How does a dealership’s floor plan impact auto sales and consumers? Let’s start by defining what a floor plan is. It’s a specific type of credit that dealerships use to finance their inventory. Most dealerships have floor plan financing in place for their car lot. For instance, if you pass by a new or used car dealership and see a hundred or even fifty cars parked outside with an average price of $20,000 to $30,000 each, you’re looking at millions of dollars worth of inventory just sitting there. However, most dealerships don’t have millions of dollars in cash on hand to purchase inventory outright. Instead, they obtain a credit line, similar to a large credit card, that they use to buy vehicles.
Here’s how it works: when they attend auctions to buy inventory, which is where most dealerships get their cars, the auction is connected to their floor plan. When they buy a car for, let’s say, $25,000, they simply sign for it, and it goes on their line of credit. The line of credit then sends a wire transfer for that $25,000 to the auction. The dealership then takes the car back to their lot, fixes it up, cleans it, and puts it up for sale.
When a dealership sells a car, they must first pay off a portion of the line of credit by doing a buydown for the first amount of the sale; usually, the price paid for the car, such as $25,000. The remaining profit, which could include additional fees for things like shipping or auction fees, is kept by the dealership. However, if the dealership is experiencing financial difficulties and needs cash, they may be tempted to delay paying off their line of credit by using the cash received from a car sale. This delay could prevent the dealership from obtaining the car title, which is held by the floor plan lender until the loan is paid off. As a result, the dealership will be unable to transfer the title, register the vehicle, or issue a license plate to the customer, leaving them in limbo. Ultimately, this delay could negatively impact the consumer’s experience.
Let’s assume that a dealership buys a $25,000 car using a loan that incurs interest payments. A few years ago, the interest rates were low, only 1% or 2%, and it might have cost a couple of hundred dollars per month to keep that car on the lot. However, with the current spike in interest rates, it could cost around $400 or $600 per month, adding up to an additional $2,000 of expense after three months on the lot. With the original $25,000 principal amount, the total tied up in the car is now $27,000. Suppose the market drops and a customer offers to buy the car for $23,000, which is less than what the dealership invested. In this case, the dealership will need to pay off the $25,000 loan plus the additional $2,000 in interest, totaling $27,000, despite only receiving $23,000 for the sale. This means that the dealership will be out of pocket by $4,000 if they sell the car under these circumstances.
If a dealership is experiencing financial difficulties, they may not be able to come up with the money to pay off the loan, which means they are better off keeping the car. However, keeping the car does not solve the problem, as its value will continue to decrease every month, adding up to more interest. This situation can negatively impact consumers, who may wonder why cars are not being sold at used or new car dealerships. They may assume that the dealership is aware of the car’s true value and wonder why they don’t just sell it at a lower price. However, the reality is that the dealership may not have the cash to pay off the loan and may have negative equity in the car, meaning they owe more than the car is worth. This situation is particularly challenging for used car dealerships with thin capitalization, as they may not have the funds to cover the difference. Even on a $25,000 car, the loss could be as much as $2,000 to $3,000, but on higher-end dealerships that sell luxury or high-end cars priced at $40,000 or $50,000, negative equity could be as high as $8,000 to $9,000. In such cases, the dealer may get stuck with the car, which can ultimately affect consumers in a variety of ways.
When you buy a car from a dealership, there are potential consequences that could affect you, such as delayed receipt of the title or paying the wrong price for the car. Additionally, if you trade in a vehicle that still has a loan, you’re relying on the dealership to pay off the loan, as per the agreement. However, if the dealership is experiencing financial difficulties and can’t cover expenses like payroll, they might not pay off your loan right away. We’ve seen cases where dealerships made car payments for customers who traded in their cars but didn’t pay off the loan immediately. If the dealership doesn’t make the payments, it could result in late fees and a delinquent record. In the worst-case scenario, the dealership goes out of business, and you’re left with the debt. The problem with dealership floor plans is not only affecting car dealerships, but it is also having an impact on consumers. Some cars are sitting at the auction for weeks, causing the book value to drop. The dealerships may be stuck with these cars and unable to sell them without coming out of pocket thousands of dollars, which they may not have due to the market turning against them.
