End of Model-Year Sales

Normally, the month of September would be a good month to catch good deals on remaining 2005 car models. And in many cases, this still may be true. However, this year, things are a little different.

First, GM, Ford, and Chrysler are just coming off of extended "employee prices to the public" promotions that have been tremendously successful for them. These were prices that were far better than any typical end-of-model-year prices. The best prices for those brands have already happened -- they won't get any better.

The success of the programs left dealers with far fewer 2005 models than they would otherwise have. Therefore, for those who will have waited until after September 6 (when the promotions end), prices will be higher and selections will be limited. This also applies to most of the other automobile brands who also enjoyed increased sales of 2005 vehicles during the summer.

In some cases, 2005 models are already gone, especially in those cases where the 2006 versions of a particular car came out during the Spring or Summer of this year.

So, for those who traditionally wait until September to buy their new cars, this was the year to break the tradition. This is not your father's car buying world any longer.

Pricing is Key to Car Sales

Coming off a season of heavy discounts, zero percent loans, and "employee pricing," car manufacturers are challenged to come up with the next greatest pricing plan. Unfortunately, they've left themselves with almost nowhere to go. Therefore, you'll begin to see a number of less drastic pricing maneuvers that carmakers hope will maintain sales and improve profits.

We've already discussed "value pricing" in an earlier post. This is intended to reduce sticker prices to more closely match what customers expect to pay, without having to resort to discounts and rebates. However, watch for those "value" prices to start low and gradually increase over time. Instead of big price increases at the beginning of a new model year, watch for a number of smaller increases during the year.

Another change that will be more difficult to observe will be an increase in the use of factory-to-dealer rebates that will give dealers more flexibility in dealing with individual customers who need help, especially for customers wanting to trade but who have large negative equity. In this case, a dealer can use his rebate to help the customer offset his negative equity by offering more for his trade-in. Manufacturer-associated finance companies such as as GMAC may also increase the amount they are willing to loan when the customer wants to roll over negative equity.

It is yet to be determined if these more subtle pricing schemes will be successful, given that the automotive buying public has become thoroughly accustomed to rebates, low cost loans, subsidized lease deals, and employee "below invoice" pricing.

An Option You Can't Live Without

A few years ago, some European luxury cars began appearing with a significant new safety feature generally called "stability control system." The feature is now offered as standard equipment on many SUV's and as an option on many cars, mostly non-U.S. makes. If you're in the market for a new car or SUV, this is a safety feature that can easily save your life.

What is a "stability control system (SCS)?" It's the next step beyond anti-lock brakes (ABS) and traction control, both of which are currently offered as standard or as an option on many vehicles. SCS is a combination of computer, sensors, and actuators that monitor a vehicle's operational stability. If it detects that driving conditions are such that the driver could lose control of the vehicle, it intelligently manages both brakes and power to bring the vehicle back to a safe condition. This is particularly significant for SUV's which, because of their high center of gravity, have a tendency to roll over in accidents.

Auto manufacturers are not consistent in how, or if, they offer SCS on their vehicles. Ford, for example, installs it as standard equipment on SUV's, but doesn't even offer it as an option on its Crown Victoria and Ford Five Hundred. On the other hand, Toyota offers it as a $650 option on their Avalon, but not on the Camry. Even when it's available as an option, many dealers don't order it because many customers don't understand its significance and think it's too expensive.

Stability control systems have different names, depending on the carmaker. You'll see names such as Stabiltrak, Vehicle Skid Control, Electronic Stability Program, and others. However, all the systems perform the same job -- saving lives on roads and highways.

Car Buying Myth #2

Myth: Consumer laws allow up to 3 days or 72 hours to return a car, purchased or leased, back to the dealer if the customer is not satisfied or changes his/her mind.

Not true.

This is a common misconception that seems to persist, even grow, despite all the information that is available both online and offline. This misconception has gotten some consumers in trouble when they thought they could "test drive" a vehicle for a couple of days before making the decision to keep or return.

There are indeed some federal and state consumer laws that provide for "grace" periods on purchases of certain products or services, in certain places. Most of these laws relate only to door-to-door sales and health club memberships. None relate to automobile sales or leasing. Some states even require car dealers to specifically inform customers that there is no such law.

Therefore, the only way that a vehicle can be returned after a sale or lease is if the dealer wants to cooperate when asked. Some of my web site readers have informed me that there are some dealers who provide a written return policy to all their customers. This is not typical, however.

Discount or Rebate - Difference?

Car dealers and manufacturers often advertise rebate programs to help sell new vehicles. Dealers may also advertise price discounts, some of which may be supported by factory-to-dealer rebates that are not made public. Customer may even negotiate extra discounts if they have the time and skill.

If a dealer offers, say, a $2000 discount on a particular model -- or a customer negotiates a $2000 discount -- on a vehicle that is priced at $24,000, the sales contract will show that the vehicle sold at $24,000 minus $2000, which results in a $22,000 sale price. Sales tax (in most states), is based on the discounted $22,000 price.

