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Jared Hamilton
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Jared Hamilton

Jared Hamilton Founder - CEO

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I just had a conversation with a friend of mine who works the desk at a Ford store.  He was telling me how you could buy a F150 Lariat in the $24k range thanks to over $10k in factory rebates.  It’s a killer deal and the public is all over it.  He said truck sales rebounded a bit for them last month and they moved a bunch of these units, especially due to the fact that you could un-bury someone with a bunch of negative equity thanks to the rebate.



I’m stoked they were able to have a better month of sales.  We all know the industry needs it, but aren’t we just digging ourselves deeper into a hole?  What is that Lariat really worth: the $34k sticker price or the $24k selling price?  Obviously it’s worth what the buyers are willing to pay, and that certainly isn’t $34k in today’s market.



Lest look at this realistic scenario: if the buyer had 9k in negative equity (very realistic considering how soft trades are) they just financed 33k, plus taxes and fees. As they left the lot they were approximately $14,000+ plus taxes and fees upside down.  OUCH! Then you figure they took out a 72 month loan with a mid interest rate (we all know FMCC doesn’t provide the most aggressive rates) and their principle balance will not be paid down near the rate of depreciation.  What’s all this equate to?  One less buyer on the road for another 4-5 years because they will be so tanked in their new truck they have no hope of trading out without a significant down payment!



How many times did this happen across the country last month? Last year?  How many buyers are out of the trade cycle because they are SOO far upside down that they are completely un-financeable?  How long will this last before banks adjust lending guidelines and dealers are really hurt?



Can you blame the dealer?  If they had sold the truck to the customer, someone else would have. Any sales manager worth his paycheck would gladly answer, "Roll it!" Their job is to put together deals, not police the nationwide market.  However this doesn’t stop the fact that we are only hurting ourselves in the long run by reducing the number of financeable buyers in the market place.



So what’s the answer?



a) Continue… knowing that just like home mortgages the piper will come calling and once the banks get tougher we will deal with it then. (That will be a tough day)



b) Switch to leasing, since there is such strong support for leasing at the moment. (Ha-ha yea right, strong support for leasing?)



c) Play financial advisor for our customers and recommend shorter terms and larger downs risking that our competitor down the street will beat us by a mile on payment.



d) Not worry about it, at least they bought GAP?



Our options aren’t too good, but seriously this is a real problem.


Alan Edwards
This *ought* to be a thought-provoking post for your readers. I work at a Volvo store and our clients tend to be sharp, analytical (if odd) folks who realize that a rebate has never unburied anyone. Still, occasionally someone drifts over to shop our lot with the mentality that a rebate is somehow a magic wand that renders their negative equity irrelevant. Somehow these folks imagine that a $45k car with a $10k rebate makes more sense than just buying a $20k car that actually mets their needs. I used to try to explain that, but if there was any possibility of selling them anything I know that I abdicated that opportunity to another dealer - most likely an unscrupulous one - by trying to talk sense into them. I still try - one time - to get the point across, but if the client doesn't grasp it immediately I give up and just try to give them what they think they want.
Jared Hamilton
Yea, a high end Volvo client is certainly a different demographic than the heavily weighted "sub prime" market the particular Ford store operated in. What I think surprises me the most is no the consumers not understanding it. (Or even the sales person because like you said, i think most sales people who understand do try and make the point like you do but in the end cant rist their deal)... but what suprises me is that the banks continue with the loans. Over the last few years we have seen banks get really lax about the lending guidelines. Advances have gotten bigger and terms have gotten longer. I guess im most surprised that the market hasn't correct itself yet, or perhaps i should say more. Given the context of the credit crunch we are in it seems fairly brazen to loan on an advance calculated against invoice, without subtracting the rebate. Its not friendly to car sales in the short run, but I wonder how much (if positive at all) it would help out the industry in the long run...
Ray McGowan
It's a great post for those who understand turning a customer "to the light of day." Depending on the education of the client (how much they really know) structuring a deal and explaining it at times can be difficult. Many "sub-prime" buyers want to do what they have to and get the new vehicle. I can certainly agree with the banks getting more relaxed. I can remember getting deals approved and telling the salesperson I needed an additional $5000 down to get a deal done. People have "Little" or no savings to be giving 10% down on a $40,000 vehicle. The loan officers were aware of it and if the person had a "decent" credit score would approve the overages. I commend you for making the attempt to explain it all to a customer but some just don't want to hear it.

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