Car Buying 101 Tutorial
Car Buying 101 Part III
About Buying a new car from a dealer. In the pre-Internet days, buying a new car from a dealer was a lot like shaking hands with the Devil because there always seemed to be something up their sleeve, little tricks they employed to increase their profits at your expense.
Fortunately times have changed and there is a wealth of information online that can help prevent you from being taken advantage of. First and foremost would be sites like Edmunds.com and cars.com. Here you can get all the information on sticker prices, rebates, factory to dealer incentives, special offers, and manufacturer financing, which can really make a huge difference.
Depending on the time of year, a factory to dealer incentive might be in the thousands of dollars, and often these are not publicized fully on television, so unless you do some research, you won’t know about them. The dealer isn’t going to tell you about them unless he has to. Imagine there is a $2000 incentive on a Jeep Grand Cherokee that you don’t know about. You go into a dealer and negotiate the profit on the vehicle to $500 over invoice. What do you think happens to the incentive? It goes to the dealer unless it is specifically factored into your deal.
You really have to read the fine print on any purchase contracts concerning cars. This is especially true concerning leases. Vehicle leasing could be a book on its own, so we will only touch upon it here.
Leases allow you to drive a new car for a set number of years, after which you return the car to the dealer. In the old days, these arrangements were terribly one-sided with the dealer charging a premium. It has gotten more competitive as time goes on and it makes sense for those who wish to drive a new car once every 2 or 3 years, provided, and this is important, that they do not drive in excess of 15,000 miles per year.
The benefit to these short-term leases is that cars are under warranty, you can even pre-pay for all the oil changes and tune-ups in one payment, so there is no additional money out of pocket. There also may be some tax benefits to small business owners, which should be discussed with their accountants. We are unable to offer tax advice here.
Watch out for long lease contracts, those over 3 years, and watch out for short mileage contracts. A 5-year lease will typically take you outside of the manufacturers warranty, losing one of the key benefits of a lease, which is only owning the car while it’s under full warranty. If you drive 15,000 miles per year, do not enter a lease contract for 12,000 miles per year. Read the lease contract carefully, no matter what has been told to you by the dealer. Make sure the total capitalization cost does not exceed the sticker price of the vehicle. If it does, you are probably over-paying. Now these contracts vary greatly and we cannot cover everything here, so make sure you understand everything fully before signing. Leases offer dealers a big opportunity for profit because they are so misunderstood and people just nod their heads when they should be reading the fine print.
Vehicle financing is another area of profit for a dealer. Typically car buyers negotiate towards a price or a payment, but forget to push for lower interest rates, which of course lower the payments. If you have a credit score of over 700, you are in a good negotiating position. If you have terrible credit, you will really pay a premium to buy a car. As bad as that is, it might be worth it if you can actually make the payments and rebuild your credit. One good car loan on your credit will go a long way to getting good financing on your second go around.
Many times dealers will advertise a car with an off-color, a color no one wants, to bring people onto the lot and then switch them to another car. It’s classic bait and switch. Watch out for it. Another switch that is often attempted is to get those who are interested in purchasing to go for a lease. Sometimes this will make sense and sometimes it won’t for the reasons I listed above. Just be careful about it if you decide you want to lease.
Before you step onto a car lot, I would recommend calling around to see if someone will work a deal with you over the phone. Some dealers will, and some won’t. Sometimes a salesman will work a deal with you over the phone only to bring you to an empty space on the lot and then claim the car was sold out from under them.
One thing that might work in your favor is the following two sentences, “I understand you need to make a profit. I’m willing to work with you.” Tell that to a salesman and you will be surprised at how quickly their attitude changes. If the salesman believes he has at least a chance to sell you the car without you scraping every last penny out of the deal, he will be more likely to be more upfront about what he can offer. Again you have to decide what is most important to you, best deal or hassle-free. The more you look for the bargain, the more hassle you will have to go through. Of course a certain amount of hassle is probably necessary no matter what, after all, we are talking about a car purchase, so keep that in mind too. You can also use the quote forms on cars.com and Edmunds.com to get a quote online for new car and add that into your mix of negotiations.
What is a reasonable profit for the dealer? It depends on whom you are asking. Our opinion would between $500- $1000 over invoice, not including rebates or incentives, depending on the make and model. That is enough profit for the dealer to make the transaction easy for you. $500 over invoice is common, but harder to get depending on the make and model. Some people are good at negotiating and can get the dealer down to invoice, if the dealer is hungry enough for a deal. Deals below invoice are not unheard of, just more rare. When the deal is below invoice, the dealer is not necessarily taking a loss, depending on the current deals they have with the manufacturer. Don’t forget you can get the dealer invoice prices online from the manufacturer at sites like cars.com and Edmunds.com.
If you have a low target in mind, you might want to ask that question over the phone, “Can you sell me the car for invoice?” Measure the response you get. If they say yes too quickly, they are probably lying. A lot of salesman will play games with you at this point, and most will do just about anything to get you onto the lot, so keep that in mind. No matter what you will eventually have to go down to the lot and deal with them face to face.
Not all brands are created equal. Saturn dealerships work on a fixed price basis, which takes the haggling out of the equation. This can be very appealing to people, especially when buying used cars, which we will discuss next.
