Buying a New Car
July 1, 1999
By Scott Lewis
I love the idea of buying a new car and trying to get the best deal on one. The vast majority of people dont enjoy this process. I plan to discuss why this problem exists, and what can be done about it. Since this is an Internet article, I will touch on how the Internet is effecting car buying, now and in the future.
Lets start with why car buying is such a stressful experience. Simply, it is because dealers will rip you off if you give them the chance. They are extremely greedy, and many times dishonest, people. The owner of a chain of car dealerships in San Antonio bought the Minnesota Vikings football team. You dont get that rich giving people a fair deal. You get that kind of money by gouging every customer that takes a step on the lot.
The most difficult thing about buying a car should be picking the color. But dealers are such unscrupulous types. All they care about is getting you to drive off in a car that day. They really dont care if the car is what you want or, more importantly, what you need. They place ads in papers advertising incredible deals that seem to be gone just before you arrive. They try to convince you that you need that special fabric protection plan for $300.
They love to take your keys on the premise to have your existing car appraised. Yea right. Unless you are hiding something, they can make their offer on your car buy looking at it through the window. But while they have your keys you cannot leave. They constantly size you up to see how much you can afford a month. They avoid telling you how much the car is actually costing you, as long it is what you can afford for payments. So what if you are paying 14.9% interest on a 7 year loan. You will only pay $299 a month with a little $3500 balloon payment at the end. What a bargain.
What can you do?
So what is a customer supposed to do. Keep three things in mind. 1) They need you more than you need them. No matter what they try to tell you. 2) If you dont like the way you are treated just say "No!" and walk out. 3) You will get frustrated with them no matter what you do, so be prepared for this ahead of time and expect it. In fact, it can be fun predicting their behavior. Just make sure you have the time to deal with their tricks.
The first two are simple. The last one is not so simple. How do you prepare for getting frustrated with a dealer? The best way is to know what he is going to do. Think of it like a game. It goes like this:
Salesman: So, you want a car. How much are you looking to spend?
You: About $18,000 - $20,000.
Salesman: We have this nice economy car over here that you might like.
You: No. I wanted a midsize sedan that seats five.
Salesman: Oh, well thats going to be tight on your budget. What kind of monthly payment are you looking for?
You: Around $300 a month.
Salesman: (Holding in tears of laughter) Well, let me talk to the manager and see what I can do. Can I have your keys to get your car appraise?
Now you spend about 12 hours looking at all the new cars on the showroom floor while the salesman and the manager talk about sports, politics, religion, world peace, and every other topic under the sun except how much the car really costs.
Salesman: I talked to the manager and he said that we can let you have this car for $580 a month.
You: Your kidding! How come its that much? The sticker says it is $19,500. What about our car?
Salesman: Well the mechanic found problems with your car. The crankenhousen(I know, and so does the dealer, there is no such thing as a crankenhousen) was loose, and the tires had practically no tread. It probably wouldnt pass an inspection.
You: But we just put those tires on 6 months ago.
Salesman: Maybe I can have him look at it again. How much do you owe on it?
You: I dont know exactly, maybe $5000.
You wait around for a while as the salesman talks to the parts guy for a couple of hours.
Salesman: O.K. My manager said that if you would be willing to buy today he can give you the car for $525 a month.
You: But what about our trade-in?
Salesman: Well its valued at $3700 and you owe over $5000. The difference will be rolled into your new loan.
You: WHAT! I have been paying 4 years on my car you tell me it is still worth less than what I owe?
Salesman: That model (doesnt matter) doesnt hold its value well, and we will have to put in over $1000 just to get it ready for the used car section to sell.
You: Well that is more than we can afford. Maybe we should look elsewhere.
Salesman: Let me talk to my manager again. Maybe I can tell him that you are serious about buying the car today and we will see if we can pay off your trade.
More waiting while the manager and salesman tell jokes to each other. Then another hour and a half later...
Salesman: I got my manager to pay off your car. We will be taking a loss on it, but he really wants you to have this car.
You: How much?
Salesman: $495 a month.
You: Well, thats still more than we can afford.
Salesman: Look, I have already talked my manager down almost a hundred dollars and got him to pay off your car. Can you give me something to go back with?
