Helping friends negotiate buying a car is sort of a hobby for me. I can't stand the thought of my friends getting less than the best deal on such a large-ticket-item. So, I've helped many of my friends buy cars, and have learned quite a bit.
The normal car buying process in America is terrible.
Everyone (hopefully!) knows that sticker prices on cars are over-inflated by
thousands of dollars. The job
description for many car salesman seems to be “use every trick possible to profit
from the customer”.
Society would be better served if people could shop for cars in an environment where true price comparison was much easier (like most other commodities). Instead, in order to get moderately close to the actual price, people must usually waste a significant amount of time “negotiating” or (somewhat better, getting “quotes”), which restricts comparative shopping. Even if you are quoted a price, there are many additional charges, extra fees, and other factors that add up to MORE profit for the dealer, and LESS ability for the consumer to comparison shop.
How much “value” do most car salesmen provide? In my opinion, practically none whatsoever. Let's look at two functions of a car salesman:
teach you about the various cars and car options
extract as much profit from you as possible in order to get a huge commission check
Unfortunately most salesman seem to spend 95% of their effort on the latter task.
Corollary: If you don't know much about what car you are thinking about buying when you visit a dealership, you are probably in big trouble.
Why is the process the way it is? Because it is highly profitable for dealerships to keep it
that way. Dealers make tons of
money on people that aren’t savvy car buyers- so it doesn’t pay for them to
change. Most people are averse to
negotiating (especially to the level required to get the best deal) and/or
aren’t knowledgeable enough to know whether they are truly getting a good deal
or not. Car dealers know their
game. If you drive off the lot with
a different car than you came with, it’s not a matter of whether you got
“taken”, it’s a matter of “how much did you get taken for?”.
When a car salesman asks, “what can you afford?”, he’s
really asking, “what can you afford, after I make an outrageously huge
profit off you?” (the
italicized part is silent).
True story: I went to a dealership and took notes, just to see how much they would try to rip me off. I picked out a new Toyota 4-runner. The car salesman told me, “I don’t need a job since I have rental properties. I just sell cars because I like helping people out.” Then he gave me the following quote:
| INITIAL QUOTE: | AFTER HAGGLING: | |
|
$32,000 new 4-runner |
$26,000 same 4-runner |
|
|
-$11,000 trade-in |
-$14,000 same trade-in |
|
|
**no rebate |
-$ 2,000 rebate |
|
|
=$21,000 out-of-pocket |
=$10,000 out-of-pocket |
**there was a manufacturer’s rebate going on at the
time, but the initial quote rolled the rebate into extra profit.
Bottom line: In “helping me out” the salesman had initially marked the profit up $11,000 more than his “minimum” profit (the dealership still makes decent money on the haggled deal, or they wouldn’t do it).
Corollary: Just because you get $6000 knocked off the price of the car doesn’t mean you’re getting a good deal.
Car dealers use all kinds of techniques to get thousands of
extra dollars from a buyer:
Keep the price of the car a guessing game, by not marking cars with their “true” price
Even the “invoice” price doesn’t reflect how much the dealer actually pays for the car
Add on all kinds of “extra” charges and hyper-inflate the price of dealer add-ons (e.g. paint protection coatings, VIN etching, etc.)
Tell customers that all the cars have the add-ons, or that the dealer add-ons are required
Give the customer much less than their trade-in is worth
Give the hard-sell on the extended-warranty and dealer installed alarm systems (both with outrageously high profit margins)
Talk to customers in terms of monthly payments (instead of out-the-door price of the car) in order to help hide the true cost of the vehicle.
Hide extra profit in financing the car
Keep manufacturer incentives, and customer rebates as profit unless the customer knows about them
Distorted "blue book" quotes for your trade-in
etc., etc., etc.
