Neil from Messick's here with the next part in our tractor buying series. Today, we're going to discuss some of the intangibles when it comes to buying a tractor, specifically financing insurance and extended warranty.
This conversation is actually near and dear to me right now because I bought a car a couple of weeks ago, and I resonate with the feeling that when you're making a purchase like this, and you sit down across the desk from the salesman, that you're about to get fleeced. When it comes to these add-ons things, the extras after you've decided what you're going to buy, it often feels like you're walking into a situation where you're about to be raked across the coals for added profit.
As we talk through these different things, realize that portions of these are profit centers for dealerships, but actually, most of it is not. A majority of the money that's made on tractors and machinery and that kind of stuff does not come through these add-on things, where profitability is really in selling you the equipment itself and not all of these add-ons. It is worth understanding these add-ons, though, because some of them do bring really significant benefit or purchasing power to your deal here.
If we start with financing, by and large, financing is not a profit center to the dealership. Here at Messick's, we work with about half a dozen different financing companies in our industry, and none of them pay us for writing you a loan for either new or used equipment. Now, we do frequently get approached by some of those lenders who are less than honest. Other dealerships may work with some of them. I don't know who they are and what their names are. There could be some shady financing out there.
By and large, when you're dealing with companies like Kubota Credit and CNH Capital, those big companies whose names are on the side of your equipment, they're selling straightforward and honest financing products, and you can trust what you're being sold. The very beginning of the financing process is to go through and do a credit app. Applying for credit on a tractor is much like applying for credit on anything else. You're going to get asked a lot of similar questions, the new normal biographical stuff, name, address, date of birth, Social Security Number, all those things that are needed to pull your credit report.
Many of our vendors will also ask who your employer is and what your monthly income is so that they can get some idea if you can afford the payments for some of this more expensive machinery. No surprises there, a lot of the same things that you're used to getting asked. The approvals from all of our vendors come back surprisingly quickly, some of them instantaneously, to only a couple of minutes. Usually, we can give you answers really quickly on whether you were approved or not.
Now when it comes to signing the paperwork, there are often some fees that are involved. When I said before that we don't make any money in the sale of these loans, that doesn't mean that there's not costs that are involved. You're going to have what's called a UCC fee. It's a loan registration fee that's levied by your state. That varies from state to state. Those of us here in Pennsylvania are blessed with the highest UCC fee in the country of $168 for a loan less than 60 months or $252 for a loan that goes above. Thank you, Pennsylvania.
Beyond that, the vendors themselves often will charge a documentation fee. In this case, Kubota Credit also charges a fee that will show up on here for running all this paperwork through. Those of us here at Messick's aren't profiting from running this paperwork. This process is not adding margin for us, but you may see some of those expenses show up when you're looking at your deal.
Our next topic is insurance. Now when you're buying a piece of equipment, particularly if you're financing, the lender is going to require some insurance on that piece of equipment to secure their asset. They technically own that machine, and if something happens to it, it needs to be insured so that it can be repaired, put back into its proper condition, and still have the value that the lender has tied up in that machinery.
Insurance and financing tend to go hand in hand with one another. Now, you are free to use your own insurance, as long as it checks all the boxes that our lenders require. You do not have to buy your insurance from your dealership. However, we are going to have options for you to do that because insuring a tractor is not like insuring a lot of other things. It's unique. More often than not, we're looking for what's called an inland marine policy. Basically, boat insurance is the closest things that most insurance companies have as the closest to your tractor.
Now we're going to want to consider insurance for a number of different reasons. There is the lender side of things, but in particular, Kubota's KTAC product or New Holland's PPP are universally loved because of the fact they actually pay for things that you break. This is insurance that you want to use, and we're going to encourage you to do that. It is not the cheapest insurance that you will buy, but it is a little bit more costly because it actually pays for things. Isn't that nice to get a little bit of value out of the money that you pay into insurance for once?
