At the Law Offices of Jason E. Taylor, we get multiple calls a day from people who feel a car dealership has defrauded them. As a result, I feel like I have a pretty good grasp of the most common problems that vehicle buyers deal with. I previously laid out some of the most common car-buying pitfalls and some tips to avoid them here. Below, in Part 2, I discuss add-on products and how to deal with the dealership’s finance and insurance department.
Pay Attention When Dealing with the F&I Department
If you’ve ever bought an automobile, chances are you started by dealing with a salesperson who walked around the lot with you and handled the first part of the sales process. This generally includes the test drive and then the haggling over the price until you’ve reached an agreement. Then, once you’ve agreed to purchase the vehicle, you’re often handed off to a different dealership employee, someone in their Finance and Insurance or “F&I” department.
Often, by the time you make it into the F&I office, you’ve been at the dealership for hours. This is usually by design. Dealerships bank on the fact that you’re fatigued by the process and tired of being at the dealership and just want to sign your papers and be able to get out of there with your new car. The dealership is hoping that they’ll wear you down and that you’ll sign off on just about anything they offer to end the process. This is especially true if they know you are in a hurry or have young children tugging at you asking when it will be time to go home.
When F&I people know you’re tired or in a rush, all they hear is “cha-ching.” This is because most dealerships, and frequently the F&I employees, make a lot of their money and commissions through F&I “back end” products.
You see, nowadays, it’s hard for dealers to make much money on the sale of the actual vehicle itself. For most vehicles, there just isn’t much of a profit margin to be made. That’s where back-end add-ons come in. These are things like Guaranteed Asset Protection (“GAP”) coverage, service contracts, maintenance plans, and other products that provide dealerships with a lot of their profit. This is because the dealership often sells these add-on products at a tremendous profit margin.
- GAP – Most people aren’t aware that they can purchase GAP insurance from their auto insurance company and don’t have to buy it from the dealership. According to the Insurance Information Institute, GAP coverage only adds about $20 a year to a typical annual insurance premium. At most dealerships, GAP insurance costs $700-$1,000. Even worse, that amount is always rolled into the financing charge, which means that after interest, you’re paying way more than the already inflated price. GAP coverage doesn’t make sense for every purchase, but if it makes sense for you, do the smart thing and get it from your auto insurance carrier and not the dealership.
- Service Contracts – These are often the most profitable add-on product that a dealership can sell you, so be prepared for a speech from the F&I person about how important this is for you to purchase. They’ll probably tell you some horror story of some person who had something happen to their car and was so thankful for having purchased this coverage. You need to understand that a service contract is not a warranty. It’s generally in addition to a warranty or after a warranty has expired. It is always for an extra cost. Typically, a dealership can purchase this coverage for a few hundred dollars and then sell it to customers for as much as $4,500. It’s essentially pure profit for them. I personally would not purchase a service contract from any dealership. However, if you feel like it’s the right decision for you, make sure you ask to read the fine print of what the service contract covers and doesn’t cover and how much your deductible is. You would be surprised how many service contracts cover things that an existing warranty already covers. In other service contracts, the deductible is so high that it’s pointless even to have it. Additionally, the service agreement’s language often excludes many things you would use the service contract for. So tread carefully! You can bet that the F&I guy isn’t going to point any of these things out to you, so you need to be the one to ask to see the contract language and terms and make sure you read it before agreeing to any service contracts.
- Service-Related Products – Perhaps the only product more profitable to a dealership than GAP and service contracts are parts and services from their service department. As a result, dealerships want to do anything they can to get customers to buy a car from them and come back to get it serviced from them. One way they achieve this is by giving buyers an incentive to come back to the dealership for service rather than go somewhere else. Sometimes this is marketed as a maintenance plan where the customer actually pays for it (essentially a double win for the dealership). Other times it is done through things such as free oil changes (spoiler alert: they’re going to sell you on other services in addition to that free oil change you show up for). Either way, their goal is to get you to return to the dealership to pay for overpriced service, which provides the dealership with large profit margins. While I’m not advocating that you turn down free oil changes, I certainly wouldn’t pay for a maintenance plan, and I would think twice about taking my car back to the dealership for any service that wasn’t covered under warranty.
- Other products – If a dealership can turn a profit on it, they’ll sell it. That explains why relatively useless products such as VIN etching, key replacement plans, tire protection plans, and dent protection plans exist and are actually sold. Dealerships will often present these products as free or costing only a very minimal price, but that’s never the case. They’re just getting creative with the numbers and taking money from one place and moving it to another. The bottom line is that you’re paying for these useless products, and the dealership is profiting. Plain and simple.
As you can see, there are a whole lot of add-on products that dealerships try to sell. Regardless of its product, the dealership is likely making a large profit margin and has trained its employees to sell these products aggressively.
If you’ve done your homework, you should know what you need or don’t need. You should also know how much the products you want will cost from somewhere other than the dealership. Don’t let the F&I department scare you or confuse you into buying something you don’t want or need. Let them make their money off of someone else!