You: Well if we cut back on those magazine subscriptions, and get rid of that second phone line for the Internet (Yikes!) maybe we can afford to go up to $350, maybe $375, a month.
Salesman: I dont see how you can afford this car for that, but I will try.
Wait around for two more hours. Now you are thinking were else you can cut back to save more money. After all you are trading in a car that was $16,000 four years ago, and you only have one more year of payments. You should be able to afford this car at only a little more than your old one.
Salesman: We are in luck. My manager said they are offering a rebate on this car, but it is based on you getting an extended warrantee. The rebate is $1,500 and the warrantee is $800. That brings the price of the car down $700 and we can let you have it for $450 a month.
You: But we told you we could only afford $350 - $375. We talked about it and we think we can come up with another $50 a month. But we cant go higher than $400 or so.
Salesman: Have you thought about insurance? That car of yours is older and doesnt have ABS or Air Bags. This new car does and that can give you a big discount on your insurance. Here, let me call an agent I have worked with and see.
Wait around for 30 more minutes.
Salesman: I was right, the agent said that he could lower your insurance payments by at least $50 a month with this car. Here is his card. You can talk to him yourself. (Under his breath... and if you buy insurance from him I will get another kick back to add to my commission.)
You: Well I guess it sounds good enough. Lets do it.
Now the salesman takes the keys and paperwork from your old car, and drives it around back. He then sits you down with a finance agent (FA).
FA: So you are buying XYZ car. That is a beauty. Did the salesman tell you about our special paint and fabric assurance program. For only $300 we will put a special treatment on the interior that is guaranteed for 5 years. If anything stains the interior we will take out the stain or replace the car with a brand new one. And for $500 we put a special coating on the paint as well. You never have to wash or wax the car, and if anything goes wrong with the paint we will fix if for free or replace the car.
You: You mean we NEVER have to clean or wax the car, and no matter what you will fix or replace it.
FA: Sure. We also have a great rust proofing deal this month. For only $199 we will put special undercoating on that will rust proof the car for 10 years. This is normally $599. A real deal. If you ever get any rust we will fix it.
You: He we need that. I had a car once that had rust holes the size of my hand.
FA: You bet you need it. I can see you really like this car. You want it to last.
You: OK, we will take that as well.
FA: Lets see here... the car is $21,500, add $300 for the interior protection, $500 for the paint protection, and $599 for the rust proofing.
You: You said the rust proofing was only $199.
FA: Thats right, let me adjust that. $21,500, plus $300, plus $500, plus $199... and lets see... did you want that free service maintenance program?
You: Whats that?
FA: That is a program that you pay $399 now and get all maintenance for as long as you own the car for free. You never have to change the oil, or anything. You just have to bring the car in every 4 months for its scheduled maintenance.
You: But what if I change my own oil, or take it to a local mechanic?
FA: That would void the deal. It only works if you have all your maintenance done here at this dealership (were we can rip you off on everything else.) Also, you have to have every maintenance stop done on time to keep the program active. If you skip a schedule you just have to pay $99 to restart the program.
You: You mean I can stop and start the program at any time.
FA: Sure, just as long as you pay the $99 startup fee (under his breath... within 3 months of stopping).
You: Cool, I was starting to hate those damn oil changes.
FA: $21,500, plus $300 (interior protection), plus $500 (paint protection), plus $199 (rust proofing), plus $399 (maintenance program), and you said you wanted the extended warrantee at $800.
You: I thought that was part of a rebate.
FA: So it is, let me see. $21,500 (did anyone notice we raised the price of the car, it was $19,500), plus $300 (interior protection), plus $500 (paint protection), plus $199 (rust proofing), plus $399 (maintenance program), $800 (extended warrantee), minus $1,500 rebate. That comes to $21,398. Add tax, title & license and it comes to $23,256.
We have a special finance program here that lets you pay for 60% of the car now, and %40 percent in 4 years. This plan is great for people that trade in their cars every few years. They really save a lot.
With this program you only pay $380 for 4 years. At the end you can trade the car in or pay the 40%. Thats a bargain (especially at 14.0% interest). And you only have to come up with $9,302 if you want to keep the car. In fact you could probably sell the car for more than that and keep the difference for yourself.
You: Wow! Now thats what we like. Only $380 a month. Where do I sign?
