Getting the Best Deal: Financing & Insurance

People are often surprised to hear that a dealership's financing and insurance department, or "business office," is a profit center. Reality check No. 2: Everything dealerships sell you represents a profit opportunity. With few exceptions, the dealer is a middleman. In the case of the new car itself, you can't eliminate the middleman. Most state franchise laws prohibit manufacturers from selling directly. But you can eliminate the dealer with regard to financing and insurance if you determine that it's in your best interest.

With the widespread availability of invoice pricing, it's harder for dealers to squeeze margin out of the new-car transaction. Much of the profit has shifted to the "back end," which includes the F&I department. The F&I department is also where many buyers let their guard down and squander any good negotiating they've done for the vehicle's purchase price.

You have various options for financing a vehicle, including credit unions, banks and dealerships. In some cases, the loan you'd get from a dealer comes from the same bank you could go to yourself. Dealers play the part of loan agent in trying to get you the best rate, but they can and do add percentage points to the rates they obtain from lenders. In many cases, they split the additional profit margin with the lender, so everyone wins — except you. Though its ethics are questionable and consumers have sued dealers over it, this practice isn't currently illegal.

However, since many captive financing companies offer discounted loan rates, it's possible to get the best deal by financing at the dealership. Shopping during an incentives period increases your chances for these savings.

In addition to loans and leases, dealerships often offer health, disability and other insurance plans. Some buyers appreciate the opportunity to make all their deals under one roof, but you should look into third-party sources and shop around before choosing an insurance plan.

Back-End Products and Services

The F&I manager is also responsible for selling additional products and services, which are a significant source of dealer profit. They include:

Service contracts: Often referred to as extended warranties, these plans are meant to take over when the manufacturer's warranty runs out and/or cover repairs not accounted for in the manufacturer's warranty. Consider your needs carefully before purchasing a service contract for a new car. While the cost of new cars has risen, so has their reliability. The period between purchase and major scheduled service is longer than ever. And experts say the parts of a car that are most likely to break after the factory warranty expires are typically not covered by third-party service contracts, though there are exceptions, such as four-wheel-drive systems and turbochargers. If you consider a service contract, bear these issues in mind:

  • Some contracts have deductibles, and some do not. Amounts vary, and you may have to pay a deductible for each claim or even individually for unrelated repairs in the same claim. Get the details.
  • Don't assume your contract will transfer to another dealer if you move. And if it can be transferred, is there a fee?
  • The contract also may not transfer to another owner. An extended warranty is a nice selling point — but not if it's tied to you rather than the vehicle. Check for owner transfer fees.
  • Sometimes one of a car's parts or systems will be responsible for damage to another part of the car. The best example of this is a timing belt. In certain engine designs, when this part breaks it causes catastrophic (and very expensive) valve damage. A timing belt may cost $20. Which will the service plan cover? Some service contracts stipulate that the insured cannot collect for damage to a part covered by the plan if it was caused by an uncovered part, negligence or some other hard-to-define condition.
  • If you're financing for a longer term, say five or even six years, check the mileage limitations of the extended warranty. It's possible you could surpass the mileage limit, thereby voiding the warranty, before the financing period ends.

Service contracts represent a significant profit source for dealers, so expect the hard sell. The price and all the terms above are negotiable, and again, you can comparison shop the service plan at multiple dealerships even if you're not buying the car there.

Rustproofing and paint protection: All new cars are built with rust-resistant galvanized steel (or aluminum or fiberglass) and treated with a rustproofing agent at the factory. Experts say dealer-applied rustproofing is unnecessary, at best. Paint "sealant" is a similar story: Factory paint is sealed and durable, and it can be protected effectively with a coat of wax you apply yourself.

Fabric protectant: Unlike rustproofing, fabric protectant can be applied effectively after the car is fully assembled, which means the dealer can do it — and so can you. If you take the time and have the knack for it, you can achieve the same result.

Vehicle Service

Vehicle repair is big business. Thanks to the complexity of modern vehicles, dealer service departments are guaranteed a steady flow of business that might otherwise go to independent repair shops.

In terms of the dealership's bottom line, the service department can contribute a healthy percentage of the profit. This illustrates how the profit margin for many dealers has skewed away from the vehicle sale and toward the products and services that follow. It also explains why dealers are sometimes willing to sell at extremely thin profit margin.

If you come in with an immaculate trade-in and meticulous maintenance and repair records, then the dealer may intuit that you're good for a few years of regular service and give you a good deal on the purchase price itself.

© Cars.com 6/3/13