by: theAlphaJohn, grade 4
We all want a new car, but the only thing we want more is to get a great deal on it. Whether you love to haggle or you detest it, the payoff comes from showing that fine ride to your friends and bragging to them about the great deal you got. So how do you get a great deal? You need to know how the system works, which is to say you need to know more than the drivel you can read on the Internet.
Hammering out a deal at a car dealership has two steps: negotiating the price and "getting out of the box". Most people think the best shot at a deal is though research on how to get the best price, but this is only half the battle.
The modern age offers many new ways to haggle over the price of your dream car without ever leaving your home. Credit Unions and big box stores likes BJ's and Sam's Club offer car buying services where the "best price" has already been negotiated with the dealership. If you would rather not involve a third party, dealerships now list their current inventory on their web along with their "Internet Price". Any haggling or add-ons can be negotiated through email, and then you simply show up and sign the papers. While either of these options offers very little stress, what you get is not likely to be much of a deal either.
You can, however, get a much better deal with just a little more effort. For starters, leave your game face and bad attitude at home; every salesperson I've ever spoken to has a story about the jerk customer who paid for it in the end. Chances are good you're not a professional actor either, so wearing your "lemon face" all afternoon will distract you from remembering all the tips you're about to learn.
Websites like Edmunds allow you to see the invoice on a particular car you're considering, but that is only one part of what the dealer has to work with. Dealers typically have what is called a holdback that is given to them by the manufacturer to advertise that particular car. If your new car went straight from the port to your driveway without ending up in print, the dealer keeps that money. Many websites detail how different manufacturers structure their holdback; it's anything but a secret these days.
More important though, most people do not understand what floor plan and stair step incentives are. Dealerships don't actually own the cars on their lot; they are on consignment for the first 90 days, after that dealers pay interest on them called floor plan. If a dealership has two identical cars on the lot, you will always get the older of the two to minimize the floor plan they pay. In Virginia, cars are inspected when they arrive from the port, so you can validate your floor plan advantage by looking at the inspection sticker to see how long they've had the car.
"Stair step" incentives are another advantage you may have in negotiating. Dealerships are given several sales targets to meet every month by the manufacturer called stair steps, and depending on the manufacturer they may have three or more. When the first goal is reached, they receive a bonus for each car sold; at the next goal they receive a larger bonus for all the cars sold. For example, if I sell 40 cars I receive a bonus of $500 per car, for 50 cars I receive $700 a car, and for 60 cars I receive $1000. If 50 cars were sold this month, the dealer receives $25,000 in stair step money, and if I sell 81 cars they receive $81,000. There is incentive to sell every car, but buyers 40, 50, and 60 are in the best position to bargain. The number of cars already sold is typically posted on the sales floor for all to see, but it is unlikely the number they need to hit will be, so you can't always be certain of where you advantage might be.
Any profit the dealer makes on the price of the car is called "front end", which amounts to very little anymore. A new VW Rabbit has less than $700 of markup in the sticker price! Once you shake hands with your sales person, you need to pay for your new car. Most car buyers do not pay cash, nor do they bring their own financing from a bank or credit union. They will need to finance the vehicle through the dealership.
Most manufacturers have their own lending arm called a captive lender; they are responsible for the TV ads that offer 0% financing for 60 months, and only offer this to buyers with excellent. If there are no special financing rates, or the buyer has less than perfect credit, this is where the dealership can make "back end" profit on your loan. The finance manager can "hold points" by selling you a car loan at fractions of a percent higher than the lender is offering it. If you are buying a new car for $20,000 and your credit is less than perfect, the lender may offer to buy the loan at 7.25%, but the finance manager may hold 0.5% giving her a $1000 profit.
A lease is another financing option where the lender owns the vehicle and you operate it for a set period of time. When leasing a car, the manufacturer gives the finance manager guidance on the residual, or how much the car will be worth if returned with a certain number of miles in good condition. If our fictional $20,000 car has a residual of 55% on a 3 year / 36,000-mile lease, it will be worth $11,000 when turned in. The depreciation, in this case $9,000, is spread out over 36 payments and multiplied by the money factor, which is the cost the leasing company charges to borrow. A lease often has an acquisition fee or early termination fee, and choosing to buy the car you leased is almost never a bargain.
A third type of financing few people are aware of is called a balloon or a driver's option, and is similar to a mortgage balloon. Again, the manufacturer provides guidance on the residual value of the car over the term, but this time the depreciation has a more traditional interest rate and the individual owns the car instead of the leasing company. So in our previous example, our $20,000 car has a 55% residual value after 3 years / 36 months, but this time we apply 3.9% interest to our $250 a month loan and pay $259.75 per month. At the end of the term, you can return to the car and owe nothing or keep the car and finance the residual with a used car loan. A balloon has no acquisition or termination fee.
The final part of the financing experience involves the various add-ons that the dealership can offer you. An extended warranty will protect you from costly repairs after the original manufacturers warranty expires, and sometimes includes oil changes and major service. GAP insurance covers when you put no money down and finance 100% of the cost; should your car be totaled and insurance only pays the book value, GAP will pay the difference. Tire and wheel warranty pays to replace a tire or rim that may be damaged by a pot hole, something neither the manufacturer's warranty nor an extended warranty will cover. Many people think these are a waste of money, but for drivers who drive aggressively and plan to keep the car for a long time it might make sense.
No two car buying experiences are the same, even if you total your new car on the way home and return the next day to buy the identical car. Any number of factors can affect the outcome, but it is within the power of an informed buyer to control the outcome and get the best deal possible. The best hagglers are no longer the only ones who get the best price, and bankers are no longer the only people who get the best financing. By being well informed, you are guaranteed years of bragging rights about what a great deal you got on your new car.