If you receive a $2000 rebate, instead of a discount, your final price for the vehicle is the same $22,000 as with the discount. However, there's a difference in what you actually pay. When using a rebate, the price of the car doesn't change -- it's not a discount. Therefore, in our example, the price of the car is $24,000 and the sales tax is based on that amount. Then the rebate is deducted.

What does this mean in dollars?

Let's assume that you live in an area with a 9% sales tax. In our example, if you receive a $2000 discount, which reduces the car price to $22,000, you pay $1980 (9% of $22,000) in sales tax for a total of $23,980.

However, if you receive a $2000 rebate (and no discount), your sales tax is $2160 (9% of $24,000). After subtracting your $2000 rebate, you pay $24,160 -- a difference of $180. Therefore, your $2000 rebate really turns out to be only $1820.

Watch for "Value Pricing"

A number of carmakers are going to give "value pricing" a try for 2006. Since it may affect what you pay for your next car, you should be aware of this new automotive marketing technique.

Value pricing is simply reducing vehicle sticker prices to more realistic levels -- the prices that customers are actually paying for those vehicles. This will reduce the need to negotiate and haggle for discounts. It is also hoped, by car manufacturers, that this will reduce or eliminate the need for cutthroat discounting and incentive programs that seem to have become fixtures in the industry. Carmakers, and dealers, simply can't survive if current levels of price cutting continue.

There are, of course, many questions about how value pricing will be structured and how it will be accepted by automotive consumers. Will prices actually be noticeably lower? After the first year, will customers realize that the prices are discounted from previous levels? Will all carmakers play along? Will dealers accept the new program? Will customers still want to negotiate for even lower prices?

The success of this new pricing scheme will depend on how it's marketed and implemented. The highly competitive nature of the automotive sales business makes dealers and manufacturers resort to techniques that tend to set customer expectation levels for a long time into the future. Dealers can't advertise "lower-than-invoice" price promotions and not expect customers to think that, indeed, it is possible to buy cars at those prices at any time, if you negotiate hard enough. It will be very difficult, if not impossible, for carmakers and dealers to change the customer mindset that they've been building up for many years.

Salespeople Don't Know Cars

If you've ever car shopped and visited dealers of both American brands and non-U.S. brands, you might have noticed that the foreign brand dealer salespeople knew more about their vehicles than their American cousins down the street.

There's a good reason, and it's not because foreign brand salespeople have higher IQs. It may have a little to do with foreign brand manufacturers, particularly the Japanese, paying more attention to details in both manufacturing and in selling. But it relates more to the differences in volume of information about makes, models, packages, and options.

A Honda dealer, for example, sells relatively few different models of cars, minivans, SUVs, and now trucks. Each model may have three or four variations, each with a standard level of equipment. Each variation has only a few options, including color.

On the other hand, a Chevrolet dealer, who may also be a Pontiac dealer and a Buick dealer, has dozens of different models, with hundreds of variations, with thousands of mix-and-match options. The number of combinations of models/packages/options on trucks alone are staggering.

So what's my point?

If you are a salesperson in a Honda dealership, you learn a "system" of models, options, and pricing. When new models come out, the manufacturer can easily educate dealers and show them the features that customers need to know about. It's not so difficult to learn and communicate this knowledge to customers.

However, if you are a Chevy/Pontiac/Buick dealer salesperson, it's humanly impossible to keep in your head all the information about all the makes, models, options, and combinations that make up your company's products. As a result, you are not able to be as responsive or as knowledgeable when interacting with customers.

I have always recommended to my web site visitors that they thoroughly educate themselves about the vehicle they want before they ever set foot in a dealer showroom. With so many resources available, online and offline, there is no good reason to depend on dealer salespeople. Therefore, the differences between salespeople's knowledge between one dealership and another becomes a moot point.

Auto Myth #1 - Pay Cash, Pay Less

From time to time, I will post common myths and misconceptions regarding automobile buying and leasing. I will then attempt to debunk them or explain them. However, myths have a life of their own and any feeble attempt on my part to eliminate any of them will accomplish little.

Myth #1 - Dealers sell cars for less if payment is made with cash

Not true. Actually, car dealers prefer that you allow them to arrange a loan or lease because they can receive additional profit through interest rate markups and commissions from the finance company. If you pay cash, you deny them this opportunity. Since the dealer is not the finance company, he ALWAYS receives cash -- either directly from the buyer as a cash payment, or from the finance company as the proceeds of a loan or lease.

Having said the above, this doesn't mean that your overall costs aren't lower when you pay cash -- because your costs ARE lower. Paying cash means you don't pay loan finance charges and, additionally in the case of a lease, you don't pay an acquistion fee or disposition fee, although you will pay more sales tax (in most states).

In summary, paying cash is always the least expensive way to acquire a new car, but not because the dealer gives you a "cash discount."

Hybrid Cars Save the Green?