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There is a tactic that some car dealers have been using for a long time, which we observed as far back as 30 to 40 years ago. Recently, it has been featured in the news quite frequently. This tactic is referred to as a bailment agreement, although some people call it yo-yo, be back, or come back. Essentially, it is a way for dealers to engage in underhanded activities that could jeopardize your purchase.
Here’s how it works: When you purchase a car and drive off the lot, the dealer may have the option to call you back and coerce or blackmail you into giving them more money. Even though you’ve already bought the car, they can make you return with more cash, raise your car payments, or even exchange it for a different vehicle. This may seem implausible since you have already driven off with the car, but it is a common practice that can occur without you even realizing it.
We are bringing this up now because Jalopnik recently published an informative article on the topic, and even high-profile YouTuber and attorney Steve Lehto discusses it as one of the dealers’ worst tactics under fire. In fact, his first video on his channel was about this tactic many years ago. While it was out of favor for a while, it is now being used more frequently.
When you purchase a car from a dealership, you are required to sign various documents, such as a buyer’s order, a bill of sale, an odometer statement, and a car loan if you have one. Once you sign all the paperwork, you are allowed to leave the dealership with the car.
Dealerships often use a financing strategy called “spot delivery” or “on-the-spot delivery.” This means that they want to get you in the car and out the door as quickly as possible. They do not want you to go home and consider the purchase because you may change your mind. Therefore, they aim to complete the entire transaction on the spot.
To achieve this, they will take your financing application and submit it to one or more lenders. They will try to find a lender that offers the most advantageous financing for you, but they may also consider the lender that offers the best commission or kickback for them. However, not everyone is approved for financing.
If you are not approved for financing after you leave the dealership with the car, you are required to return the vehicle. This is a legitimate practice to protect the dealership’s interests.
One of the documents that you sign when buying a car from a dealership is a bailment agreement. This agreement stipulates that if your financing is not approved, you must return the car immediately upon request, and the dealership will refund your money and trading back, effectively undoing the transaction. While this is a legitimate and fair practice, it is worth considering whether you should sign such an agreement.
When you apply for financing, the dealership sends your application to various lenders. They assess your credit score, income, and other factors to determine the best financing option for you. However, there is always a possibility that the lender may not approve the financing as expected. For instance, they may approve you for a higher rate or a lower amount of money than what the dealership anticipated.
In such cases, the dealership may ask you to return to the dealership and put more money down or sign up for a higher payment. This may not seem fair, but the bailment agreement that you signed allows them to do so. In some cases, you may have to return the car or switch to a lower-priced vehicle if you are not approved for financing.
Dealerships include bailment agreements in every spot delivery deal. However, there are ways to avoid this.
To avoid signing a bailment agreement, wait until the dealership secures financing before taking possession of the car. If you are in the dealership and they negotiate the terms and financing, do not agree to anything until they have the financing approved and structured as they have proposed.
Instead, ask them to contact you once the financing is ready. It usually takes no more than a day or two. You may leave a deposit to hold the car if you wish, but this poses little risk.
Even if you do not anticipate being declined or rejected for financing, waiting is still a good idea. The dealership may put you in a low-rate financing or monthly payment tier, which may not come through as expected. If they made an error in their financing calculations, they have the leverage to bring you back in and fix the mistake, which could result in more costs for you.
An example of this, we worked with a client who went to a dealership to buy a car late at night, and they negotiated a great deal on a leased vehicle. The dealership factored in the car price and incentives from the factory, such as rebates, which were prevalent in 2017 or 2018. They also included incentives on the lease, which resulted in a lower rate and overall payment, making it an excellent deal.
The dealership delivered the car on the spot, but the customer refused to sign a bailment agreement, stating they did not want to take the car until the financing was approved. They wanted to ensure it was a done deal before committing. Therefore, they asked the dealership to call them the next day when the financing was finalized.
The dealership called back the following day and informed the customer that the deal might not be the same as what was initially proposed. The customer rejected the new offer and said they would look elsewhere for a car. Eventually, the dealership agreed to honor the original deal, and the customer returned to complete the transaction.
The customer in this scenario had good credit, so their financing approval was not an issue. However, the dealership made an error in calculating the lease deal incentive and the rebate incentive. They combined both incentives, which was not allowed. If they had completed a spot delivery, they could have called the customer back and demanded a higher payment. Since the customer did not take the car, they had more leverage to negotiate.
