How To Buy a New Car

In a future socialist utopia, a car buyer will be able to confidently walk into a dealership and pay the same price as everyone else buying the same type of vehicle. But, alas, in today’s free economy and capitalistic regime, we must each fend for ourselves at the dealership. And guess what, most folks are paying thousands more dollars than they need to for their new car. That’s because car dealerships are the enemy of the car buyer. Upfront price quotes are often meaningless. Competitive quotes are misleading. Advertised specials are not so special. They just want to get you to the dealership, because once you’re there the real magic begins!

Every step of the car buying process is fraught with danger. You will be misled. You may think you got a great deal while the salesperson is in the other room high-fiving and making “ka-ching” sounds to his colleagues. Some dealership staff come across as cocky, sleazy, arrogant, or just plain “car-salesman-ey”, while others are courteous, professional consultants ready to provide crucial support in your car buying endeavor. But make no mistake, no matter what the behavior and attitude is of the staff, they share one thing in common—they have many strategies to invoke during the car buying process with the singular goal of separating you from as much money as possible. Even the nicest salesperson follows a dealership protocol designed to maximize the salesperson’s cut and the dealer’s profit.

Still not convinced? Did you know that some dealerships have microphones installed in the rooms you sit in when discussing the deal with them? When they leave to “take your offer to their manager”, they may instead go into a room to listen to what you talk about when you think they’re not around. So, don’t divulge any tidbits like “I’m ready to buy it, but I just want to see if I can get a lower price first”.

Dealers also want you to think of the cost in terms of a monthly payment. That’s awesome because they can dress up a monthly payment that looks really good. In goes the trade-in, cost drops. 72-month payment terms, cost drops. Big down-payment – that monthly payment is so good now, tell me where to sign. Don’t fall for this. Always focus on the price of the vehicle and your drive-out price. Never answer the question “How much can you afford to pay each month?”

Most people think of buying a car as a single financial transaction, but the dealer looks at it as three: the new-car price, the trade-in value, and the financing. The dealer sees this as three ways to make money. You need to negotiate each transaction individually. We’ll cover each of these in a bit. But first, what kind of car did have you in mind…

New, Used, or Certified Pre-Owned?

Are you after a new car, used car, or certified pre-owned? What’s that last one? It sounds like a used car that a dealership is charging a premium for because they’ve checked it over. That’s true enough. You’re buying a used car at a less than new car price, but often with a better warranty than you would get with a new car. What’s that again? Let’s see – if I buy a new Honda, I get a warranty of 3 years / 36,000 miles with 5 years / 60,000 miles on the powertrain. But if I buy a certified pre-owned Honda, I get 4 years / 48,000 miles with 7 years / 100,000 miles on the powertrain. Pretty neat deal.

Technology and styling on vehicles is constantly evolving. Is that important to you? I’d like to say it doesn’t matter to me much, but in fact it does. If you’re considering a new car because you want the latest capabilities, then take a look at the previous year’s model and the year before that. What’s changed? Are those changes of value to you? It isn’t uncommon for a vehicle model to have no changes for two years, or only changes in the lineup rather than the actual vehicles. When considering buying used, decide on what the earliest year is that gets you all the good stuff you like.

If you’re of the mindset that a new car is for you, but you still want to save big, then you need to consider previous year models that are still available shortly after the current year models are launched. If you really want to hit the sweet spot, ask each dealership what new prior year vehicles they have with a few miles on them. These may have been used as demo vehicles, loaners, or vehicles used by the dealership staff. They’ve never been titled, and therefore have a new car warranty. They should have very low mileage, and you can negotiate more aggressively for a good price on these.

Do You Want to Buy a Car the Easy Way?

Just like government are experts at reducing your bank account balance by uncontrolled and undisciplined spending (can you say “budget”, anyone?), dealership are also experts at withering away your earnings through the masterful skill of car salesmanship.

And just like our friendly representatives, car salespeople have more tricks up their sleeve than you can ever think of and guard against. No matter how confident you are in getting a good price for a car, unless you’re professionally involved in the car sales business, there’s a good chance they’ll make more money off you than you intend or even realize.

