Knowledge Is Power
In the negotiation game, knowledge is truly power. And in the car buying business, the car salesman usually has the most information. Think about it. When the average buyer walks into the dealer, he’ll immediately divulge to the salesman which car he wants, how much he can pay per month, and which vehicle he’s trading in.
Meanwhile, the salesman gives away no information that would help the buyer. Information like how much the car really cost the dealership, how low they’ll really sell it for, or what’s the real value on the buyer’s trade-in.
Who do you think’s going to get the better deal in this scenario? The dealer, of course. He’s the one with all the information!
Thus, to minimize the amount you pay for a car, you need to do two things: 1) hold your cards close by not telling the dealer exactly what you’re looking for or how much you’re willing to pay and 2) find out as much information about the car you want to buy before you walk into the dealership.
Know How Dealers Make Their Money
When you’re talking with a dealer, it’s important to know that dealers make money three different ways with each customer.
Most buyers just focus on #1. However, car dealers might actually make more money on numbers #2 and #3. Thus, when you start negotiating for a used car, take into account things like financing and the trade-in value of your current car when calculating the final price.
How to Negotiate for a Used Car
Buy cars that are at least two years old. Why two years old? Well, they’re new enough that they still look nice and probably don’t have a lot of problems. But more importantly, a new car’s wholesale value drops between 45 and 55 percent of its original sticker price after two years. What a bargain!
Read Consumer Reports annual auto issue. Consumer Reports annual auto issue comes out every April and has a used car section that gives you info like lists of most reliable and least reliable used cars and frequency-of-repair records for recent model years. This information can help you create a list of used cars you want to check out.
Get the big picture value. Once you have a list of possible used cars, get an idea of how much they generally go for by checking the Kelley Blue Book’s Guide to Used Cars and the National Automobile Dealer’s Official Used Car Guide. Don’t just rely on the website versions of these value guides. The websites won’t give you a car’s wholesale price, just the retail value. The wholesale price is what dealers use to determine how much they should pay for a car. After paying the wholesale price, dealers jack the price up for retail. You want to buy the used car for as close to the wholesale price as possible.
However, don’t take these values too literally. The values in the Blue Book or Official Used Car Guide don’t reflect the specific situation in your specific market. For example, your town might have a glut of Astro Minivans (Why are you buying an Astro Minivan?), so the price on those will be less than the blue book value. So you’ll need to…
Fine tune your estimate. Find out what the going price is for the cars you want in your area. Check out autotrader.com for prices in your area.
Check the dealerships to see if they have the car. Look on autotrader.com, call around to the dealerships or check their websites to see if they have the used car you want and what they’re asking for it. If they have the car you’re looking for, swing by the car lot and write down the car’s Vehicle Identification Number. You’ll need it later.
CarFax. Get one. CarFax gives a comprehensive report of a vehicle’s history. The report will tell you how many owners the car has had or if it’s had any accidents. That sort of info can help get you a lower price (or steer you away from the car altogether). For example, if the car belonged to a rental fleet, it probably had a bunch of different drivers who had varying degrees of driving skills. Some may have gunned the engine at stoplights and others might have kept their foot on the brake. Bottom line, an old rental car has a lot more wear and tear than a similar car that had only one owner (especially of the old lady variety). Consequently, the old rental car should have a considerably lower price than the one owner car.
To get a CarFax report, just visit CarFax and enter the Vehicle Identification Number. They cost $34.99, so try having the dealer get it for you. “Show me the Carfax” seems to work on tv.
Research financing rates before you walk into the dealer. Ideally, you should pay in cash when buying a used car, but sometimes you just don’t have ten grand lying around to blow in one fell swoop. That’s when auto financing will come in handy and car dealers would love to help you finance your new used car. Remember that dealers make money on the back end by getting you signed up with dealership financing. A bank actually funds the loan, but the dealer acts as a middleman who gets a commission for signing you up. Consequently, the salesman will pressure you to finance with the dealer.