Owning a piece of equipment is something you need to have in the back of your mind that it will need work at some point. A lot of these machines are used in wooded environments, where you have tree branches and rocks and sticks and things that will do damage to a machine. Many people buy grapples to go on their tractors or skid loaders, and it's very easy for limbs and things to push back into your machine and do damage. We can even get some policies and stuff for hay equipment. If you're out in a hay field somewhere, and you ingest something into a baler or a mower that was out there in the field and you didn't know it, insurance can be something that really covers that repair in ways that warranty does not.
We see a lot of people even seek out insurance outside of the financing aspect of having to check that box and a financing contract because of the value that it brings. We make nothing on most of those transactions, particularly if you go buy it outside of the financing contract. It's not a profit center for dealerships, but we certainly like to see it because we have seen the value in tractors like this that have had logs dropped in their hoods and their headlights smashed out. To be able to go to an insurance company and get these things paid for keeps your equipment looking better and, I think, leads to a better ownership experience.
The last intangible for you to consider would be an extended warranty for your equipment. There is a lot of gray area between where insurance stops and extended warranty starts or how those two interact with each other. Essentially, insurance is for cases where you have broken the tractor; extended warranties and your base machine warranty is for the cases where the machine mechanically fails because of a manufacturing defect. A manufacturing defect is what they're really looking for when they're paying warranty claims.
Now, in many cases, I see less value out of extended warranties than what I do out of the insurance side. It's a little bit more difficult to make a claim there. However, I do encourage you to go through and price out an extended warranty. There are cases where extended warranties are priced way too high for the value that they bring for an equipment. However, there's cases where the extended warranties are priced so well you're almost silly not to get one. I've heard stories from manufacturers before that offer extremely well-priced extended warranties because they want the claims registered through the warranty system to better learn how to improve their products.
If you think about things from the perspective of a manufacturer, they don't know what happens with this machine after it's gone out of its base warranty. No paperwork makes it back to the manufacturer for them to know how their equipment is aging, and getting things through the extended warranty system is a way for them to collect data. Some of these extended warranty programs are priced really well, like the one for the SSP, and you should consider adding it to your transaction.
Those are three of the things that you want to keep in mind here at the end of this tractor-buying process. We are not the typical F&I person at a car dealership, where everything that you're being presented has a 50% profit margin in it. There's value to many of these things. In a lot of cases, they're necessary to wrap up your sale, and you shouldn't be sitting here with a distrustful look at your tractor salesman because of experiences that you might have had over in the automotive industry.
In a lot of ways, these transactions feel the same, and oftentimes, they're in the same price range, but we're very different industries. Especially in our case, we're a lot more looking towards long-term relationships with you. We're going to be selling parts and accessories and implements, and we're going to see you in our service department for years to come. We're here to build relationships and not to push high-margin products on you. If you're shopping for a piece of equipment, we can help. If you get parts of service needs for a machine you've already got, give us a call at Messick's. We're available at 800-222-3373 or online at messicks.com.
It's very easy to understand the transaction of simply writing a check for something, right? But understanding the transaction for something that's financed is a lot more complicated and there's a lot more moving parts. So we're going to go through and discuss a little bit here how that finance transaction financially works and what it looks like, kind of who are the players that are involved. Me here is the dealership, we're looking at a traditional kind of 0/60 financing for example. We don't make any money on your financing transaction. It does not matter to us one iota whether you write a check or you choose the financing. There's more paperwork for us when you do the financing, but we're not generally making money on that. When you're looking at automotive financing or high interest rate stuff, sometimes there are kickbacks to the company that's selling that loan to you, right? But for us as a dealership, that generally does not happen. We do not make money on this.
Generally the equipment company is not either. They're subsidizing these loans, that 0/60, that 0/84, whatever you're seeing out there. That costs them money, right? They're going out to banks and buying those loans and buying down those low rates. That cost is usually offset a little bit in some kind of potential cash discount. So when you go through and you look at the cash discount for your piece of equipment, what you're going to want to weigh here is the value of that financing, the value of your cash in a 0/60, versus the potential cash discount that you're going to get by writing that check. More often than not, what I find is that the cash discount that's offered is usually stingy enough, it's low enough, that going and taking your money and investing it elsewhere, putting your cash to work some other place than writing a check back to the equipment company for that piece of machine, is ultimately going to put more money back in your pocket in the long run.
