Car dealerships in the USA

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A typical car dealership in the United States

In the United States, a car dealership is a retailer that sells new and/or used cars. Used car dealerships carry cars from many different manufacturers, while new car dealerships are generally franchises associated with only one or two manufacturers. However, in some areas, dealerships have been consolidated and a single owner may control a chain of dealerships representing several different manufacturers. New car dealerships also sell used cars, as they take in trade-ins and/or purchase used vehicles at auction. Most dealerships also provide a series of additional services for car buyers and owners, which are sometimes more profitable than the core business of selling cars.

1 Selling cars
2 Trading for Cars
3 Additional services
4 Regulation
5 Criticism of car dealerships
- 5.1 Honesty
- 5.2 Discrimination Issues
6 References
7 External links

[edit] Selling cars

Most car dealerships display their inventory in a showroom and on a car lot. Under federal law, all new cars must carry a sticker showing the offering price and summarizing the vehicle's features. Typically, salespersons working on commission only, negotiate with buyers to determine a final sales price. In many cases, this includes negotiating the price of a trade-in — the dealer's purchase of the buyer's current automobile. Negotiations from the dealership's perspective is often referred to as "desking" a deal, although different terms are used throughout regions and should be considered regional.

Profit margins on automobile sales are surprisingly low. A new car dealer may mark up a car by less than two percent over the manufacturer's invoice cost, and typically the car dealer borrows from the manufacturer for inventory and pays interest (called flooring or floorplaning). On the other hand, some manufacturers pay "hold-back" to improve the fiscal stability of dealers. Typically this is around 1% to 2% of the vehicles' wholesale price to the dealer. Hold-back is usually not a negotiable part of the price a consumer would pay for the vehicle. Hold back is designed to offset the cost the new car dealer has for paying interest on the money s/he is borrowing to keep the car in inventory.

[edit] Trading for Cars

Many times a customer will offer his or her car as a trade-in in hopes of offsetting the final price paid for a new(er) car which the buyer is interested in acquiring. If this buyer has full ownership of this car (owing no payments to a bank or finance institution), the car will not only offset the selling price but also lower the sales tax paid on the new(er) car in most states.

To an average dealer, the actual cash value of a trade is an opinion of what the vehicle could reasonably be sold for at auction in six weeks to three months time, less any reconditioning costs should the dealer be unable or unwilling to re-sell the trade to the public. Since most states have requirements for a dealer to warranty or even guaranty a used vehicle for a certain amount of time and or mileage if sold to the public at a certain price, a dealer has to make a profit selling the previously traded car (now a used car).

Trade in value is an important facet of the car deal. Trade value estimates can be found at sites such as KBB.com, edmunds.com, http://consumerreports.org, as well as NADA.com. However, most of these values are estimated from a theoretical chart that may or may not be based on recent average sales prices of a particular make and model. If a particular make and model has less accurate data available from recent auction prices the dealer will be more cautious in the appraisal of the car in question. A simple exercise of inputting an identical used car on each of the above sites will render different values. Sometimes these values will be close, other times their sites may differ significantly.

A dealer may have a manager charged with the appraising of each vehicle offered for trade. This person will often be the person who also attends used car auctions, often buying and selling on behalf of the dealer. This person will have a realistic idea of the actual cash value of the trade. A dealer will look carefully at a trade for body damage, windshield damage, engine noise, and known problems with a particular make and model and price it in such as way as to re-sell it at a profit.

The better way to get a real idea of what a trade car might be worth is to go to at least three dealers and ask them what they would pay for a trade outright. One or more dealers that handles that particular make and model when sold new should be consulted.

Always keep in mind, however, as with anything, a used car is worth what anyone will pay for it, there is NO SET VALUE per se.

[edit] Additional services

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. For example, in the U.S. state of California, there must be several signs prominently posted on the premises,^[1] and the contract must contain several prominent warnings, such as the words "THERE IS NO COOLING-OFF PERIOD."^[2]

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. People within the business refer to such dealers as "buy here, pay here" dealerships. These stores 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, utilize indirect lenders. This means that the contracts are immediately "assigned" or "resold" to third-party finance companies, often an offshoot of the car's manufacturer such as GMAC, or banks, which pay the dealer and then recover the balance by collecting the monthly installment payments promised by the buyer. Sometimes the dealer has the option of marking up the interest rate of the contract and retaining a portion of that markup. For example, a bank may give a wholesale money rate of 6.75% and the dealer may give the consumer an interest rate of 7.75%. The bank would then pay the dealer the difference or a portion thereof. 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 or states strictly limit the amount a contract rate may be marked up (by giving a range of rates at which they will buy the contract). In many cases this amounts to little difference in the customer's payment as the amount borrowed is small by comparison to a mortgage and the term shorter.

