Cars
Wheeling and Dealing
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, how much they paid for the model you want and the kinds of deals other buyers in your area are striking.
By Mark Solheim, Senior Editor, Kiplinger's Personal Finance
May 2005
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The trade-in. Don't be overly optimistic about what your car is worth, but don't give it away, either. When you consult a used-car price guide, look for the trade-in value, not retail. Better yet, let several dealers, new or used, appraise it so you can get a consensus. Some buyers think it's best not to mention a trade-in at all until a deal is cut. But dealers don't like last-minute surprises any more than buyers do. Don't lie about having a car to trade in. Just say that you'd like to discuss it after you've negotiated the new-car price.
Financing. Here's where the going can get tough. For one thing, dealers tend to put their most talented closers in the financing-and-insurance office. For another, it's easy for dealers to inflate interest rates and the price of extended warranties and add-ons because that cost information is harder to come by.
If you have a good credit history, you should get the auto-loan buy rate, the rate a lending institution passes along to the dealer, or the lowest rate offered by the carmaker's financing arm. Some dealers are reluctant to reveal the buy rate and try to add a point or two (or more) even for their best customers. If your credit is a little shaky, you may have to pay a higher rate. But the rate is negotiable, and the dealer earns a $100 to $200 fee for arranging the loan even if he doesn't get the extra money. The best defense is to know what you qualify for at your own credit union or bank.
Dealers push extended warranties, gap insurance (which pays the difference between what you still owe on a loan and what a car is worth if it's totaled or stolen), credit life insurance (which pays off the loan if you die) and aftermarket add-ons because dealers earn fat commissions on them. Be wary of all such additions. Extended warranties, for example, are high on complaint lists because prices are inflated, coverage is often limited, and the industry has had a high rate of bankruptcy.
On aftermarket items, such as alarm systems and oversize wheels, assume there's a hefty markup and ask for a discount, advises John Honiotes, an ex-dealer who is now vice-president of dealer relations at Autobytel. Also, be on the alert for inflated fees. The document fee, for example, should never be more than $35. One Kiplinger's reader reports that he threatened to walk when a $300 "document processing fee" was sprung on him at the last minute. The dealership immediately waived the entire charge.
Leasing. The basic negotiating strategy is the same for a lease as for a purchase, but the confusing lingo of leasing often works to the dealer's advantage. Just as Lipset did when he leased the BMW Z4, you need to look behind the monthly payments to the deal's individual parts and compare terms at several dealers.
First negotiate the price of the car, which in a lease goes by the alias capitalized cost. The gross capitalized cost includes not only the price of the vehicle but also other products you might encounter in the finance office -- fees, extended-service plans, gap-insurance premiums and any add-ons. Adjusted cap cost is the gross cost minus items such as your trade-in, your down payment and any rebates.
Two other crucial numbers: The money factor is leasing jargon for the interest rate, and the residual value is the percentage of the vehicle's sticker price left over at the end of the lease. Ask the dealer to compare leasing offers from the manufacturer's financing arm as well as those from a few banks. That might produce a lower money factor or higher residual value -- either of which means lower payments.
--Research: Amy Esbenshade Hebert