Making The Right Deal

The key to getting the deal you want is to simplify things. If you’ve followed the buying guide up to this point you’ve eliminated  some of the complexity already. You know the type of car you want. You know how much you can pay. Hopefully you’ve already got financing and you’ve kicked the tires of the cars on your list. Now it’s time to negotiate.

Because the average dealer will mark the car up $2000-$3000, their asking price will likely be higher than the KBB value and this is where the negotiating starts. Once you have figured out your walk away price, YOU HAVE TO STICK WITH IT! If the dealer’s price is $1000-$2000 higher and they say they can’t meet your price, you have to say thank, the KBB price is roughly this and  i’m going to keep looking. You have to mean it. Give them your phone number and tell them to call you if they change their mind and leave. It may be hard, but you have to stick with your price.

To give you a better idea of how dealers make their money, let’s break it down in terms of how used and new car dealers work.

Used Car Dealers 

Here’s a breakdown of where used car dealers make their money and how:

Mark-up – Used car dealers typically mark up cars they buy at auction by 20%-50% depending on how much reconditioning they have to do. On average you should assume a used car dealer will make between $1500-$3000 on a car depending on the sticker price. Because the dealer is borrowing money from a lender to pay for the car they have finance fees that eat into that number and at the end the dealer will usually try to make $1000-$2000 after expenses. So bottom line is they have an incentive to negotiate on price and if you set your walk-away number – the absolute most you will pay – at about $500 for lower cost cars and $1000 at the higher cost cars, you’ll usually be able to make a deal.

Financing – Used car dealers typically pass through finance charges unless they are Buy Here Pay Here (BHPH) dealers (we’ll get into them in a moment). As we explained earlier the finance companies look mostly at your credit scores, so using the table in the Finance section and your credit score you can get an idea of the interest rate range you should expect to pay.Insist that the dealer tells you the interest rate and gives you an amortization table showing how much interest you will pay over the length of the loan.  If it’s more than 3% more than the range in the table, something’s not right and you need to tell them it’s too high and be prepared to walk away.

BHPH dealers operate by a slightly different set of rules because they own more of the car and so have higher risk on the loan. Their rates will typically be higher, sometimes significantly, and they won’t negotiate on price, but they are also willing to lend to people with lower credit scores. For them its all about lowering risk, so the key with BHPH dealers is to have a big down payment and agree to a shorter term loan, both of which lower their risk. The one thing to understand about BHPH dealers is that your payments are not reported to the credit agencies so you score won’t improve.

Service Warranties – Beyond the margin dealers make on cars they sell, the next biggest profit center for dealers is selling service warranties. In most cases if you are buying a cr that is more than 5 years old service warranties may make sense. There are a couple of things to consider:

• Reliability – You should check out the reliability of the car you want to buy. The best place for this is JD Power (www.JDpower.com ) which publishes reliability data on pretty much every car. If your chosen car scores high you probably shouldn’t buy a warranty.
• Exclusion vs Inclusion Warranties – You should buy and ‘exclusion warranty’ which means it covers everything but the exclusions. Most warranties are inclusion warranties, which only cover specific parts. These warranties aren’t very comprehensive, especially in comparison to exclusion warranties that cover all parts except for the ones they name. Read the policy very carefully to find out exactly which warranty you’ll be getting.

Dealer Mark-up – If you decide to buy a warranty the important thing to understand is the mark-up. A typical warranty will cost somewhere between $2000-$2500 from a dealer. The dealer will typically pay about half of that or roughly $1000 on average. Negotiating on warranty prices is easy because the dealer has nothing to lose by cutting the price other than the margin. You shouldn’t generally have to pay more for an exclusion warranty than $1200 so this is an area where you can save money. Before you buy one, get the suppliers name from the dealer and research them online.

Aftermarket Products

Dealers will try to sell you a wide range of aftermarket products from collision avoidance to window tinting. Our advice is that unless you absolutely have to have them you should say no and if you say yes, you should try to get them to throw in the product (unless its very expensive) as part of the deal at the very end of your negotiation. Keep in mind that the margins for dealers are really high on these products so you should assume that they are marking them up by 50%-100%, which means that if you want the product you should negotiate aggressively to get a better price. 

Gap Insurance 

As we explained earlier, GAP insurance is a type of policy that covers the difference between what an insurer will give you if your car is totalled and what you still owe on your loan. As a rule you should buy GAP insurance, particularly if you are buying a more expensive car where the gap might be between $5000-$10000. Like service warranties GAP insurance is lucrative for dealers. A typical policy that costs you between $500-$750 costs the dealer between $100-$200. As rule you shouldn’t pay more than $350 for a policy and you can usually buy one for that price from your local credit union, which as we have noted is also a good place to get financing for your car if you have reasonable credit.

