How To Deal For A New Car
By Marc J. Rauch
Executive Vice President & Co-Publisher
THE AUTO CHANNEL
Originally published in 1998 but still pretty good advice, and I'm still here!
From my personal experience, paying 100% cash doesn't necessarily give you any advantage when buying a new car or truck. Here's what I mean: because new car dealerships usually don't provide their own financing (there was a time many years ago when they were more involved in doing so), but rely on third parties, they get cash for the car regardless of the type of transaction. In fact, in certain instances, they get a commission back from the financing organization for turning the "paper" over to them. In such circumstances, as you can see, the dealership would prefer a financed deal because they can make more money on the sale. Therefore, they can't or won't give you the best deal just for paying cash.
On the otherhand, if a person's credit is so bad that they can't get financing, and cash is the only way to go, then the dealership (if they want the business) will make the best deal possible (by "best deal", I mean the best deal for them, not you).
In general, the best way to make a good deal is to be armed with information, and the self-control to avoid making an irrational decision. Many, if not most people buy cars on impulse, stimulated by the emotion. New vehicles can be beautiful, sexy things; and the decision to buy a particular one can defy all logic. Yes, sometimes people with 3 kids and a big dog buy two-seat sports cars.
You must also avoid all pressure placed on you by the sales staff. Remember, their need to earn a living is just as strong as your desire to buy a car. So turn the pressure back on them to make a better deal.
On a sheet of paper, write down your specific requirements, i.e.; if you have children, if you need to carry around bulky items, if you're a sports fanatic and you want to lug around a sailboard or hang-glider. Is fuel economy important? Do you need four doors for better accessibility? Do you need 4 wheel drive capabilities?
Once you have this list, check your budget, how much can you afford to spend; both from a standpoint of available cash and how much you could also pay monthly.
Begin window shopping, literally and figuratively. Look at vehicles on the web, in newspapers, on TV, and in showrooms. See if anything catches your eye and matches your requirements. Check and read reliability reports. Read unbiased reviews, speak to your friends and co-workers. The Auto Channel has reviews on many different vehicles, we may have one for the type of car you're looking for. Consumer Reports is always a good source as well.
Once you have narrowed the choices down, you could consult The Auto Channel's New Vehicle Price Guide. Listed in this database you'll find the suggested retail price and the price that the dealer pays the manufacturer for the vehicle. Now you have a feel for the range that the dealer will work within.
At first blush, you'll think, if the dealer wants to charge $15,000, and he pays $12,500, then he'll never go lower than $12,500 (his cost). Most times this is correct. However, a few things can happen that affects this logic. Firstly, as I mentioned above, if you're financing the car, the dealer could get a commission from the financing company. This might be worth giving you the car at the price he pays.
But the other thing to consider is that almost all manufacturers offer incentives to the dealer. These incentives are typically offered on a monthly basis and increase depending upon the number of vehicles sold within the month. This is why many people find that the best time to buy a car is at the end of the month. For example: if a dealership sells more than 10 vehicles in a month, the manufacturer will pay $200 back to the dealer per unit. For more than 15 vehicles, maybe they pay $250 per unit and so on. As the dealership sells more vehicles during a month and they realize that they can earn more incentives, they increase their efforts to sell cars - usually by offering better deals to consumers.
Another way that a dealer makes money, sometimes far more than from the purchase of the vehicle itself, is from options and add-ons. Extended warranties, undercoating, enhanced audio systems, etc., are all ways to increase profitability. Keep in mind that every day consumers buy option and add-ons for several hundred or even thousands of dollars that costs the dealer practically just pennies. And unfortunately, sometimes these add-ons don't work or improve the life expectancy of the vehicle.
So again, you see, even if a dealer sells a vehicle at "cost", he could be making a great deal for himself.
Okay, now you're ready to make a deal. You know the vehicles you want (you should have more than one possibility in mind - this will give you better bargaining power), you know the price the dealer pays for the vehicle, and you've researched the effectiveness and necessity of the add-ons that the dealer will tempt you with. Go into more than one dealership and tell them the price you are willing to pay for the vehicle. If you live in a town that only has one dealership of a particular manufacturer, then visit other nearby towns. To make your offer look serious, make out a purchase order. If you will pay cash, indicate so. If you will finance the deal, then show them a copy of a pre-approved committment from your bank or credit union. This will let them know that you might qualify for their financing which would give them additional money, and sweeten the reason for accepting your bid.
The remaining question is how much to offer the dealership over their cost. Are they entitled to make a profit? Of course they are. You just don't want to be gouged. If you're buying some of the add-ons take into account that they could be making anywhere from 50% profit to an astronomical 300 or 400% profit on the item(s), even if the item is of value. Therefore, if you buy something for $1,000 that you suspect they could make $500 on, then make your bid on the vehicle lower. What kind of items carry a large mark-up? Extended warranties, undercoatings, paint protectants, interior protectants, etc.
If you've got great self-control, and the time to do it, be merciless - it could be a month that they're getting a big incentive from the factory. If you can't find any dealer that will accept your bid, then you can always increase it (or travel to more additional towns). Remember, if in order to save a lot of money you travel to a distant town, your local dealer of the same manufacturer still has to honor the vehicle's warranty. So you won't be hurting yourself.
Lastly, if you have a vehicle to sell in order to buy a new one, then you are better off selling it to a private party and using the cash for the new purchase. Trading one vehicle in towards the purchase of another almost never works out well for the consumer. You can get hurt on both sides.