Millions of cars are bought every year across the U.S from new cars to old. The auto industry is a billion-dollar business of car buying, leasing, renting, and maintenance. As a potential car buyer, you’re constantly being bombarded with numerous commercials and advertising to purchase a new vehicle, trade-in an old one, or even lease a new one. Most of us don’t have a clue when it comes to car buying. A study by Experian noted that the average car payment for new cars is $554, and the average for used cars is $391. On the surface, those numbers are not bad, but when you compare that to the average car loan lengths, we begin to see reality. The average car loan length in the U.S comes in around 65 to 69 months. We’ll discuss recommended financing choices later but all in all, we want to ensure we’re getting the best deal. In the past five years, the auto dealer markets are in the middle of being revolutionized by technology. Brick and mortar dealers, while still profitable, are beginning to lose their edge to virtual dealerships. For instance, take your favorite electric car company, the car you purchase isn’t even on a lot. You chose your options all online and the vehicle is brought to you. This is a whole new ball game. Even used car dealerships, while still maintaining a local lot in some fashion, are transforming themselves to meet the needs of this new digital car buyer. Truth be told, even with the traditional dealerships, you can negotiate your price and lock in your deal all over the phone. Just because the industry is figuring out a new way to sell doesn’t mean the art of the deal changes, but that’s what we’re here to talk about. So, let’s talk about the business of car buying.
Dealerships, like many other businesses, are in it to make a profit, otherwise, they wouldn’t be in business for long. In order to get a better picture of car dealerships, we have to first understand how they make money. Contrary to popular belief, the bulk of car dealership profits don’t come from car sales. The larger portion of their profits come from the maintenance and parts department. While car sales are a large part of their marketing, the real money comes after the sale.
Most dealerships rely on a high volume of sales to operate and therefore the profit per vehicle may be low compared to the cost of the vehicle. Aside from new cars, there is no exact price for a vehicle. The identical year, make and model vehicles sale for different prices in different locations. While one can argue, no two used vehicles are the same, the sales prices can sway thousands of dollars with just the most minor of differences. So how do you know if you’re getting a deal or not? This is what brings us to the main point of contention with car buying. How can we reasonably know if we’re paying too much for a used vehicle? How can you ensure you’re getting a good deal and what are some of the best practices for car buying?
Getting Ready to Buy
As with any negotiation, preparation is key. During the art of the deal phase, the dealership will gather as much information they can about you from figuring out of you’re a serious car buyer, how much you can afford, and even trying to tell you how much your vehicle is worth. They shouldn’t be the only one with this information. Therefore, from the moment you decide you’re in the market for a new vehicle, you should start your research.
Step 1: How much can you afford to spend on a vehicle?
The total cost of the vehicle you purchase should be no more than 50 percent of your annual salary. If financing, its best to get a loan for no more than 48 months. This ensures, you’re getting the best overall deal on the vehicle of your choice without being too far financially upside-down on your vehicle if any
Step 2: Research Interest Rates
You monthly price will depend heavily on 2 things:
- The negotiated price of the car
- Your interest rate
Research interest rates before visiting the dealer so you can be prepared with the best rate you can get. This will give you more leverage going in and will help you factor monthly car payment also.
Step 3: Decide the type of vehicle(s) you want and research
This is crucial. Never walk into the dealership without knowing what you want. How can you honestly know you’re getting a good deal on a vehicle if you haven’t even done the research?
Key Questions to answer before arriving at the dealership:
- Year/ Make / Model you’re interested in
- If buying used, how many miles are you willing to be ok with?
- What vehicle features are you most excited about?
All of these questions are important because they will help you narrow down the true value of the vehicle you will be purchasing. Without knowing these factors beforehand, you won’t be buying a car, you will be getting sold a car and those can be two different things.
Step 4: Research the value of your car.
The last thing you want to do is have the car dealership tell you how much your vehicle is worth. Do honest research on your vehicle and print this information out or save it to your phone. You’ll need this later when this question comes up during negotiations. I recommend using Kelly Blue Book to look up values but feel free to use other sources out there if you like.
Now that you’ve done your homework, you’re now ready to take your first visit to the dealership.
The Art of the Deal – Step 1
Once you arrive at the dealership, stick to the plan. You’ve done your research on the vehicle you want and now its time to see it in person, give it a walk around, and maybe even test drive it.
I recommend calling the dealer beforehand to ensure the car is still available. There are cases when the website has not been updated and a customer may have just purchased the vehicle. This saves you a trip and doesn’t waste your time.
Before we go any further in our car buying experience, let’s go over some ground rules for car buying:
Rule #1 – Don’t fall in love with the car
Falling in love with a car is the single most reason preventing you from getting the best deal. Never become so enamored with a vehicle that it causes you to lose sight of your overall goal.
Getting the Best Deal
Some of the best deals I’ve gotten have been from me walking away from the table. You’ll be amazed at what happens when a dealer knows they have a buyer in hand and all they have to do is make the money work. By not falling in love, you’ll surely get a phone call, if not moments after leaving the lot, the next day. This is when real deals get done.
Rule #2 – Don’t bring up cash, down payments or trade in…yet
The art of the deal begins the moment you step on the lot, therefore, play your cards close. Only talk about one thing at a time. First the car. Then the down payment or trade-in and so forth. As you’ll see later in step 2, these are separate negotiations and should be treated as such.
