Friends of ours recently asked if we could lend a hand in demystifying the car buying process. One of the (only) advantages to having the insane level of car ADD that I’ve displayed is that, what is normally a confusing and intimidating process for most people, becomes a (reasonably) well understood game. A lot of it, honestly, comes down to “the art of the deal” (borrowing a line from His Hairness) but even for those of us not blessed with the natural gift of brutal negotiation, you can still do some work ahead of time to put yourself in a better bargaining position. I decided that, since I’ve had a fair bit of car chatter on the blog, and the topic does come up a bit, it might not be a bad idea to once more take a break from the geekery (especially as of late) and “shift gears” (groan) back to cars for an entry. Without further ado, some basic guidance… Comments welcome on this one!
1) TRADE-IN STRATEGIES: To make trade-ins easier (if there is one) you can go here:
This process will lead to an estimate that participating dealers have to honor (unless the vehicle was misrepresented). Cars can also be sold this way. They have participating dealer centers that will just buy the car even if you’re not buying something new.
TAKEAWAY: pre-negotiating trade-in value is a lot less painful unless you’re a very good negotiator and prepared to walk (or sell privately). Remember that in PA trade-in value reduces the sales tax burden of the new car. So a $30k new car that you applied a $10k trade-in to is taxed as a $20k purchase.
2) GETTING THE BEST DEAL: To get an idea of how much to pay you can go here:
Few things to be aware of… There are 3 components of a car price: dealer invoice, holdback and MSRP. MSRP is the regular retail price (the “sticker price”). The goal is to never pay this. Dealer invoice is what the dealer paid to the manufacturer. In between the two is their gross margin, but cost of sale comes out of that, so net profit isn’t a straight MSRP-invoice. That said, it’s often possible to get pretty close to dealer invoice price (assuming you can learn what that number is which is where a site like Truecar helps). The reason dealers can come so close to “cost” is because of manufacturer holdbacks. These are basically cash kickbacks to the dealer at some set percentage. The manufacturer, through holdbacks, is basically helping to finance cost of sale.
TAKEAWAY: the more you know about the dealers cost structure the better you can negotiate. Special incentive deals are a kind of concession. They’re good because they’re automatic, but they do make additional negotiation more difficult. Not impossible though, especially if you know the costs
3) LEASING: some things to keep in mind about leasing, assuming this is of interest… The key components of a lease are:
–Money Factor: this is the interest rate and is negotiable based on credit score. Incentive leases often have fixed interest rate.
–Cap Cost: the purchase price of the vehicle. This is where nearly all lessees make their first mistake. A leased car should absolutely be negotiated the same as a purchase. As a matter of fact, don’t even bother mentioning how you plan to pay until the price is final. At that point spring the lease on them.
–Residual Value: this is the agreed upon value of the car at the end of the lease term and is almost never negotiable. It is based on a lot of factors and the manufacturers use it to play some games. The only real buyer influence over this is mileage. A higher mileage lease will of course carry a lower residual value. Beyond that, some car companies make the residual artificially low (Audi) to disincentive leasing. Others make it artificially high (BMW) because their business model is built around leasing. The difference between the cap cost and the residual value is what you’ll be paying off monthly plus tax and interest. So in essence, you are paying for the depreciation. Keep in mind that you are paying for the estimated depreciation and not the real depreciation. As an example, in the case of BMW, you’ll often enjoy a lower payment than the value of the car would suggest, but at the end, if you keep it, you may very well be paying above market for what the car is worth.
4) POST SALE “EXTRAS”: After the handshake you’ll always be handed off to “the finance guy”. This is normally a hard-sell, but these guys are good at reading people so it’s pretty easy to also blow off the entire thing with a close off enough posture. They are looking to sell extended warranties, protection services, and various types of insurance. Examples are glass coverage, tire and wheel coverage, ding and dent repair, and comprehensive warranty additions. These services are all rarely a good deal and I would suggest avoiding them. Some exceptions are if you plan to keep the car a very long time, or put lots of miles on, and are able to validate that the warranty program they are selling is any good. Some aftermarket warranty enhancements are ok, most are not. If they’re offering a good program, then it’s a question of getting it for the right price as dealers seek to make back a lot of lost margin on the car in that room (50% markups are normal for warranties). Things like tire and wheel, or ding insurance can be OK if priced cheap and if you find yourself normally spending a ton on these types of repairs.
5) GENERAL APPROACH: when approaching the dealer go armed with facts, but don’t present yourself as armed with facts. This is a good way to measure how honest the salesperson is and get an overall feel for how genuine the dealership is. Don’t go in committed to buy unless you truly know your bottom line numbers. Always be prepared to walk away. Make sure to get a test drive (amazing how many folks skip this), if for no other reason than to measure the dealers customer service approach.
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