Monday, March 15, 2010

The Used Car Dealer

The local used car dealer has a giant inflatable monster. Do they have good deals as well?

I was reading the local paper yesterday, and the local used car dealer - the one that advertises heavily with an inflatable "Monster" - had their prime deals in the paper.

I was somewhat appalled at the prices they offered. Or rather, the lack of prices. Everything was listed in terms of monthly payments, which is a good first step in obscuring the real price of an item.

For example, they were offering a 1999 Firebird for $199 a month for 48 months at 9.99% APR with $2000 down.  Now right off the bat, if you are astute, you might realize this is a pretty poor deal on several grounds.  First off all, using a reverse amortization program, you realize that the poor sap who buys this 11-year-old GM F-body is borrowing over $7800, which combined with the down payment, totals $9800.  Now even assuming this is a fully loaded TransAm coupe in excellent condition, this means the car is already $1000 over Kelly Blue Book retail value (which is a lot of dough for a decade-old car).

(Of the three "book values", KBB, NADAguides, and Edmunds, the Kelly Blue Book is the highest, and the dealer retail the highest of that.   A more realistic price for this car, in private party sale, would be far less than KBB retail.   So being $1000 over KBB retail is a very high price for any car).

In addition to the staggering interest rate (adding over $1700 to the price of the car) is the problem of collision insurance.  How on earth is one going to get reasonably priced collision insurance on a decade old muscle car?  I am sure the mullet-head who buys this nightmare will find a way.   But a better way is to find a car like this from a private owner, pay cash, and drive it.

(And I am sure how such cars are sold these days - on the basis that they are "collectible".   Here's a clue, the reason why they stopped making Pontiacs was because of cars like this.  And real collectors don't pay $199 a month for a collector car - they pay cash).

The other "bargains" seemed also overpriced.  A 2000 Dodge Grand Caravan for $198 a month for 36 months at 9.9% interest with $2000 down seems like a lot - for a decade-old car.  Kellly Blue Book retail (the highest number possible) lists this load at $4820.   Again, using reverse amortization, we realize that the poor sap is borrowing $6145.20 in addition to the $2000 they are putting down on this load. The total price is nearly double the book value, and the loan amount exceeds the book value. What insurance company is going to write on this?   Not for cheap, to be sure.  When all is said and done, the person buying such a car would pay over double what the car is worth.   And for what? A decade-old minivan that might barely outlive its payments.

You can go down the list and see the rest of their "deals" are pretty much the same. Their loud billboards declare that they can get a loan for "anyone".  Bad credit generates more bad credit. People get upside down on car loans and end up in real trouble, and then get repossessed and end up buying another bad deal down the road.  Repeat ad infinitum.

And yet, you can buy, for cash, cars not too different from these listed, for a lot less money.   So why do people go to such places and pay too much?

Television is one answer.  They advertise heavily on television, and people tend to believe these ads. The "Monster" is going to give you a good deal - because he smashes prices with his big club!  Never mind, or or, there are still plenty of people out there who will drive into a place like that and buy something without doing any research or comparing similar cars to one another, or even checking basic price information.

THERE ARE IDIOTS, Look around you. Just because a lot of people make bad economic decisions does not make them good economic decisions.  Just because something is advertised on TeeVee or in the newspaper does not make it a good deal.   In fact, usually the opposite is true.

And I am not picking on Monster Motors - all used car dealers do the same thing - they try to get the highest possible price from their customers any way they can.  If that means selling cars based on monthly payment, or even weekly payment, then so be it.  It is not their fault for offering such deals - only your fault for accepting them.

And many people get sucked into such deals based on vanity.  They want a shiny car to impress their friends, so they sell their souls to a used car dealer. I can only imagine what is going through some mullet-head's brain when he buys that 11-year-old Firebird.  "It's a real MACHINE!" he'll no doubt tell his friends.  But in reality, it is just an ugly used car.

Again, the best deal in a used car is to buy a late-model reliable car from an individual owner, and to pay cash whenever possible.   If you don't have cash, finance the car through your credit union.   But used car lots are no bargains, and oftentimes, the prices they charge are within a stone's throw of a new car price, particularly when you factor in the higher interest rates on car loans.

So long as people make poor economic decisions, used car dealers will thrive.

I suspect they will be in business a long, long time.