Ferrari Mailing List: Re: The clYde testimonial

[Hans E. Hansen (FList]

The answer is still "no".  On a typical new car profit was typically
$1000 - $1500 (remember, we're talking Chevy here, not
high end lux cars).  Financing would maybe come to $500.
Some dealers would charge exorbitant rates for things like
polish, undercoat, and service contracts, and that could
amount to another $1000.  In fact, for the real shysters
in the business, the add on crap was the bulk of their
profit.

Discounted contracts like you describe exist in the world
of clunker used car lots.  But for new cars and the types
of used cars usually found on new car dealer's lots, the financial
arrangement was entirely different.  Finance contracts had
a "dealer buy rate", which the finance company would often
vary a bit depending upon the person's credit.  Total interest
is calculated at the buy rate and again at whatever rate the
dealer charged.  On new cars, financing is highly competitive,
so the rate was typically only marked up at the most 3%.
Usually more like 1.5% to 2%.  In fact, many finance cos
limited the amount that you could mark up to figures not
much more than that.  They didn't want to see the customer
"buried" in the paper they were acquiring.  Now, say the
difference in interest for these 2 calculations was $1000.
Some finance companies would cut a check for some
fraction of this figure, like half.  Others would put part or
all of this in a "dealer reserve account".  If the customer
either defaulted or paid the contract off early, the dealer
only gets some portion (or none) of the reserve.  If the
contract goes to termination, the dealer gets all.  But this
could be 5 years down the road.

Got to rush out to dinner now, hoping I didn't leave anything
relevant out of that description.  I'll probably think of
something later....

Hans.

On Tue, Feb 2, 2010 at 5:31 PM, Paul K Rentiers <rentiers [at] me.com> wrote:
> OK but in the long term scheme of things leeaving aside recent insanity
> woyuld you not say the paper was the profit?  Similarly McDonalds is a real
> estate company. Think about it. K
>
> Sent from my iPhone
>
> On Feb 2, 2010, at 7:26 PM, "Hans E. Hansen" <FList [at] hanshansen.org> 
> wrote:
>
>> Sorry, Ken, but that's not even close.  I was a Chevrolet
>> dealer for nearly 30 years.  Of the profit on a typical sale,
>> only a small portion is attributable to the dealer reserve
>> on the note.  In fact, most of  the paper written these days
>> is low interest "incentive" type of financing.  On those 0%
>> advertised rates, GMAC would give us a flat $50 for the
>> contract.  Period.  That's all we made on the paper.  Excepting
>> that $50, ALL of the profit was made on the sale.
>>
>> Hans.
>>
>> On Tue, Feb 2, 2010 at 5:17 PM, Paul K Rentiers <rentiers [at] me.com> wrote:
>>>
>>> On Feb 2, 2010, at 11:11 AM, Michael James wrote:
>>>
>>>> Well, this is where Clyde and I part company, slightly - I realize that
>>>> the Dealership must make a profit if it is to stay in-business.
>>>
>>> Not really. Perhaps excepting exotic cars, but in mainstream auto sales
>>> they are not selling cars. They are selling paper.
>>>
>>> Michael buys a $25,000 Chevy and the helpful sales manager reduces the
>>> payments by spreading them over 5 years. At 12%. Michael buys a $33,367
>>> note. The dealer then delivers the car, and flips the note to MegaAcceptance
>>> at a discount. Car gone. Profit turned. The delaer makes what he can on the
>>> car sale, but really doesn't care about the price too much as long as he
>>> doesn't lose money. It's the note he is after.
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