Customers may also find that a dealer can get them better rates than they can with their local bank or credit union. However, manufacturers often offer a low interest rate OR a cash rebate, if the vehicle is not financed through the dealer. Depending upon the amount of the rebate, it is prudent for the consumer to check to see, if applying a larger rebate results in a lower payment due to the fact that s/he is financing less of the purchase. For example, if a dealer has an interest rate offer of 7.9% financing OR a $2000.00 rebate and a consumer's credit union (or other lending source) offers 8.25%, a consumer should compare at the credit union what payments and total interest paid would be, if the consumer financed $2000.00 less at the credit union. The dealer can have their lending institution check a consumer's credit. A consumer can also allow his or her lending source to do the same and compare the results. Most financing available at new car dealerships is offered by the financing arm of the vehicle manufacturer or a local bank.

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 often they do not. Often service contracts carry a deductible as might any insurance contract. Because of the vast number of choices, it is important for consumers to be aware of the coverages before entering into an agreement. Usually these service contracts do NOT cover regular maintenance items such as brakes, fluids, or filters. In some states, such as Florida, the cost of such agreements are heavily regulated.

There are three main types of service contracts offered. The first is offered by the manufacturer through the dealership and is usually good at any dealership in the US that has that same franchise. When warranty repair work is required, the dealer submits a claim to the manufacturer and is reimbursed for the repair less the deductible paid by the consumer. Under this type of service agreement there is usually no incentive for the dealer to do anything but repair the car as reimbursement from the manufacturer is usually profitable.

The second service contract is usually a simple insurance policy that the dealer purchases wholesale and is administered through a third party working for the dealer. This "third party" can often be a major insurance company. This money collected by the dealer from the consumer is put in a "reserve" fund for the length and / or term of the service contract. When a repair is required the dealer authorizes the repair with the third party administrator, usually before the repair is done. The third party deducts the repair expense from the dealer's reserve fund. The fewer payments or deductions made on the service contract the greater the profit to the dealer as any unused portion of the "reserve" is given back to the original selling dealer less an administration fee when the service contract retires.

The third type of service contract can be purchased directly from a few automobile insurance companies. Check with your agent for information.

GAP insurance: 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 (New York, for example, does not allow dealerships to profit from the sale of GAP insurance).
Credit/Life/Disability insurance: It is important to note that this kind of insurance is a profit center for the dealership working very much like the second type of service contract described above in this article and can not be required as a condition of the loan. Customers / Borrowers often have the option of purchasing protection for their loan should the borrower become disabled and unable to work for a period during the time the borrower is required to make payments. Often the coverage begins on the 31^st or 32^nd day of disability: Meaning the borrower has to be unable to work for a period greater then 30 days before a claim can be filed. Often the borrower is required to submit paperwork to validate a disability claim. Credit Life insurance will usually cover the entire remaining balance of a loan if the borrower dies within the term of the contract. Customers can often obtain this coverage from their own insurance companies, if desired. Consumers should compare rates and policies with their own insurance companies. See Consumer Reports for their opinion

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.

Maintenance agreements: Many dealerships that have their own service shops will offer pre-paid maintenance agreements. These are sometimes offered directly through the manufacturer (such as Saturn's Basic Care or Car Care programs) or by the dealership alone. 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 are the recommended service intervals (see below).

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.

[edit] Regulation

In the United States, most aspects of operating a car dealership are regulated at the state level. Car titles are issued and transferred by the individual states through their respective Departments of Motor Vehicles. The purchase price of a vehicle usually includes various fees which the dealer forwards to the state DMV in order to transfer the vehicle's title to the buyer. In many states, the DMVs also license and regulate car dealerships. In many states, car dealerships are capable of issuing all of the necessary forms for the DMV, allowing the customer to skip a trip to the local DMV office.

Consumer complaints against car dealerships are investigated by the Attorney General's office in the state in which the dealership is located.

[edit] Criticism of car dealerships

[edit] Honesty

Car dealerships are frequently criticized by customers and advocates for their lack of honesty with customers. This may include misleading the customer in the actual price of the car, taking advantage of what the customer does not know, or sneaking in expensive, unnecessary add-ons. These may include everything from warranties that will not likely cover more than their cost, dealer-provided accessories or services for which the customer is charged hundreds of dollars above what they are really worth, or non-existent taxes.

Many car dealerships will increase the commission offered to the salesperson if s/he is able to sell the vehicle for a higher price. This gives the salesperson more motivation to increase the final sale price of the vehicle with these add-ons.

In used car sales, vehicles are often passed off as being in better condition than they really are, and negative details of their past may not be disclosed. While various services, such as CARFAX, can provide a lot of information about the vehicle's history, a complete list of hidden problems is generally not available. The average consumer does not know as much about motor vehicles as the typical mechanic, thereby enabling a vehicle to be sold with the customer unaware of any problems. It is prudent for a consumer to ask to be allowed to take a used car in which s/he is interested to a trusted third party for inspection such as his or her own mechanic BEFORE finalizing the purchase. A dealer should not take issue with this request if the car is in good condition and the dealer is not attempting to hide anything.

[edit] Discrimination Issues

Studies have found that some auto dealerships charge higher interest rates or otherwise raise their prices to ethnic minorities, such as African Americans, and women ^[3]^[4]. These issues have sometimes resulted in lawsuits, including class action lawsuits, against the dealers on the basis of discrimination based on Nationality.^[5]