First, we will discuss several factors that should be given consideration when you are attempting to negotiate a price that is favorable for you when you buy or sell a car.
1. Use the Internet to get as much pricing information as you can about the car you want to buy and/or the car you want to sell. An article in The Wall Street Journal (10-22-06) stated in this regard that consumers who used the Web to obtain price related information paid an average of several hundred dollars less than the average buyers of the same vehicles.
The article also mentioned that there are a number of online services that will assist people in purchasing a car, but surprisingly stated that although these services make the car buying process easier, a person is likely to pay more for the car than they would if they did their own negotiating.
2. If you intend to purchase a new car and have a choice between purchasing the newest model or the prior year’s model, keep in mind that you may pay a lower price on the prior year’s model, but that car’s resale value will reflect an extra year of depreciation that could be costly if you decide to sell that car within the following few years. However, the longer you plan to own a car, the less significant the depreciation factor will be.
Furthermore, a Wall Street Journal article (10-12-03) stated that during some periods when buying incentives are given by car makers on new cars, the depreciation rates increase on most domestic cars. The reason, according to the article, is that the attractive deals on the new cars cause a glut of used vehicles on the market, thereby pushing down the values of used cars. As a result, the values of some domestic used cars plummet as much as 45% in just the first year. However, several brands of used foreign cars generally hold their value much better than most domestic cars.
3. When you want a dealer to provide you with an offer on a brand new car, request the salesman to quote a specific dollar amount above or below the factory invoice price for the model in which you are interested.
- Before you visit any auto dealers, go to a web site to get a free report as to the amount dealers receive for holdbacks and incentives, an estimate of the actual dealer cost, and the average price that buyers are paying
- Examine the factory invoice to make certain that the total price you have been quoted by the dealer is correct.
- The amount above the factory invoice price should be without regard to special features, so you will not need to negotiate separately for each car of the same model that you are considering, and you will know the cost of the special features.
- Be sure to ask the salesman if there will be additional fees. Some fees (e.g., preparing documents) are negotiable, while others are part of the dealer’s cost of doing business (e.g., floor planning) and, therefore, you should not be required to pay them. As a general rule, fees that are not included on the factory invoice do not need to be paid.
4. Carefully evaluate any incentive offers to purchase a car. Sometimes car buyers are given an option to choose between a low — or even zero — interest rate to purchase the car and a cash rebate. Most buyers apparently choose the low interest rate loan. However, an article in The Wall Street Journal (10-1-86) stated that, “Calculations by finance experts show that the cash rebates being offered as alternatives on most models can be the more economical way to go – sometimes by a substantial margin.”
To determine which of the two alternatives is more economical, only two steps are necessary.
- Subtract the total cost of the car dealer’s loan (i.e., all closing costs and all interest expenses over the life of the loan) from the total cost of your next least expensive source of a loan (e.g., a credit union) for the same amount.
- If the difference calculated in the prior step is more than the amount of the cash rebate, it is probably more economical to choose the car dealer’s loan rather than the cash rebate. Otherwise, the cash rebate is probably more economical.
For example, if the total cost (i.e., all closing costs and all interest expenses) of the auto dealer’s loan is $2,200 and the total cost of the next least expensive loan is $3,200, you would save $1,000 by choosing the loan from the auto dealer. But, if the cash rebate on the car exceeds $1,000, you would benefit more from taking the rebate, rather financing the loan through the auto dealer.
However, there is another alternative. Some credit unions or other financial institutions offer so-called zero-rate auto loans that do not require a car buyer to give up the manufacturer’s rebate on the car. A prepaid finance charge, instead of monthly interest, is paid to the creditor, and the resulting savings can be significant.
5. Remember that the price you are paying for a replacement car includes the market value of the vehicle that you trade-in. If a salesman offers you more than the true market value of your trade-in, he is not really offering you more than your car is worth. In fact, he may not be offering you even its wholesale value. The more the salesman allows you for your trade-in, the less he will reduce the price of the car that you want to purchase. Therefore, in most cases, the net cost of a vehicle that you are purchasing will actually be less if you sell your old car yourself, rather than trading it in.
6. Take into consideration not only the purchase price of a car, but also its potential future costs.
- Investigate the past repair experience of each make and model of car that you are considering for purchase. If you are interested in a brand new car, check the repair experience for the same make of car in prior years. This information is available from several sources including Consumer Reports and publications by the federal government. The U.S. Department of Transportation Auto Safety Hotline (800-424-9393) will tell you if a car model has ever been recalled and send you information about that recall. Also, any car dealers can provide you with this information.
- Before finalizing the price for a previously-owned car that you are interested in purchasing, be sure to have an independent mechanic inspect the vehicle, unless it has at least a year remaining on its original warranty. You can use what the independent mechanic tells you about the car to help you in negotiating the final price of the car and/or to have the seller fix the problems the mechanic finds. A U.S. Department of Transportation publication entitled Common Sense in Buying a Safe Used Car says on page 5,
In shopping for a good used car, be CAUTIOUS AND SUSPICIOUS. Remember, the previous owner had some reason for getting rid of it. The reason may have been that he wanted a new car, or it may have been that the car was practically worn out and required major, costly repairs to make it both safe and dependable.
- If you are interested in purchasing a previously-owned car through a dealer, tell the salesman that you will not finalize the purchase price until you have spoken with the previous owner. Since the salesman will need to get approval from the previous owner of the car for you to speak with the previous owner, insist that the salesman do so in your presence, so you can be confident that he has actually attempted to phone the previous owner.