But here’s the deal. You don’t have to finance your car with the dealer. You can use any bank that you want. To avoid the pressure of inking a car loan at the dealership, shop around for different auto loan rates. Check your bank. When the dealer starts pushing you to the little finance office, you can tell them you’ve already been approved for a car loan and what the interest rate is on that loan.
Of course, the dealership still wants to get that commission from their bank, so they’ll start negotiating auto loan rates with you. You might even get a better deal going with the dealer. Who knows! Just have your financing ready before you step foot on the car lot. You’ll save yourself some money.
Take care of the trade-in. If you’re going to trade-in a car to buy your new used car, do some research on your current car. You want to get as much money as you can on the trade-in. Dealerships will low ball you on the price so they can turn around and sell it for a hefty profit. Ask for the wholesale price or as near to wholesale price as you can. Again, to find the wholesale price on your car, check out Kelly Blue Book or the Official Used Car Guide.
If you don’t want to deal with the dealer, you can always sell the car yourself at retail price. It’s a bigger hassle, but you might get more money that way.
Time to start dealing. Alright. You know the wholesale/retail price and the going price for the car in your area. You also have a few auto loans with competitive rates lined up. It’s time to do business.
Step into the dealership with a set “walking price” fixed in your head. If the dealer refuses to meet this price, you know you’re walking away.
If you’re shopping as a couple, make sure you’re both on the same page and get your “routine” down. When one person gets up to walk, the other gets up too. You don’t want one person hard balling while the other jumps in with, We’ll take it!”
Make an offer. Most dealers build about 20% gross margin into the used car’s asking price. That means they ask for 20% more than what they paid for it. So offer 15% below the asking price. Tell the salesman you know that there’s about a 20% gross margin in the price and that you want him to make a profit, but you’re not going to let him take you to the cleaners.
In the negotiation game, knowledge is truly power. And in the car buying business, the car salesman usually has the most information. Think about it. When the average buyer walks into the dealer, he’ll immediately divulge to the salesman which car he wants, how much he can pay per month, and which vehicle he’s trading in.
Meanwhile, the salesman gives away no information that would help the buyer. Information like how much the car really cost the dealership, how low they’ll really sell it for, or what’s the real value on the buyer’s trade-in.
Who do you think’s going to get the better deal in this scenario? The dealer, of course. He’s the one with all the information!
Thus, to minimize the amount you pay for a car, you need to do two things: 1) hold your cards close by not telling the dealer exactly what you’re looking for or how much you’re willing to pay and 2) find out as much information about the car you want to buy before you walk into the dealership.
Know How Dealers Make Their Money
When you’re talking with a dealer, it’s important to know that dealers make money three different ways with each customer.
- They can make money on the front end of the purchase by selling the car for more than what they paid to buy it.
- They can make money on the back end, selling you things like financing, extended warranties, and dealer add-ons like rustproofing.
- If the dealer includes trade-in value, they can make money on the difference between what they pay for your car and what they get when they sell it.
Most buyers just focus on #1. However, car dealers might actually make more money on numbers #2 and #3. Thus, when you start negotiating for a used car, take into account things like financing and the trade-in value of your current car when calculating the final price.
How to Negotiate for a Used Car
Buy cars that are at least two years old. Why two years old? Well, they’re new enough that they still look nice and probably don’t have a lot of problems. But more importantly, a new car’s wholesale value drops between 45 and 55 percent of its original sticker price after two years. What a bargain!
Read Consumer Reports annual auto issue. Consumer Reports annual auto issue comes out every April and has a used car section that gives you info like lists of most reliable and least reliable used cars and frequency-of-repair records for recent model years. This information can help you create a list of used cars you want to check out.