If the customer had taken possession of the car and enjoyed driving it, they would have been less likely to return to the dealership to redo the paperwork. Therefore, not accepting the car gave the customer more bargaining power. The dealership had to sell the car for a lower price, which may have resulted in a loss.
The dealership often includes a bailment agreement in the paperwork when you buy a car. This agreement requires you to bring the car back if they cannot secure financing for you. Do not accept this arrangement. Instead, tell them to call you once the financing is approved, and you are sure the deal will go through. You do not want to speculate with the dealership or commit to a deal that they can undo, leaving you without the same option.
It is unfair for the dealership to have the power to undo a deal while you do not. You want a level playing field. If they cannot commit to the deal, do not lock yourself into it either. Unless they are willing to give you the same option, do not sign the bailment agreement.
This issue has been recently highlighted in articles by Jalopnik, Steve Lehto, and Car and Driver. Dealerships are starting to include this tactic again in their playbook, which was popular in the 80s and 90s. To avoid any problems, do not accept the bailment agreement, as plenty of cars are available, and you can always find a dealer who will make the same deal for you.
Can you obtain an electronic or digital copy of your car title? It may seem reasonable to download or print a car title on your phone, as other documents such as boarding passes and passports are now going mobile. However, vehicle titling is conducted at the state level, meaning no single national car title exists. Nevertheless, progress has been made in California, where the DMV is starting to digitize car titles. This means you would no longer need a paper title and would no longer have to deal with the DMV bureaucracy or fill out forms. Everything can be done electronically on your phone, making vehicle titling and proving ownership much more straightforward, even if you have a lien on the vehicle. Evidence of ownership can be documented with a QR code or electronic signature on your phone.
However, the question now is how to migrate this system to other states. California is leading the transition, and a few other states, including Virginia, New Hampshire, and Vermont, have signed contracts with companies to switch to electronic car titles. But how does an electronic car title work, exactly?
The process of digitizing vehicle titles uses blockchain technology, the same technology that backs up cryptocurrencies. A blockchain signature code will provide value to vehicle titles, identifying the vehicle, VIN number, owner, and any lien holders. All the relevant vehicle information, including its year, make, model, and history, will be stored securely in the cloud using blockchain technology. This allows for seamless transfer of ownership records, which can be done electronically, without the need for notarized and signed paper documents.
When you buy or sell a car, you can connect with the other person electronically, and the transaction can be completed on your phone with funds transfer, resulting in an instant transfer of ownership. Even dealerships can use this system to transfer ownership instantly to customers who buy cars from them. The process eliminates the need to wait for 30, 45, or even 60 days to receive the title and plates for a purchased vehicle.
California plans to introduce digital wallets that hold and transfer token car titles, with the DMV acting as a middleman to oversee the operations. This system promises to revolutionize the way vehicle ownership is documented and transferred, making the process more efficient, secure, and convenient for all parties involved.
This is a game-changer! It promises to simplify the process of dealing with vehicle titles and ownership. One of the problems with vehicle titles is that they are not something that you use or update every year, unlike your registration and license plates. You renew these items every year, and you keep your driver’s license in your wallet because you need to show it regularly. However, your car title is a different story. You receive it, and then you throw it in a drawer where it is forgotten about for years. When you finally need it to sell your car, you might struggle to find it. This can be frustrating because you may need to file for a lost title, fill out forms, and show your ID. If you have moved, this process can be even more complicated because your address may be wrong.
Digitizing vehicle titles will prevent title fraud, where someone hides prior salvage or lien information from future buyers. It will also prevent titles from being washed from one state to another and lock down the record so any future owner knows about liens and salvage. If a vehicle is reported stolen, it can also be reported on the blockchain. This more straightforward way of obtaining a title can help you avoid the bureaucracy of dealing with the DMV and other agencies that make getting titles difficult.
If you’re involved in an automotive transaction, whether you’re buying or selling a car or you’re a dealership, you should be aware of the new changes to section five of the law or regulation from the FTC. These changes will drastically transform the way vehicles are sold in the future. As a car buyer, this benefits you because you no longer have to haggle over price or worry about a dealership mistreating you with their pricing strategy.
Although not all dealerships engage in unfair practices, some do, and the changes to section five will make a big difference in how they operate. Dealerships can no longer rip you off on price; if they do, you can defend yourself with severe consequences for the dealer. This is all on the federal trade commission website, which explains that the overall theme of section five is whether a dealership’s actions are an unfair method of competition.