To determine your strategy for buying a car, you’ll want to first identify what your purchase goal is:

  • Is your primary concern to minimize the hassle of buying a car while making sure you pay a reasonable price and aren’t being ripped off?
  • Is your primary concern to get the lowest price you can, and you don’t mind suffering through an extended car buying process to achieve it?

If you’re in the option A group, that means you’re smart and you have more important things to do than obsess over your new (or used) car purchase. Good for you! Unfortunately, I’m in the second group, so I’ll be explaining that approach as well.

You can think of the second option as the first option but with a lot of added negotiation hassle, so let’s just take a look at the first option first.

  1. Use edmunds.com, truecar.com, or kbb.com to locate your desired vehicle and identify its true or fair market value price (terminology varies from one service to another).
  2. Go to the vehicle manufacturer’s website to identify any special incentives currently available. Ensure you bring these up to the dealership, and subtract from the price described above if the incentive is a cash allowance.
  3. Use a TTL calculator to figure out what you should expect to pay for tax, title and license for the price of the vehicle for your state. The carmax.com site has a good one and is available for most states.
  4. Add the TTL to your price to get your drive-out price. This is what you’ll be writing a check for or your loan amount.

Unless demand currently outstrips supply, you should be able to get a dealer to agree to your price without any prolonged negotiation. They’ll dance a little, but you should be able to cut through it quickly. If they won’t then tell them you’ll go elsewhere, and do it if they still won’t budge. You can also call the dealerships in advance and speak to an Internet sales specialist to get a verbal commitment on price before you go. If you’re up to it, shop around, and pit them against each other: “Dealer A said he would do $X, will you beat that? I’m buying today.”

Just a quick note, when you’re at the dealership, they generally won’t just agree to your price right away unless you’re gotten a verbal (or email or text message) quote already. They like to bewilder you with all kinds of numbers designed to inflate your expectation on how much you need to pay. Ignore it all, and focus solely on the drive-out amount you had worked out in advance. Don’t even tell them how you obtained your number because that just provides ammunition for them to break down your price components to explain those miscellaneous charges that tend to creep in after you reach a deal if you’re not dealing with a drive-out price.

If you’re trading a vehicle in, financing, or considering an extended warranty, then you need to consider those scenarios too. More on those in a bit.

But I Fancy Myself as a Negotiator

Perhaps you have a unique situation. In my case, I came across a new car that was last year’s model and had been used as a demo. Or perhaps you’re passionate about getting the lowest price you can. Still listening? Ok, let’s get started. Here’s what we’re going to cover:

  • Preparation
  • Timing
  • Engagement
  • Negotiation

You’ve most likely done quite a bit of research on the vehicle you’re interested in already. That’s important. In particular, you need to figure out two numbers:

  • Your ideal target price
  • The maximum you’re willing to pay

To figure out your maximum price, figure out your drive-out as described above by looking up its true or fair market value and adding TTL. Then you’ll most likely want to adjust this a little lower. You’ll also need to think about what your initial offer should be. Lots of factors play into this. Is there a supply excess or shortage of these vehicles? An excess means you should aim lower. Are you buying a previous year model? That’s worth taking some money off too (and it isn’t reflected in true / fair market value numbers of new cars). Was the car used internally by the dealership and has some miles? You’ll drop the price for that as well.

Good, you’re prepared. Now you might need to wait a while. Ideally, you want to engage the dealership close to the end of the month. They have a quota to hit each month, and in those last few days they tend to become more motivated to ensure a potential deal doesn’t leave the building unsold.

Now, it’s time to engage the dealership. Guess what? You don’t want to just walk in because you need to connect with the right kind of sales person. And that person is…. an Internet sales specialist. These folks deal with pricing inquiries over the Internet and by email. So connect with your dealership one of those two ways and let them know what you’re interested in buying. This strategy is useful for a couple of reasons. First, is that web inquiries mean web-savvy people, which means people that have generally done research and have a strong idea what they should pay. The Internet sales specialist is geared towards this engagement scenario and will most likely offer you a pretty good deal right away. Compare this to the maximum you’re willing to pay and make sure your number is at least a bit lower. The second reason that this strategy is useful is because Internet sales specialists are often paid for units sold as opposed to a percentage of the sale amount. That means your salesperson is working for you. It is his goal to make sure you are happy and get your deal. He isn’t motivated to maximize the dealership’s profit from the sale. Call your guy when you’re ready to go in to ensure he’ll be there and let him know when to expect you.