Get the big picture value. Once you have a list of possible used cars, get an idea of how much they generally go for by checking the Kelley Blue Book’s Guide to Used Cars and the National Automobile Dealer’s Official Used Car Guide. Don’t just rely on the website versions of these value guides. The websites won’t give you a car’s wholesale price, just the retail value. The wholesale price is what dealers use to determine how much they should pay for a car. After paying the wholesale price, dealers jack the price up for retail. You want to buy the used car for as close to the wholesale price as possible.
However, don’t take these values too literally. The values in the Blue Book or Official Used Car Guide don’t reflect the specific situation in your specific market. For example, your town might have a glut of Astro Minivans (Why are you buying an Astro Minivan?), so the price on those will be less than the blue book value. So you’ll need to…
Fine tune your estimate. Find out what the going price is for the cars you want in your area. Check out autotrader.com for prices in your area.
Check the dealerships to see if they have the car. Look on autotrader.com, call around to the dealerships or check their websites to see if they have the used car you want and what they’re asking for it. If they have the car you’re looking for, swing by the car lot and write down the car’s Vehicle Identification Number. You’ll need it later.
CarFax. Get one. CarFax gives a comprehensive report of a vehicle’s history. The report will tell you how many owners the car has had or if it’s had any accidents. That sort of info can help get you a lower price (or steer you away from the car altogether). For example, if the car belonged to a rental fleet, it probably had a bunch of different drivers who had varying degrees of driving skills. Some may have gunned the engine at stoplights and others might have kept their foot on the brake. Bottom line, an old rental car has a lot more wear and tear than a similar car that had only one owner (especially of the old lady variety). Consequently, the old rental car should have a considerably lower price than the one owner car.
To get a CarFax report, just visit CarFax and enter the Vehicle Identification Number. They cost $34.99, so try having the dealer get it for you. “Show me the Carfax” seems to work on tv.
Research financing rates before you walk into the dealer. Ideally, you should pay in cash when buying a used car, but sometimes you just don’t have ten grand lying around to blow in one fell swoop. That’s when auto financing will come in handy and car dealers would love to help you finance your new used car. Remember that dealers make money on the back end by getting you signed up with dealership financing. A bank actually funds the loan, but the dealer acts as a middleman who gets a commission for signing you up. Consequently, the salesman will pressure you to finance with the dealer.
But here’s the deal. You don’t have to finance your car with the dealer. You can use any bank that you want. To avoid the pressure of inking a car loan at the dealership, shop around for different auto loan rates. Check your bank. When the dealer starts pushing you to the little finance office, you can tell them you’ve already been approved for a car loan and what the interest rate is on that loan.
Of course, the dealership still wants to get that commission from their bank, so they’ll start negotiating auto loan rates with you. You might even get a better deal going with the dealer. Who knows! Just have your financing ready before you step foot on the car lot. You’ll save yourself some money.
Take care of the trade-in. If you’re going to trade-in a car to buy your new used car, do some research on your current car. You want to get as much money as you can on the trade-in. Dealerships will low ball you on the price so they can turn around and sell it for a hefty profit. Ask for the wholesale price or as near to wholesale price as you can. Again, to find the wholesale price on your car, check out Kelly Blue Book or the Official Used Car Guide.
If you don’t want to deal with the dealer, you can always sell the car yourself at retail price. It’s a bigger hassle, but you might get more money that way.
Time to start dealing. Alright. You know the wholesale/retail price and the going price for the car in your area. You also have a few auto loans with competitive rates lined up. It’s time to do business.
Step into the dealership with a set “walking price” fixed in your head. If the dealer refuses to meet this price, you know you’re walking away.
If you’re shopping as a couple, make sure you’re both on the same page and get your “routine” down. When one person gets up to walk, the other gets up too. You don’t want one person hard balling while the other jumps in with, We’ll take it!”
Make an offer. Most dealers build about 20% gross margin into the used car’s asking price. That means they ask for 20% more than what they paid for it. So offer 15% below the asking price. Tell the salesman you know that there’s about a 20% gross margin in the price and that you want him to make a profit, but you’re not going to let him take you to the cleaners.
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