For instance, if a dealership quotes you a price or payment for a vehicle that turns out to be different from what was promised, you have the right to leave without buying it. However, wasted time, lost opportunities, or being pressured into purchasing a vehicle are all considered violations of FTC regulations. This goes beyond fair competition, which involves evaluating a dealership based on merits, such as superior business strategies or inventory.
The rule would prohibit dealerships from making misrepresentations or engaging in deceptive practices surrounding motor vehicle transactions. This includes misrepresentations concerning the cost, terms, financing, or leasing of a vehicle, as well as deceptive practices surrounding total costs, added features, and the availability of discounts. Deceptive advertising or marketing that creates or maintains market power, even if the dealership is not selling anything, is also prohibited.
To capitalize on this rule as a car buyer, it’s important to document all activities and try to get everything in writing via email or text message. This way, you can hold the dealership accountable for any misrepresentations or deceptive practices. Remember, the conduct doesn’t have to cause actual harm but instead has a tendency to generate negative consequences, such as limiting choice, lowering quality, or impairing other market participants.
In conclusion, the new changes to section five of the law or regulation from the FTC are a big deal. They aim to promote fair competition and protect consumers from unfair practices. As a consumer, it’s essential to be aware of your rights and hold dealerships accountable for any misrepresentations or deceptive practices. And as a dealership, it’s crucial to comply with the new rules to avoid serious consequences.
In the dynamic world of automotive sales, the unseen gears of dealership operations play a crucial role in shaping the market and influencing consumer experiences. In this blog post, we delve into the intricacies of dealership floor plans and explore how they can significantly affect both auto sales and consumers.
Before we unravel the impact, let’s understand what a dealership floor plan entails. Simply put, a floor plan is a specialized line of credit that enables a car dealership to finance its inventory. Imagine a typical car lot with rows of gleaming vehicles; these cars represent a substantial investment for the dealership. Instead of having cash reserves to purchase each vehicle outright, dealerships rely on a floor plan—a sizable credit line akin to a giant credit card.
Most dealerships source their inventory from auctions, where they bid on vehicles to restock their lots. The auction process is seamlessly connected to the dealership’s floor plan. When a car is purchased at auction, the dealership simply signs for it, and the purchase amount is transferred from their line of credit to the auction. The dealership then takes possession of the car, prepares it for sale, and showcases it on their lot.
When a dealership successfully sells a vehicle, the financial dance begins. The initial purchase amount is deducted from the sale, and the dealership pays off that portion of the line of credit. The remaining profit, after deducting any fees, becomes the dealership’s earnings. However, temptation arises when a dealership faces financial challenges. Instead of promptly paying off the line of credit, they might delay the process, creating a financial limbo.
This delay in paying off the line of credit can directly impact consumers in several ways. Firstly, title transfers, registrations, and license plate processing may be delayed. While the dealership may have sold the car, the title remains with the floor plan bank until the line of credit is settled. Consumers may find themselves unknowingly in limbo, waiting for essential paperwork.
Beyond paperwork delays, fluctuations in interest rates can have a profound effect on dealership floor plans. In times of low-interest rates, the cost of keeping a car in inventory is manageable. However, with interest rates on the rise, dealerships may incur significantly higher monthly expenses, especially on vehicles that linger on the lot for extended periods. This dynamic shift can lead to increased financial strain on dealerships, impacting both the pricing and availability of vehicles for consumers.
Consumers should exercise caution when engaging with dealerships affected by floor plan challenges. If a dealership is unable to promptly settle outstanding loans, it may jeopardize the timely payoff of trade-in vehicles. In such scenarios, consumers could face late fees, delinquency records, or, in the worst-case scenario, non-payment of the previous loan.
The interplay between dealership floor plans and auto sales is a complex puzzle with far-reaching consequences. From delayed paperwork for consumers to the potential risks associated with trade-ins, the financial health of a dealership can significantly impact the overall car-buying experience. As the automotive industry navigates these challenges, consumers are advised to remain vigilant, asking questions, and understanding the financial stability of the dealerships they choose to engage with. The unseen dance of dealership operations is a critical factor that shapes the landscape of auto sales, and consumers play a vital role in ensuring a transparent and secure transaction.
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