The previous owner can — and usually will — tell you about any problems he (or she) had with the car. In some cases, such as when the vehicle was not owned by an individual, you probably will not be able to speak with the previous owner, but in most other cases you should be able to do so, if you insist.
- Also, if you are interested in purchasing a previously-owned vehicle through a dealer, determine if the car is covered by a warranty. If you had satisfactory results from following the first three suggestions regarding potential future costs, a warranty will not be as important as it would be otherwise. Nevertheless, if the car is covered by a warranty, make sure that you get a written copy of the warranty and that you understand what the warranty does cover and what it does not And, if you have any work done on the car during the warranty period, be sure you get a written description of the work, so you will have a record if the same problem recurs after the warranty expires.
While most people are aware of the importance of negotiating a good price when they are buying or selling a car, many people do not give much thought to the timing of their car purchases and sales. You probably would benefit from doing so.
1. Consider the condition of your current car. Unless you intend to sell your car as a “clunker,” try to sell it before you will need to make major expenditures to keep it in satisfactory operating condition. For example, try not wait to sell your car until there is an obvious need for the tires or the brakes to be replaced.
2. Consider the time of the year.
- If you want to purchase a brand new car, rather than a previously-owned vehicle, plan to buy the car near the beginning of a new model year, so you will have two model years from which to choose.
- If you want to purchase a previously-owned car, February, November, and December are usually the best months to buy, probably because many people don’t like to shop for a car when the weather is nasty or they have holiday activities on their mind.
- If you want to sell a car to another individual, rather than to a dealer, try to do so before the winter months, not only because there are fewer potential buyers during those months, but also because you will save some money if you do not need to pay for a winter tune-up. Likewise, it would be prudent to try to sell your car before you need to get its air-conditioning serviced for the hot weather months.
If you are planning to visit an automobile dealer to negotiate the price of a car that you are interested in purchasing, the next two timing strategies are also worth considering.
3. Consider the time of the month. Keep in mind that if a dealer and/or the salesman with whom you are negotiating is below their quota near the end of a month, they may be willing to give you a better deal in an effort to meet their quota.
4. Consider the time of the day. If you are ready to purchase immediately a car from a dealer, choose at least two dealers from whom you would be willing to make your purchase. Go early enough during the day so you will have ample time to visit both dealers on the same day. As you visit the dealers, let each salesman know that you intend to purchase a car that day from either him or another dealer, depending on which one makes you the best offer.
If there is only one dealer who has a car that you are interested in purchasing, go late enough so you will be the salesman’s last customer that day. (Of course, do not tell the salesman that his dealer has the only car that you are interested in purchasing.) Try to take up at least an hour of the salesman’s time with questions, test driving cars, etc. before you begin negotiating on the price. Knowing that you have taken so much of his time and that you are his last opportunity to sell a car that day, the salesman is not likely to let you leave until he has done all that he can to give you a price that will entice you to buy a car from him.
If, however, you want to save time and you do not feel a need to be at the dealership while you are negotiating a price on a brand new car that you are interested in purchasing, you can simply telephone several dealers to obtain their offers. Try to speak with the sales manager, since he will be in a better position than a regular salesman to make you a firm offer over the telephone. If you have access to a FAX machine, request the sales manager to send you a FAX confirming his offer.
If you are considering leasing a car, be sure you get all the necessary facts before you make a firm commitment. Most sources indicate that leases are not practical for most people.
An article in The Wall Street Journal (12-12-86) stated,
In a lease, the customer’s monthly payments are lower than they would be for the same car bought on credit. But the lessee doesn’t own the car, which is returned to the dealer when the lease expires. . . . The customer also must pay a per-mile fee if he exceeds an annual mileage limit, usually 15,000.
Another Wall Street Journal article (4-16-06) gave the following explanation of the factors involved in negotiating a lease:
Consumers get mugged by leases every day because they . . . don’t understand the inner workings of the contract. They assume that if you’re not buying the car, you don’t need to dicker over price.
Leases are built around three factors: capitalized cost, residual value, and interest rate.
“Capitalized cost” is the agreed-upon sales price. . . .
“Residual value” is what the dealer expects the car’s value will be when you return it at the end of the lease term. . . . You don’t have direct control over this, but many auto Web sites list which cars retain their value the best.
“Interest rate” is obvious. If you’re going to lease a car, check with various lenders to find who is offering the best terms. You don’t have to use the dealer’s in-house financing.
With a lease you pay the difference between the capitalized cost [i.e., the sales price] and the residual value.
By negotiating a lower sales price and concentrating on vehicles that retain the most value, you can shrink the gap between the capitalized cost and the residual value. Then, by shopping for the best lease terms, you lower your interest rate.
And, an article in Forbes magazine (3-6-89) cautioned people who are trying to decide whether or not to lease to consider more than the advertised monthly fee. The article went on to provide the following important considerations:
Most leases are closed-end; that is, the leasing company determines a fixed price for the residual value of the car at the end of the lease. Make sure your lease specifies that amount. It is usually 30% to 40% of the sticker price after four years. Get an option to buy at a specific price. Never mind vague promises like “fair market value.”
Beware of artificially low payments; there may be balloons.
Steep penalties for giving up a lease before its due date are standard. You may tire of the car, or repair bills may start to mount. Whatever the reason, those penalties will be a major disadvantage if you decide to pack the car in early. And if the car is in bad shape when you turn it in, you will be charged for repairs.
A Business Week article (5-1-95) concluded, “[B]uying is still the cheapest option over the long haul. . . . [I]f you drive cars until they fall apart, you’re better off buying. Likewise, if you drive more than average, steer clear. . . .”