Trade-ins

Ok, Mr. Negotiator it’s almost time for the fun stuff. But first let’s take a look at what you’re going to do with your existing vehicle if you have one.

Beforehand, you should have gone to the Kelly Blue Book website to find the average trade-in value for your vehicle. You’ll also get upper and lower range values based on better or worse condition. Be sure to actually read the notes about the condition classifications. A lot of sellers consider their vehicles to be in very good or excellent condition, but the buyer may classify the same vehicle as fair or good. Often the buyer is right in this case, so be sure to read the explanations against each condition classification to ensure you really are choosing the right one, so you can get an accurate trade-in estimate.

Second, you need to decide what you’re willing to accept from the dealer. Are you willing to give the car away to get rid of it? Will you be happy with a slightly lower amount than the trade-in value?

You also need to consider how you want your trade-in vehicle to participate in the process:

  1. Is your new purchase contingent on a satisfactory trade-in value?
  2. Are you willing to purchase the car without a trade-in if the trade-in offer is too low?

Most people are in the first category, and those people may already know that the best strategy is to discuss your trade-in after finalizing the sales price of your new vehicle. The dealer doesn’t like this, because he doesn’t want the trade-in to become a stumbling block to the transaction once they achieved an agreed upon price. They would much rather incorporate the trade-in value into the initial discussion, so they can wow you with your resulting lower net cost.

If you’re in the second category, you may want to consider an alternative strategy for your trade-in. You probably also fancy yourself as a negotiator, because being willing to deal with the hassle of selling privately goes hand-in-hand with being willing to deal with the hassle of negotiating for a lower price. So, in this scenario, you factor in your ideal trade-in value to the drive-out price as follows:

  • What I’m willing to pay for the new vehicle
  • Subtract my trade-in value assessment
  • Add TTL for the new cost

Let the salesperson know that your drive-out price is how much you’re willing to pay with your trade-in. They will come back with their proposed price and give you a breakdown that shows how much they valued your trade-in. If they seriously low-ball you on the trade-in, this tells you that they are trying to make more profit from you off the trade-in to so that they can achieve decent profit margin even if the price of the vehicle is below what they are comfortable with. If the trade-in value is reasonable, this tells you that as negotiations proceed you shouldn’t move up much from your initial offer since they’re already comfortable with their profit margin.

Negotiation Time

Woohoo! You’ve told the salesperson what you’re willing to pay, and he’s come back with a sheet of paper showing you their offer. The offer is going to show their starting price, less various discounts they’re giving you to show how serious they are about submitting a competitive proposal, plus TTL to give a final price.

The main number on this sheet that you’re interested in is the final price. Determine how far that is from your offer, and that’s the gap that needs to be closed. Be sure to express your disbelief at this point. There may well be some things on the sheet that you need to point out as being unrealistic. Don’t even consider increasing your offer until these items are addressed in some way or another. It might just be a verbal response from them, or it might be a revised offer. Some tricks you’re likely to encounter at this point are:

  • The starting price is much higher than MSRP because of “dealer adds” that they thoughtfully already added to the car. This is a standard dealership package added on to their new vehicles at a grossly inflated price. They do it for the sole purpose of inflating the MSRP so they have more profit to work with on a deal.
  • As mentioned earlier, they may low-ball the trade-in. Tell them that it is unacceptable. Really, you only care about the drive-out price, but this forces them to return with a revised proposal without you having to budge.
  • If you asked for some accessories they will have listed them in the deal along with grossly inflated prices for each. Be sure you use the build-and-price tool on the manufacturer’s website beforehand to find the cost of accessories you’re interested in. To give you an example, all-weather mats are listed on one manufacturer’s website for $250, but they were added to the offer sheet for $700. Don’t pay attention to any crying about installation costs (the online price includes installation) or the need for them to make a little bit of money. By taking issue with it, what you’re doing is forcing them to revise the offer again. You’ll notice that they probably won’t adjust the price of the accessories, but will instead just change the final price.

