Real protection…

…or another marketing gimmick?

Hyundai recently announced a trade-in guarantee.  Buyers of a new Hyundai will know immediately what trade-in value they’ll receive on their next purchase.  Sounds great.  Is it as good as it sounds?  Let’s see.

We have to start with the obvious premise that car dealers have to make money or they won’t be in business.  Outside of the manufacturer’s discounts which dealers don’t typically control, they make their money through:

  • Margin on the new car sale
  • Margin on the used car sale
  • Financing costs (interest)
  • Extended warranties
  • Repair services

There’s no guarantee that buyers are going to bring their cars back for repairs especially when those cars are outside the warranty period.  A Consumer Reports survey from 2007 showed that 75% of the 8,000 respondents did NOT buy the extended warranty.  That leaves dealers with basically three options for making money on a new car sale – the margin on the new car, the margin on the trade-in and the financing fees.

Hyundai, with its guarantee, has opted to limit its income potential on the used car trade-in.  First, it has to provide a reasonable trade-in value or buyers will quickly see through the facade.  Buyers are so much more astute today because information is so readily available.

Second, Hyundai is going to attract buyers who don’t maintain their cars well.  They’re the ones who will benefit most from the pre-established trade-in value, theoretically.  Buyers who maintain their cars well will typically negotiate for higher trade-in values because they can.

That leaves Hyundai with the margin on the new car sale and financing costs to generate the profits they need.  If, as I suspect, owners of the poorly-maintained vehicles are the ones to avail themselves of this guarantee, the dealer won’t be able to come down off the sticker price as much as he would otherwise.  The dealer may have more latitude in negotiating the sticker price if interest rates are high enough to provide additional profits there, but that depends heavily on where the economy is and what interest rates exist at the time.

When examined in this light, we find is that the ‘guaranteed trade-in value’ is a marketing ploy.  The deal Hyundai buyers get in the future won’t be much, if any, different than the one they’ll get today.

What’s the moral of this story?  If you’re being offered a guaranteed price, rate or buy back program that’s years into the future, there are aspects of the deal that allow the seller to circumvent the guarantee.  Don’t buy into these programs.  Make the best deal you can today and position yourself for another in the future.  Companies cannot accept higher levels of risk without a safety net of their own or they won’t be in business to honor their original guarantee.

Author – Dale Furtwengler