealerships. After all, a dealer who gets financing at 8.5% and adds a markup of two percentage points stands to make more than $1,100 on a four-year, $25,000 loan.

Be wary if an F&I closer presents a computer printout showing that borrowing is actually cheaper than paying cash. The Federal Trade Commission has closed down companies that sold software used to produce such misleading printouts.

Customers with marginal credit ratings are easy targets for gold-digging F&I departments, Royce says. You expect less-creditworthy borrowers to pay higher rates, but not as high as some dealerships charge. It's not unusual for some dealers to run the rate up to 20% for some customers. "These people usually don't complain, and when they drive away, the folks in F&I are doing high-fives," says the former sales manager.

A dealership will try to take advantage of your uncertainty about your credit rating, according to Royce. For example, a young graduate student who applied for a loan at a Boston dealership was told that a spotty credit raring meant he'd have to pay 14.5% interest. Undaunted, he went to his school's credit union and secured financing at 7.25%--half the dealer's rate. The lesson: If you have any questions about your credit rating, get a copy of your credit report before you shop for financing.

Document prep and other fees

Dealers are paid by the factory to prepare new vehicles, so if you pay a dealer-prep charge, the dealer gets paid twice. And national advertising is a normal business expense for manufacturers, so it should not be listed on the invoice or added to your final bill by the dealer. (In many states it's illegal for manufacturers to charge dealers for national advertising.)

An invoice charge listed as "local dealer advertising/marketing association" usually represents an actual charge incurred by the dealer to pay for group advertising. The original factory invoice has a box for this item, and the dealer enters the amount, which is typically about 1% to 2% of the invoice price. Dealers consider this to be a legitimate part of their "invoice cost," so if you're being offered a deal that's at or below invoice, you'll probably have to pay it. But if the deal is for a significant amount over invoice, consider this charge to be negotiable.

Redundant protection

"In F&I, the goal is not only to get you financed through the dealership but also to sell you products that increase in profit from $200 to $1,200," says Eric Wilson, a former salesman in Washington, D.C. Your best defense in this situation: "Just say no to anything you don't like," advises Jeff Gutierrez, a 15-year veteran of the business.

Be prepared for a big push to get you to buy an extended warranty or service contract. These typically cost $400 to $2,000, but they're packed with so much profit that the price is highly negotiable.

More important, most extended warranties are simply unnecessary. Chances are the standard manufacturer's factory warranty is more than adequate. For example, the 1999 Ford Taurus carries a three-year or 36,000-mile warranty on all components except tires; corrosion protection for five years or unlimited miles; and up to eight years or 80,000 miles on selected emissions-control parts.

Given such coverage, there's almost no need to purchase extended-warranty protection on a new car. Extended warranties are so lucrative, however, that some dealers routinely sell them to customers who lease a car, even though most leases expire before the manufacturer's warranty does.

Most extended service warranties never pay out as much as they cost, which gives you some idea of how often they are needed by buyers for serious expensive repairs. If you do decide to buy such a warranty, review the contract carefully to make sure you aren't paying extra for something that's already covered by the manufacturer.

You don't have to buy an extended warranty the day you buy the car. Most carmakers give you 12 months or 12,000 miles, which should be ample time to see how reliable your car is.

Selling fear

One ploy of the back-end salesman is to scare or embarrass customers into buying products they don't need. The finance manager of a large East Coast dealership once told a reluctant buyer, "We're very disappointed in you. We're selling you the car at cost and thought you'd reciprocate and buy the credit life insurance."

Credit life may look like a good deal: For a premium of just a few dollars a month, you can be sure your outstanding auto loan will be paid off if you die. Trouble is, it's one of the most expensive kinds of insurance you can buy. Two consumer groups, the Consumer Federation of America and U.S. Public Interest Research Group, have launched campaigns against credit life, blasting it as a "consumer rip-off" that wastes hundreds of millions of customers' dollars.

A study by the National Association of Insurance Commissioners (NAIC) showed that consumers get only 42 cents on the dollar in benefits from credit life insurance--and that figure is declining. But industry standards say credit life insurance should be priced to pay out at least 60 cents in benefits for every premium dollar, according to NAIC.

Unless your health is so bad that you have no other way of protecting your loved ones from debts you leave behind, don't buy credit life. With a little effort, you can find a better policy for a lot less money. If you need insurance to cover the debt, a term life policy will invariably be cheaper, especially if you're in your twenties or thirties. And if you're single with no heirs, credit life is unnecessary because it's supposed to protect your surviving family from claims.

Regardless of that, you can expect a hard sell from the finance manager when you're closing the deal. F&I departments also often try to sell high-profit disability insurance to cover your payments if you get sick. Your best strategy: Buy a car from a car dealer and any insurance you need from an insurance company or agent, after shopping carefully for the right policy and the right price.

Rust, dust, gold and security