If this seems a little far-fetched, dont bet on it. I only hinted at some of the things here that dealers really do. Many times they have paper work with a higher price when you get to the finance guy, they try to stick you with a bunch of stuff that costs them nothing, or next to nothing. Factories paint cars so well that they dont need much care anymore. And even if you did get a protection, try to get them to paint the car after all those rock chips, and door dings are there. If you should get into an accident that would void the plan unless they fixed the car and "re-treated" it, at a very high cost to you or your insurance.
Scotch Guard is cheap in the stores, and thats all they do. Most people live with stains as they come, but if you did try to get them to take care of it, they would never give you a new car. They would clean it at best, at worst they would find a loop hole out of it.
Cars dont rust anymore, with modern galvanized metals. Maybe the car has plastic body panels. Yea, they rust. Not! Extended warrantees are a huge profit for the dealer. They are selling you a policy from another company and getting a kick back. Very few people need that protection. Especially when you are financing that in the car loan for 14% interest.
Here is the right deal. That car that had a sticker of $19,500 probably had an invoice price of about $18,000. Many people think this is what the dealer pays. Not true. It is a gauge for what the dealer pays. Dealers get holdback money from the factory on every car. This is around 2-3% of the sticker price depending on the manufacturer. There is also manufacturer to dealer incentives, such as volume discounts and rebates to the dealer, as well as rebates to customers.
So our car costs the dealer $18,000, minus $1,000 dealer rebate, minus $500 customer rebate, minus 3% holdback fee, minus 4% volume discount. That comes to $15,135 which is pretty close to what the dealer pays. He throws in some worthless paint/interior/rust protection that costs him anywhere between 0 and $50. And you paid $23,256 with a balloon payment of over $9,000 after 4 years. Thats going to be more than the car is worth in 4 years. You are back where you started.
You should be able to get that car (assuming they are offering the rebates) for around $18,300 - $18,500 before the rebates. Then the customer rebate brings it down to $17,800 - $18,000. Offer to split the dealer rebate and you have $17,300 - $17,500. This leaves close to $2,000 for the dealers profit (a lot for a single car sale) and you can get your own financing. You check the Kelley Blue Book value of your car to be $6,800. Make sure you get this and you have $1,800 equity. That means you only finance $15,500 - $15,700. We will use the higher. A $15,700 loan for 4 years at 8.0% would give you payments of $383.28. Then it will be all yours with no $9,000 balloon payment.
It really should work this way. So now your wondering how to get it to work. That takes time and research.
Start here. Test drive the cars you are interested. NEVER talk price. Just go by the sticker price as a way to compare difference makes and models. Be clear that you have not made up your mind on the car you want, but feel free to tell them which other models you are interested in. They will all have something negative to say about every other car, but you may find this information useful. Take it with a grain of salt. Oh hell, take it with the whole damn shaker of salt.
Once you know what car you want it is time to do some research. Check Edmunds Car Prices to get the invoice price of your model, and the dealer holdback. They also list very current information on rebates for each manufacturer.
Get the Kelly and N.A.D.A. value for your car. Kelly Blue Book prices are probably closer to reality. Use the good condition price as the price you expect to get for your car. Even if you think your car is in excellent condition you will have to waver somewhere. He will always low-ball you. Know the true value, and dont let him give you a cent less. Remember that the wholesale price assumes the dealer will put work into the car before he resells it. If your car is in really good shape that will save the dealer money on the resale, use that to your advantage. Just be sure you are being fair about the real condition.
A dealer can make a decent profit on a car sold at invoice. This should be your goal. Try to get it at invoice. You may have to go $300 - $500 above. If you are lucky you might even get them below invoice, but I doubt it. Then subtract the rebates from this goal. No matter what the dealer says, factory to customer rebates do not effect the amount the dealer pays for the car. The rebate is yours. Factory to dealer rebates are different. They are designed to get the dealer behind a car to help push it even harder. If you know there is one, offer to split it with the dealer. That becomes the price you should pay.
Then remember the first rule... They need you. Just say no, and go to another dealer. I had to go to 5 dealers to get a good deal on my Ford Explorer. We paid $1900 below sticker, and that was with them taking a loss on our trade that had been hit in the front. Not bad.
Good Luck. If you have any good car buying stories, please feel free to pass them on. I love to here a good story about a dealer getting screwed.