Hybrid cars such as those from Toyota, Honda, Ford, and others all have better gas mileage figures than their conventionally powered counterparts with very little sacrifice in performance. However, prices are considerably higher. Furthermore, prices for hybrids are rarely discounted and almost never see the kinds of promotional sales programs that frequently apply to other models. This makes the actual price difference between hybrids and conventionals even more dramatic.

The question then becomes: Do long-term fuel cost savings justify the added front-end cost of purchasing such a vehicle? Each situation is different but, in general, when the math is done, the break-even point doesn't occur until many years down the road. In most cases, this point will not occur within the time that the original buyer owns the vehicle, assuming it will be traded or sold within a few years as most cars are.

Therefore, if your motives are to help keep the environment green, then hybrids are for you. However, if your goal is to help keep your pockets green (with money), you may want to do the math to determine if this will be the case in your particular situation.

Employee Pricing - Big Success

GM, Ford, and Chrysler all experienced record sales in July with their "Employee Prices to the Public" promotions. It was so good, in fact, that they have now extended the programs until September 6, 2005. All of the programs make it possible to get below-invoice pricing on all qualifying vehicles.

Interestingly, these promotions seemed to have created a broad level of excitement that has also created increased sales for other manufacturers such as Toyota and Honda. Sales for all brands is generally up.

Contrary to some reports, the prices also apply to leases. Don't let your dealer tell you otherwise. With the employee discount combined with cash rebates that are available, lease payments are significantly lower.

Many dealers have complained that the promotions have increased sales but hurt overall gross profits. Some like it; some don't.

For consumers, the programs have created some interesting effects. The high volume of new-car sales has driven down prices of used cars. This has happened primarily because of the high volume of trade-in vehicles resulting from the new-car buying frenzy. Dealers' used-car lots are overflowing. If you are a used-car buyer, this is a great time to buy. If you are a seller, it's not a great time.

The success of these "employee price" programs has significantly reduced dealer inventories. Therefore, if you have waited to participate, you may find your choices in 2005 model vehicles very limited in some areas.

It's very likely that GM, Ford, and Chrysler have hurt their 2006 sales because of these programs. People who were possibly waiting to buy a 2006 model have now acted early to get the good deals on 2005 models. These companies will be forced to offer incentives on 2006 models to get them moving, but the deals won't be as good as the 2005 deals.

New Roadsters Hard to Find

One of GM's new little roadsters, the 2006 Pontiac Solstice, should be in some dealerships by now. That's the good news for the 10,000 people who are waiting for them. The bad news is that there aren't enough to go around because of limited production. This is going to be a hot car at a base price of only $20,000. Don't expect to get any deals on this little baby.

Those who are looking at the gracefully lined Solstice might also want to look at the upcoming Saturn Sky, which is very similar in specs, but with a harder-edged design (think difference between the BMW Z3 and Z4).

The new redesigned 3rd generation 2006 Mazda MX-5 Miata is also just out and in the same price range. Actually, they've dropped the Miata part of the name from the car this year, although they still use the name in advertising. Dealers won't have a full inventory of these models for at least a couple of months.

Car Loan Markups - Fact of Life

One of the "hidden" fees when buying a car is the markup that dealers add to your loan interest rate. Say the normal interest rate from the finance company used by the dealer is 4.5%. He marks up the rate by a percentage, say 2.0%, making your real rate 6.5%. This markup is never mentioned anywhere in the documents you sign. Car dealers claim the practice is justified to cover the cost of their brokering customers' financing.

There have been a number of individual and class-action law suits regarding abuse of this practice. Consumer advocate groups have been active in some states to eliminate or regulate the practice.

Automotive News reports that a number of companies such as DaimlerChrysler Services, Honda Finance, and GMAC have settled on a 2.5% markup limit agreement. California now has a law that sets a 2.5% markup ceiling for most car loans. So it seems that 2.5% is now the magic number in the industry.

A common question from consumers who are buying new cars is, "Can I negotiate my interest rate on my car loan?" In most cases you can try to negotiate the markup, but not the base rate. The dealer sets the markup; the finance company sets the base rate.

In the past, there was no good way to know what the car dealership markup percentage was but, now, with the recent "agreements" and laws, we can assume the markup rate is going to be 2.5% added to the base rate.

Be aware that not all dealers mark up loan rates, but it seems to be a growing practice. Also remember that your base loan rate will be partly determined by how a finance company values your credit history and FICO score. Therefore, shopping around for the best rates is always a good thing to do.

Leasing Returns to New York

The massive $286 billion Federal Highway Bill that was signed into law on August 10, 2005 contained a little-noticed component that is of great importance to New York car leasing consumers -- it bans the state's vicarious liability laws which caused major auto leasing companies and banks to pull out of the state or raise their fees. Similar laws in other states are also outlawed.

The laws made car leasing companies jointly liable if a leasing customer caused an accident and was sued.

It's not yet clear how soon leasing will return to normal in New York state, but our guess is that it will be within a few weeks.