By following these simple guidelines – plus all of the other advice we’ve given you- you should get the best deal for the vehicle that’s right for you at a price that you can afford. The most important thing to understand in the end is that if you prepare, stick to your budget, negotiate intelligently and work with a used car dealer whose signed the Pledge you’ll get the car you deserve.

New Car Dealers 

Here’s a breakdown of where new car dealers make their money and how:

Dealer Mark-up – New car dealers mark-ups are typically much lower than used car dealers because they are set by the manufacturer. A typical new car dealer makes between $500-$1500 per car, depending on manufacturer incentives and car sales volumes. In practical terms this means that you won’t be able to negotiate much on price and you should buy your car based more on manufacturer sales events (Presidents Day etc) than dealer advertising

Financing – Dealers (and manufacturers) make most of their money these days through financing and its complex. Its not unusual for a manufacturer to offer financing without a down payment, interest free for the first 6 months, very low interest and a low monthly payment. While this sounds good it’s never that simple, no surprise. First off these deals are usually for people with 720+ credit scores and if you are below that the interest rates will go up quite a lot. Second the financing is usually for 60-72 months which is way longer than we recommend for a purchase.

Don’t get us wrong, there are good reasons for buying a new car, but you have to go into the purchase with your eyes open. Don’t be fooled by the low monthly payments. When the loan is for 5-6 years you will pay a lot in interest and if you have to give up the car at year 3 you’ve got a serious problem on your hands as you will basically pay mostly interest for the first 3 years and won’t own much of the car at that point.

If you decide to buy a new car, you should plan to keep it until its paid off. First off it will decrease in value by roughly 50% over the first three years and then it will maintain its value for the remainder of the loan period. If you take good care of it and don’t put too many miles on it the car will last a long time and you will end up owning something that you can sell or trade-in for a good price. In the end buying new is a choice you have to think about pretty carefully.

The bottom line here is that the dealer will charge you as high an interest rate as they can and you should negotiate on that. You won’t be able to get the price of the car down, but you may be able to shave a point or two off the interest rate if you bargain. This is also a situation where it makes sense to apply for a loan from your credit bureau since they will likely offer you better terms if you qualify and if you can walk into the dealer with financing you’ll have more leverage to negotiate the price

Aftermarket Products – New car dealers will try to sell you a wide range of accessories, and aftermarket products. As long as they don’t affect your walk away price, feel free to accessorize. But remember, in most cases you don’t need the bigger stereo, better wheels or anything else they might offer. Oh and remember that the dealer is marking everything up by 50%-100% so you have room to negotiate or to get them from a thrid party like your credit union.

Dealing With The Dealer 

Ok now all that’s left is what many consider to be the hard part, dealing with the dealer. The good news is it’s a lot easier than it used to be. The bad news is that you’ll be dealing with sales people in a highly competitive business and their job is to sell you. So here are a few pieces of advice:

They work for you – you have to remember that the sales person is there to serve and help you. Their job is to help you find the right vehicle at the right price with and financing. You don’t have to put up with any of the things so often associated with car sales like high pressure sales tactics or subtle sexism/racism. You won’t see a lot of that anymore, but if you’re not totally comfortable with the person you are talking to tell them you need to politely disengage and move on. There are lots of car dealers out there…

Keep it simple – we’ve said this before, but keeping it simple is the most important thing about the car buying experience. If you’ve done your homework, understand what you want and can afford, you can focus on the most important things: cost, interest rates and loan term length. Don’t fall into the trap of negotiating for the monthly payment rather than cost, rate and length. It will pay off.

Stick to your walk away – we can’t emphasize this enough. Don’t budge from your walk away. There are plenty of cars out there

Avoid Zero Down Deals – While its tempting you should stay away from no money down deals unless you absolutely have to and use your down payment as a bargaining tool. If you’ve gotten financing from someone other than the dealer, the combination of that and a reasonable down payment will give you the leverage you need to get the best deal.

Discuss aftermarket products and warranties after you’ve done the deal – It’s important to keep the financing separate from any discussions about aftermarket products. Many dealers will try to roll aftermarket products into the monthly payment, but you should negotiate them separately because you can almost always get a better deal from the dealer or from someone else. So negotiate the core financing first and negotiate for aftermarket product separately. Then you can add them into the monthly fee if you want to. The best approach is to do the deal for the car and try to get them to throw the other stuff in to close the sale.

Congratulations!!! If you’ve stuck with us all the way through this long and sometimes complicated guide to buying a new or used vehicle you’re ahead of 90% of the people who go out to buy a vehicle. Understanding the ins and outs of all of the factors you have to consider isn’t simple, but if you’ve stuck with it and taken our advice you’ll wind up with the vehicle you need and can afford which is why we created the guide in the first place.