Beware of Dealership Floor Plan Financing: Understanding the Risks for Car Buyers

Download MP3

How does vehicle dealership floor plan affect auto sales and affect consumers? Well let's first talk about what floor plan is. A floor plan is a specific line of credit. That a car dealership gets to finance their inventory. Most dealerships have. A floor plan financing in place. For their car lot For example, if you drove by a typical new car dealership or even a used car dealership, and they have let's say a hundred cars parked out front on their used car lot even 50 cars. You know at an average of 20 or $30,000 per car. You're talking about millions of dollars worth of inventory just sitting out on that parking lot or in the showroom. Now most dealerships don't have millions of dollars in cash. Just sitting around in the in their pocket to put out an inventory So what they do. is they get a credit line kind of like a big credit card that they use to buy their vehicles And the way it works is when you go to an auction to buy your inventory which is where most dealerships get their cars from at auctions. The auction is connected to their floor plan. And when they buy a car they just signed for it It goes on their line of credit They buy a car from let's say for $25,000. The F the line of credit sends wire transfers that $25,000 to the auction…The dealership takes the car back to there. there are a lot fixes it up cleans it and puts it for sale.

Now, when the dealership sells that car, What they have to do is take the first 25,000 from that sale and pay off that. Part of the line of credit at the do a buydown. The rest of it they get to keep So if they sell it for let's say… They take the first 25 pay off the floor plan, take the other 3000 put it in their pocket And they may have some fees for like shipping or auction fees or reconditioning, but that's where the profit goes now. What if you're a dealership. And you start running low on cash Maybe you can't. Cover your rent maybe you're short for your payroll. Maybe you have other financial problems.Well when you sell that $25,000 car, It's very tempting to say look here's 25,000 in cash. That maybe I can use to pay some of that and delay paying off your line of credit. Well, You could do that to some extent your floor plan lender your bank doesn't know you sold the car unless you tell them. But you're also not going to get the title because the floor plan bank holds the title for that car until you pay it off, just. any other kind of loan.So if they're holding that title you're not going to be able to do the. Title transfer registration license plate for your customer They're going to be kind of in limbo and they may not know it. While you delay and hopefully you sell another car and then it's like a it's like a shell game or Ponzi scheme. Well that could affect the consumer because now your title's delayed. It could also affect the consumer another way.

So let's say that dealership buys that $25,000 car Now this these loans are not free. You have to pay interest on these loans. Flashback two or three years the interest rates were very low 1% 2% might cost you a couple hundred dollars a month to keep that car on your lot. No big deal Right. Well now that the interest rates have spiked up. It might cost you. Maybe. Four or $500 a month or $600 a month. They keep that car on your lot. So now the used car market has swung now instead of selling a car it's on the lot for two weeks. Now it's on a lot for three months… You have three months at $600 per month in interest, you now have another $2,000. Of expense tacked onto that car A plus. You have that $25,000. Original principle amount. So at 25,000 plus rounded off $2,000. You now have $27,000 tied up in that car. So now the market has dropped and somebody comes in and they say look. I'm looking at the book values or there's a consumer that wants to buy your car and they say I'm only going to give you. 23,000 for this car that make you an offer. Well you could take their 23,000, but now you have to pay off… The 25. plus the two you have to pay 27 So by selling that car, you have to come out of pocket 4,000.

Well if you have money problems, You're not going to be able to come up with that money So you're better off just keeping the car. But it's not going to help you because every month the car goes down in price Again the book value reduces and you have more interest. So how does that affect a consumer Well, You might be looking at cars on these used car dealer lots or even new car dealers, and wonder why aren't you selling them? Just cut it loose right The market dropped just sell the car, right You're not stupid You have to know what it's worth. Well, they physically might not be able to sell the car because they don't have the cash to pay for it They might have negative equity in the car. They might be upside down in the car or underwater in the car. And if you're a used car dealer with thin capitalization meaning you don't have a lot of cash. You can't cover that difference. Look on a $25,000 car. There might only be a two or $3,000 loss involved. But on higher end dealership. operations where they're selling luxury cars or high-end cars that are 40 50,000. We've seen some that have eight or $9,000 in negative equity The book dropped that much in two or three months. So…what does that dealer do? That dealer might get stuck with it. This can affect consumers in a number of ways.

If you're going to a dealership and you buy a car it might effect you getting a title. It might affect you getting the right price on a car. It also might affect your trade in because if you trade in a vehicle that has a loan on your trade in. You're trusting that that dealership's going to pay off your loan. Right because that's part of the agreement. They take your trade they pay off your loan They give you the new car new loan whole deal. But if they don't have the cash to pay payroll they might not pay off your loan right away In fact we've seen some dealers that have actually made the car payments for. Customers that traded in the car. And didn't pay it off right away And you hope that they make those payments because otherwise you have a late fee. And a delinquent. Record. Or they don't pay it off at all and go out of business and then you're stuck even more So. This dealership floor plan problem. Is something that could affect consumers. It certainly is affecting the car market. And there are some cars that are sitting at the auction 2, 3, 5, 6, 7 weeks. And the bookshelves dropping. Why don't they sell them This is why they may be locked into that car and have no way out to escape without coming out of pocket Thousands of dollars. Which they may not have as a dealership because the market has turned against them.

Beware of Dealership Floor Plan Financing: Understanding the Risks for Car Buyers
Broadcast by