Looking at a used car at a dealership should be no different than looking at a car from a private seller. Inspect it thoroughly, look for any possible damage, scratches, dings, or dents that could provide you with a little more leverage to get the price marked down. If you still plan to buy the vehicle, you can negotiate to get these fixed with the purchase or use this to bring the price down. As you’re looking at your vehicle, any good salesman will use to opportunity to begin subtly vetting you as a buyer. Be casual but stick to the plan. Treat this like a courtroom, everything you say and do may be used against. Salesmen are trained to subtly ask prior questions to pull info from you. While much of it is helpful and to ensure you’re buying the right car, the other half is to pull information from you for the potential deal.
If you’re not car savvy, I highly recommend you never buy a car alone. Bring someone and have them help you inspect the car. If it’s not a big brand dealer, call a reputable mechanic before going to the dealership who can give the vehicle a thorough buyers inspection. This type of inspection normally costs somewhere around $100 but is well worth it if you’re serious about the vehicle. This could also lead you to another opportunity to negotiate a lower price giving you a better deal.
The Art of the Deal – Step 2 – Talking Money
Terms to Know
Out the door price – This is the final price you pay which included taxes and included fees. Confident car buyers offer out the door price immediately in order to cut to the chase.
Once you’ve found your car, now we can talk numbers. This is the part that most people hate the most so I’ll get you prepared properly. Below is this 4 Square Car buying method. Each of these squares will represent the parts of the deal.
STEP 1 – Car Price and Monthly Payment
First things first, if the car price is not near the Kelly Blue Book (KBB) price you researched earlier, now is the time to get it in range. You should already know what monthly payment price works for you before you get to the dealership, therefore, this should not be a negotiation.
After telling the car salesman the monthly price you want to pay, they will try their best to avoid lowering the car price. This is why we only do these two sections alone. Instead, they will work to get you to finance a longer-term i.e. 60, 72, or even an 84-month loan. This will only get you further from a good deal and increase the interest you pay on the vehicle. Remember, the real deal comes from getting the price of the vehicle lower, not extending your loan length.
My Recommendation – Leverage your monthly price on two factors.
- The monthly price you decided on
- 48-month or lower financing.
By doing this, it will handicap the salesman into only being able to change the price of the car to get to your monthly price. Remember, if the vehicle price isn’t close to the KBB price, your first negotiation is to get to the lower end of that price but no more than the high end. If the vehicle is already in the high end of the KBB price, your mission is to get it to the lower end if not lower. Negotiating this price now will lower the chance of you being upside-down on your vehicle payment years later.
Things to Expect:
- Several fees leading up to the total price. (Doc fee, theft protection fee, etc.)
- At least a back and forth three times on the price.
- The salesman will need to talk to their manager
- They will, at some point, say this is our lowest price. (in which case, it won’t be)
Fees: Typical fees added to the price of your vehicle may range from doc fees ($0- $299), Nitrogen (tire) fees, Theft protection fee. I recommend you negotiate the price of these fees out of your vehicle cost. While they may still end up on the charges list of your car price, which they have to do, you will have successfully reduced the car price by the total cost of these fees altogether. Once you get the cost of the vehicle down to your decided monthly price, we can move on to the next two squares.
Buyer TipIf, after the back and forth, you cannot agree on a price, do not hesitate to walk away from the deal. As I stated earlier, sometimes the real deals are made after you have walked away from the table. Kindly take their card and thank them for their time.
Step 2 – Trade in Value and down payment
First off, I highly recommend you do not put a cash down payment on a vehicle. Financially speaking, if your purchasing the right car for yourself and have negotiated the car correctly, you should not need to put a cash down payment on the car. However, in case you have a cash down payment, it is critically important you do not talk down payment before you negotiate the vehicle. Dealers will leverage this down payment amount to get you to your monthly car payment which could keep you from getting the lowest price on the car. The only time I would suggest your talk down payment and car price is if you’ve already factored in your cash down payment into the cost of the car in order to get you to your monthly payment. In this case, you would already know what price you want to pay for the car and subtract your cash down payment to get to your out the door price.
The only time you should be required to pay a down payment is if you are buying a car that the bank considers overpriced, or your credit score is too low that the financier requires you to put a down payment. If the latter is the case, I would either recommend you look for another car or look to buy car cash until you can bring your credit score up
Trade-ins can be considered down payments, therefore, if you have a trade-in, you should not need a down payment. Now that we’re at the last square of the 4 square deal this is when the previous research comes in handy. This is where the car dealership has the potential to make the most money. Like the car price, expect at least a back and forth three times. The dealer’s first offer will most certainly be lower and almost disrespectful. They will tell you the worst about your car to win this negotiation. Remain firm with your research. You should be aiming somewhere close to the KBB private party value and the high end of the KBB trade-in value price. Once again, don’t be afraid to walk away from the deal. You can also sell your car on your own. If you’ve already gotten to your required car price or monthly amount before this, I would recommend not stressing this too much but their offer should be somewhere close to the high end of the trade-in value.
Finalizing the Deal
Once all four squares have been negotiated, we can move forward to reviewing and signing the documents. Look over the fees and taxes and ensure everything is correct. Once everything is reviewed, sign the papers and move forward with your purchase. This can be a long ordeal but if you’ve taken my advice you will have most likely received a great deal for your vehicle.
Walking away from the Deal
If you have to walk away from a deal, don’t feel bad. Be prepared for them to call you with further offers. Continue to use the recommendations suggested above for further negotiations but I would suggest you continue to look at the other vehicles on your list. This could give you more leverage to get the best deal and even pair them against each other for your business.
If you have any questions feel free to reach out to us on Facebook. We’ll gladly give you advice on any potential vehicle purchases.