When a dealer is getting really desperate to close the sale, my all time favorite line is, “Hey man, I’m losing money on this deal.” While it is rare that a dealer will ever sell a car at a loss, chances are they will make up for it in the finance office. Revenue from finance and insurance are at $7 billion dollars.

Before we dive into the details, it is important to let that dollar figure sit in. Automotive News reports that in 2014 dealerships across the country had a total revenue of $7,000,000,000 by selling finance and insurance products such as: extended warranties, service plans, GAP insurance, and a variety of other services.

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What is even more mind blowing than the total dollar figure for F&I, is the average revenue per vehicle. At the top of the list is Richardson & Partners automotive group; they have some dealerships in the Illinois area. They managed to rake in an average (key word average) of $5,271 per vehicle. The number two dealership only took in an average of $2,283 per unit sold.

That means many of Richardson’s customers forked over an additional five grand in finance and insurance products on top of whatever car they were buying.

So what are all those car buyers getting for that extra cash? The most common products are extended warranties. Depending on the vehicle sometimes these can be worth it, but more often than not consumers aren’t getting their monies worth. According to a Consumer Reports survey published in February of 2014:

“55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.

Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties for all brands was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375. Factoring those who didn’t use their policy, the median savings was zero.”

When it comes to selling these products, some dealers are making record profits by pushing them on to customers illegally. In a recent Morning Shift, Patrick mentioned a massive investigation and subsequent settlement for several dealers in the New York area due to alleged unlawful sales of credit repair and identification protection products. Earlier this year, the Fucillo family of dealers, also in New York, had to pay a $1.6 million dollar settlement for selling a bogus “theft protection” package. Also worth mentioning that the Serra dealership group in Alabama, the same organisation that was the subject of multiple federal investigations for loan and wire fraud, was one of the “biggest gainers” for F&I revenue in 2014.

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Since there is so much profit to be made with these products that in many cases don’t benefit the consumer, car buyers should know there are a few things they can do to protect themselves.

- Get outside financing. By showing up with a check to purchase the car at a previously agreed upon price that you got in writing, the finance office has no opportunity to up-sell you on extras.

- Read all of your paperwork. If you choose to go with dealer financing, and if you are getting the best rate through them there is no reason not to, make sure you read your buyer’s contract carefully. Everything should be clear from the purchase price, to the local sales tax and DMV fees. If there is anything extra you don’t recognize, question it and ask that it be removed.

- Do your research and do the math. Sometimes the extra warranty coverage is worth it. Know about the specific vehicle you are buying and be aware of the problem areas. If it is something with a less than stellar reliability history, paying a little more for some protection could be a good investment. However, make sure you run the numbers and not over-buy on your warranty.

- As always... be ready to walk away. If you get the feeling that this dealer is being a little too pushy about F&I products or they added fees to your contract without discussing it with you first, it might be best to shop elsewhere.

(Update: Original post incorrectly used the term profit instead of revenue)

(Image: AP)

If you have a question, a tip, or something you would like to to share about car-buying, drop me a line at AutomatchConsulting@gmail.com and be sure to include your Kinja handle.

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