Cars
Wheeling and Dealing
To be on sound footing when you shop for a new car, you need to know how the process works, including how dealers make their money and how much they paid for the model you want.
By Mark Solheim, Senior Editor, Kiplinger's Personal Finance
November 2006
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Updated January 2008
Americans' love affair with cars too often turns sour in the showroom. It isn't hard to see why. You've been coached to ignore the sticker price and go in ready to haggle, but you're never sure if you're getting the best price. Or if you're getting enough for your trade-in. Or if the finance office is offering a fair deal. If you lease your new wheels, there's a whole array of arcane nooks and crannies to worry about.
To be on sound footing when you shop for a new car, you need to know how the process works -- how dealers make their money. When you zero in on a model, you want to know how much the dealer paid for it (the invoice price) and the kinds of deals that other buyers in your area are striking.
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Ironically, the adversarial relationship between dealer and customer may have gotten worse in the past decade precisely because educated shoppers are driving harder bargains in a buyers' market. Here's the playing field: Factories are churning out vehicles to keep the production lines moving, creating surpluses on dealers' lots. So carmakers prop up demand by offering rebates or low-rate financing. Buyers are equipped with information from the Internet that lets them negotiate prices closer to invoice than to sticker price.
Although car buyers have ready access to prices, they don't necessarily know whether they qualify for the best financing rate, or even what that rate is. That has led to a rash of complaints being filed with attorneys general and consumer-protection agencies about the dealer reserve -- the commission the dealership receives when it inflates the lender's loan rate.
Many dealers defend the practice as fair compensation for arranging the loan. In fact, lenders sometimes approve loans for riskier customers as a way to pay back the dealer for sending business their way. But the amount of the markup is usually decided by the dealer, and that has gotten some dealers in trouble. Studies show that African Americans and Hispanics pay higher rates than Caucasians.
Score the best deal
The best way to get the best deal is to tell the dealer exactly how much you're willing to pay for the model you want and how much you want for your trade-in. You should also know the interest rate you qualify for at your credit union or bank so you can compare it with the dealer's offer -- which automatically eliminates any hanky-panky in that area. In other words, you need to do enough homework to avoid surprises.
And remember, the price, the trade-in and the loan are separate transactions, so negotiate each one separately. Never negotiate on the monthly payment because that's when the line between each transaction gets blurred. If the dealer wants to add an extended warranty that would bump up your monthly payment by "only" $25 -- and you're signing a 60-month loan -- you're paying an extra $1,500. Or the dealer may try to flip you to a lease and raise the price of the car because the monthly payments still come well within your budget. If you can't get the concessions you want or a straight explanation about any part of the process, walk away. Dealers need you more than you need them.
The purchase. Tell the dealer you'd like to pay as close to invoice as possible. Supply and demand is a big factor in how low a dealer will go, so research the average transaction price in your area.
Shake off any notion that if you pay invoice, the salesperson and the dealership get nothing. Carmakers may offer the dealer cash to help sell certain cars. Dealers can also make money from the holdback. That's 2% to 3% of the cost of the vehicle -- money that carmakers refund to dealers to offset the cost of financing the car while it sits on the lot. It's rare that a dealer will cede part of the holdback, but it should strengthen your negotiating clout if the manager knows that you know about it.