Car dealerships have turned ‘cutthroat’ amid a buying frenzy and dwindling car inventories

Car Dealership
The pandemic has upended the market for new and used cars.

  • The frenzied car market is pitting car salespeople against one another, Bloomberg reported.
  • New and used car prices have skyrocketed during the pandemic amid a shortage of vehicles.
  • Some dealers are even shelling out to buy leased vehicles years before the end of their term.
  • See more stories on Insider’s business page.

The pandemic has upended the market for new and used cars, sending prices skyrocketing and inventories dwindling.

A buying frenzy – coupled with soaring prices and a historically low supply of vehicles – has turned car salespeople into enemies, one dealership employee told Bloomberg.

“It’s really cutthroat,” Jared Luner, a salesman at Columbia Honda in Missouri, told the outlet. “Normally we’re all friends and coworkers, but right now, when someone pulls up, it’s a little edgy.”

Luner said he recently had a fellow salesperson sell a vehicle out from under him. Hawking cars was always a tricky business, but now, as dealers suffer from a devastating lack of inventory of both new and used vehicles, there aren’t as many sales to go around.

In June, new-car inventories stood at less than half of 2019 levels, according to Cox Automotive. And the crunch is only getting worse as a global shortage of computer chips continues to force automakers to idle production lines and slash manufacturing targets.

Mark Scarpelli, who owns two Chevrolet dealerships in the Chicago area, recently told The New York Times his lots typically have between 600 and 700 cars. Now, he’s down to around 50.

While the chip shortage directly impacts the supply of new vehicles, it’s also bringing a new wave of customers to the used market, slashing inventories and driving prices skyward. This is all happening as demand for cars remains strong, due in part to low interest rates, a robust economic recovery, and travel habits that are still in flux due to the pandemic.

The insane market has pushed dealers toward increasingly crafty methods of obtaining used cars to sell.

Dealers are so strapped for inventory that they’re calling up lessees – no matter whether they sold the vehicle or not – and offering to buy leased vehicles for high markups, Ivan Drury, senior manager of insights at Edmunds, told Insider.

“They’re being contacted right now and being told: ‘You can sell that. We will not just pay the buyout price. We’ll pay all your payments and hand you a check on top of that,” Drury said. “Dealers are very desperate for inventory. They’re willing to make those payments, pay that buyout price, and get that piece of inventory back.”

The supply crunch is so dire that Drury has heard of people who are less than a year into a three-year lease being contacted by dealers. Since used-car values are so astronomical right now and many people haven’t been putting as many miles on their vehicles, those who are able to part with a lease stand to make a killing selling it to a dealer or online retailer, he said.

“You actually stand to make money in that situation because supply is just so drained,” Drury said. “There’s a lot of power for someone who currently owns a vehicle.”

Are you a car dealer, owner, or private seller with a story to share about what it’s like to buy and sell cars right now? Has a dealer offered to buy your used or leased car? Contact this reporter at tlevin@insider.com

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A simple regulation would save American car buyers $5 billion and help boost the US economy

Car Dealership
New Chevys for sale fill the lot at Raymond Chevrolet in Antioch, Illinois, July 17, 2014.

  • One of the most significant purchases for any household is their car.
  • While car prices are transparent and easily negotiable, financing deals are not. Dealers typically mark up financing offers to earn additional revenue. 
  • Lawmakers need to ban mark ups on auto financing and save consumers hundreds of dollars. 
  • Jonathan Gruber, Ph.D, is a professor of Economics at MIT.
  • Tobias Salz is an Assistant Professor at the MIT Economics Department and a Faculty Research Fellow at the NBER.
  • This is an opinion column. The thoughts expressed are those of the authors. 
  • Visit the Business section of Insider for more stories.

The COVID-19 pandemic has had a devastating impact on the US economy. Since early March, the country has lost 9,839,000 jobs. The unemployment rate peaked in April at 14.8%, the highest rate since the Great Depression, and as of January remains at 6.3%, the highest level since March 2014. 

Congress has so far been unable to agree on a new package of financial relief, while unemployment insurance extensions are due to run out at the beginning of March. Americans need financial relief from wherever they can get it. Fortunately, there is a relatively simple way to provide significant financial relief to consumers on one of their most important expenditures: car purchases.

One of the most significant purchases for any household is their car. Cars are necessary for both work and pleasure, yet the cost of a car is very high relative to the income or assets of most families. The average new car purchase amounts to around half of average after-tax income. As a result, 85% of new car purchases in the US are bought with loans. 

This is a significant financial obligation, with car payments amounting to around 6.5% of the income of the typical household that finances their car. As a result, lowering the costs of car purchases for American families would provide significant financial relief.

Car dealers mark up financing deals

It is common knowledge among Americans that the price of their car can be negotiated at the dealer.  What is less known, however, is that the financing costs of their purchase can also be negotiated. 

Dealers serve as middlemen on auto loans, with lenders providing terms to the dealers, and dealers then providing offers to potential purchasers. But dealers don’t just pass along those financing terms, they are allowed to “mark them up”. 

If dealers are able to charge a higher interest rate on a loan than what was originally suggested by the lender, they receive a payment from that lender. Dealers therefore benefit if car buyers pay higher interest rates. Dealer profits from financing and insurance have steadily grown and now account for the majority of their overall profits

Why does this matter? Because while car prices are “transparent” to the consumer and readily negotiated, financing terms are not. As a result, consumers end up paying much more for their financing than they need to. The average revenues from this “kickback” on financing new car purchases is around $750 per car. Multiplied by the number of financed new car purchases per year, this amounts to more than $8 billion in annual discretionary markup revenues.

It doesn’t have to be this way 

Auto dealers can play an important role helping consumers find the proper financing. But that won’t happen so long as their financial incentives are set to benefit lenders and not consumers. Rather than playing a fiduciary role in helping consumers find the best deal for them, dealers are doing the opposite.

Congress needs to change the incentives by no longer allowing dealers to “mark up” the financing of auto loans. Regulators in other countries already have moved in this direction. The Financial Conduct Authority in the UK has announced that commissions that are linked to the customer’s price of credit are banned starting 2021. It’s time for the US to follow suit.

Auto dealers may argue that this will just lead to higher car prices – and they are right. Some of the gains that dealers make through marking up financing allows them to cut better deals on price. But the extra price reduction doesn’t make up for the higher financing markup. 

When consumers negotiate over car price, they are relatively savvy, and can strike a good bargain. But when comparing financing terms, consumers face a much less transparent and confusing array of choices, and so it is harder to shop effectively. 

Based on our research, consumers would save between $300 and $500 on each new car purchase without dealer markups. That is roughly $5 billion in financial relief to US consumers that we can provide with a simple regulatory change.

Consumers face a bewildering array of choices in their everyday lives. An important innovation in recent decades is the rise of middlemen that can help organize these choices and allow consumers to shop more effectively. But the benefits of these middlemen can be offset if there are financial incentives against offering a neutral playing field for consumers to find the option best-suited for them.

Choosing how to finance a car is a perfect example – and an easy one to fix. Lawmakers need to ban markups on auto financing to make car purchases less burdensome for consumers – at exactly the time when US consumers could use the relief.

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