Haggling with a car salesman can waste many hours, and then
haggling with the salesman’s manager, and even then you probably won’t get
the best deal. If you buy from
a salesman, without haggling with the manager, it's a sure indication the
you’re paying WAY more than you should be since managers don't need to
get involved if the profit is outrageously high. Car salesman can make thousands of dollars on one sale, in one day, if
they sell to someone who doesn’t do a good job researching and negotiating the
price of their car. Do they deserve this much for the "value" they
provide?
Despite all this, I enjoy buying cars. I like haggling, playing the game, beating the system, and getting a great deal. So I’ve helped many of my friends and relatives buy their cars. I recommend Consumer Reports magazine for researching different vehicles, and getting reliability data. Another excellent source of information is www.edmunds.com for invoice pricing, rebate information, and used-car valuation.
For those looking to buy a new car, my advice is to buy from the FLEET department- (you don't have to be a member of CostCo etc., anybody can buy through the fleet department. Despite what they say, you still have to negotiate with fleet to get the best price). For used cars, there is no fleet department.
Final suggestion: After you have worked hard to negotiate your deal, and are signing the paperwork. Look closely over the financing! It has been my personal experience that they often make "mistakes" in their favor, costing you hundreds of dollars, or more. Don't be embarrassed or worried about giving them the impression you don't trust them. You shouldn't trust them.
For example: below are some true stories of experiences I have had personally:
One salesman actually bragged that sometimes "in the past" they had intentionally failed to credit a customer for their trade-in when leasing a car. Since calculating leases was often difficult for customers, most never knew the difference, and the salesman would keep the trade-in for themselves! The salesman said, "of course, we don't do that anymore."
Another time, I spent 20 minutes strongly arguing with the finance officer that I absolutely did NOT want the extended warranty. Later as I was signing the paperwork, I noticed a large extra charge. "What's this?", I ask. The loan officer says, "Oops, I must have accidentally left the extended warranty on there, let me redo the paperwork."
Yet another time, after all the negotiating was "finished", when it came time to sign the paperwork, there was extra charge for several hundred dollars. The finance guy says, "Oh, that's for etching the VIN number on all the windows. We do that to all the cars." The charge was not on the window sticker as a dealer add-on, and it had never even been mentioned to me. They just add on the charge at the end, and try to slip it past everyone- business as usual. And if they get caught, they say they were trying to do you a favor, "Oh it's really valuable- everybody wants it". I told them I wasn't going to pay for it, and they removed it from the bill. But if I hadn't said anything, it would have been equivalent to 30 movie tickets down the drain, for not taking the time to look and ask.
Another true story: Negotiations between me and a car salesman who brags he's been in the business 15 years:
Salesman: "What if I could get you this car for $300 a month?"
Me: "Okay, let's do it"
30 minutes later-
Salesman: "There's NO WAY we can get you that [same] car for less than $400 a month
Can you afford $400 a month? It's a great car."
Me: "Why did you say earlier that I could get the car for $300 a month?"
Salesman: "I said, 'WHAT IF'- I didn't say we could do it."
Me: "With 15 years in the business shouldn't you have known it wasn't even close to possible?"
Salesman: "Yeah I knew it wasn't really possible."
Me: "Isn't that very misleading?"
Salesman: "That's my job. I'm supposed to get customers interested in buying a car,
so I tell them what it takes to get them interested."
When I was fresh out of college looking to buy my first car I was haggling with a car salesman to get to a reasonable price:
Salesman: "I have to make money on this deal. I have a family to feed."
I think: "I'm a 'starving college student' up to my neck in student loans.
If you are in such dire need of money, why not hock all those gold
chains around your neck and huge diamond rings you're wearing on
practically every finger? This guy practically wore as much gold as Mr. T!
His sob story wasn't very credible. Most likely he had funded his jewelry
fetish upon the sympathies of prior customers.
If salesmen were really trying to be "helpful" why do they start out with a high price and then give you a lower price later? Why don't they give you the best price the first time? Answer: because then they'd have to find a different job (perhaps doing something useful).