Stay focused on the drive-out price. Don’t consider negotiating on the price before TTL, otherwise you’ll find that your anticipated TTL price is actually much more with a breakdown showing all kinds of charges includes hundreds of dollars in a miscellaneous category. Those extra changes will remain on the final financial paper work and that’s fine. Your goal is to ensure they’re absorbing all these extras, whether they’re legitimate or not, into that drive-out price.

Now it’s time to move your offer. They will suggest a price between your price and theirs. It will be much closer to theirs. They’ll say that they will take that offer to some higher-up for review to see if they can make it work. Instead, you decide on a much lower price that is above your initial offer but still lower than the best offer you decided upon beforehand. They won’t be able to accept your offer of course. Why? Well it’s because they’ve already gone as low as they possibly can. They’ll talk to you a lot, and see how they can make you understand why you need to offer more money, and what an amazing offer they’ve already made you. This is getting close to the time for you to announce your final offer because quite frankly you’re ready to leave. You should increase your previous offer by a smaller amount, and announce you’re done – take it or leave it. There’s a good chance that they’ll accept at this point. Of course, each deal is unique, so choose your responses based on the gap between the two offers, the gap relative to your offer amount, how many times they have already reduced their price, how many times you have increased your, etc. If you reach your maximum offer price and still cannot make a deal, it’s time to leave. Sometimes walking out is the final straw for them. Sometimes an intervention happens before you leave, but it could be a call afterwards, or you may never hear from them.

Don’t Get Caught by Financing

You’re agreed upon a price, and can breathe a little easy now, right? Not so quick. The paperwork and, if applicable, financing part of the process represents another opportunity for the dealer to make some extra money.

You’ll be signing several documents, one of which will say that you agree to purchase the vehicle as-is. If you’re discussed and gotten any verbal agreements to fix any issues with the car, you should make sure you have this in writing (some dealers call it a “we-owe” sheet) before signing to accept the vehicle as-is. That includes accessories – you did negotiate for them to throw in some all-weather floor mats, right!

Know if you have good credit before going to the dealership. If the vehicle manufacturer is marketing a low interest rate, then insist on it if you have reasonable or good credit. Here’s an awesome trick that a dealership likes to use when working out financing terms: “Sir, would you like the promoted low X% interest rate, or the slightly higher Y% plus the dealer incentive cash of $1,500”. What’s going on here? As it turns out, they’ve already apparently factored the $1,500 into your agreed price, so what they are really saying is that it will cost you an additional $1,500 to get the lower interest rate. If you’re not careful, you can end up signing your paperwork for that lower rate and perhaps never realizing that the additional money has been added to your purchase price. This is perfectly legitimate for the dealer to do, in fact it is a common practice. Take a look on the manufacturer’s website. If it doesn’t mention it, then it is a dealer initiative, and that means it’s negotiable. Tell them you really wanted the lower rate, and you’re not willing to pay extra for it. Perhaps they will meet you in the middle or give you the rate if you give them a little more on the down-payment. Just remember it’s all negotiable. Don’t let them make you think they have no control over the interest rate, because they do have some wiggle room.

If you’re bought a new car before, you’ve probably also been offered an up-sell for the extended warranty. Here’s a surprise. The dealer is probably not taking advantage of you here. How do you know? Verify that the extended warranty is provided through the manufacturer. If it’s not, you probably are being ripped off.

You Did It

Buying a car can be a grueling exercise. Expect to be at the dealership for four hours or more, especially if you’re a negotiator. After it’s over, just RELAX and enjoy the drive home in your new car. As you think over the experience, you’ll start to wonder if you really did get the best price. Let me put your mind at ease. You probably didn’t. But you darn well got a great price. Good job!

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