Car Buying Part 1: Know Your Position

You must Know Your Position and have a strategy to get there before you begin negotiating with a dealer.  Despite the fact that a car purchase is one of the two biggest purchases many people make in their lifetime, the process is regularly approached like a clothing purchase rather than a major purchase, such as a home.  This lack of perspective costs consumers thousands of extra dollars on their automobile purchases.

DEALER MOTIVES

Dealers’ motives are easy to predict.  They try to 1) make as much profit as possible, 2) sell cars that shouldn’t be sold (unsafe or unmerchantable), 3) sell a car that a customer doesn’t need, and/or 4) sell a car that a customer doesn’t want.  If you have prepared well, the third and fourth motives do not concern you.  It is also unlikely that you will become a victim of the second motive.

The first motive remains a significant issue and will continue to be an issue throughout the process.  There are many areas of a car purchase where a dealer can take advantage of a less experienced car buyer.  And the simple fact is: every consumer is less experienced buying cars than the dealers are selling them.

CONSUMER’S BEST DEFENSE

While dealers’ motives are rather basic, their sales strategies and tactics are far more complicated.  It is a daunting prospect to provide consumers with all of the information, issues, details, dealer strategies, etc. that are involved in negotiating for the purchase of a vehicle.  There are simply too many scenarios.  The simplest and most effective rule is to Know Your Position.

DO YOUR HOMEWORK

Preparation is required to establish your position.  The first considerations are the obvious: a) what vehicle or type of vehicle you want and/or need, and b) what you can afford.  Which of these is more important will depend on your individual situation.  An important part of affordability is whether you have a vehicle to trade-in.  (Trade-in vehicle considerations are discussed in “Car Buying Part 2: Trade-In Games”.)  Once you have narrowed your choices, it is time to research prices and financing terms.

PRICING

Finding the price of a new vehicle is simple.  The manufacturer websites (GM, Ford, Honda, etc.) list the manufacturer suggested retail prices (MSRP) for all of their vehicles.  Dealers cannot sell a vehicle above MSRP unless there is an added window sticker specifically identifying the mark-up over MSRP.  On the other hand, a consumer can always attempt to negotiate for a price below the MSRP.  Whether or not a consumer is successful in negotiating for a below-MSRP purchase often depends on the Market Conditions discussed later in this article.

For used vehicles, finding the market value (price) is slightly more complicated.  The Kelly Blue Book website, and several similar sites, will provide the values of used cars after requesting some information such as mileage and accessories.  They will then provide a range of values based on the overall condition of the vehicle.  Printed Kelly Blue Book Used Car Guides, and other similar guides, are also available at bookstores.

FINANCING

If you plan on financing, it is important to know, in advance, the terms for which you qualify.  The best way to determine this is to get pre-qualified for an auto loan.  This will establish the interest rate and loan amount for which you qualify.  This information will also help determine your budget and the category of vehicle available to you.

This information is extremely important in negotiating financing terms.  Dealers often inflate your interest rate to increase their profit.  Instead of accepting the higher rate, you can make the dealer match the terms for which you have been pre-qualified.

With your preparation, you now know the vehicle or type of vehicle you want, the price or price range of that vehicle, and the financing terms for which you qualify.  In short, you know how much you are willing to pay for the vehicle you want.  However, your position is not yet set.  You must now estimate the price a dealer is willing to accept for the vehicle you want.

MANUFACTURER INCENTIVES AND MARKET CONDITIONS

You must consider new car incentives and market conditions.  This does not require training as a tax consultant or an economist.  Rather, it requires that you check manufacturer websites for rebates, reduced interest rates, and other deals that manufactures pass on to buyers to move their product.

Do not count on dealers offering this information or even using the incentives to your advantage.  For example, it is a common dealer tactic to use rebates to reduce a purchase price to the amount agreed upon by a salesperson and buyer, rather than to reduce the agreed purchase price by the amount of the rebate.

            Example: Joe Buyer and Bob Salesman agree on a purchase price of $20,000 for a 2009 Toyota Camry.  When the two sit down to document the sale, Bob Salesman documents the purchase price as $21,500 and applies a $1,500 manufacturer rebate to reduce the price Joe Buyer pays to $20,000.
            The proper way to document the transaction is to enter the purchase price as $20,000, then apply the $1,500 manufacturer rebate.  This will reduce the price Joe Buyer pays to $18,500.

Knowing the market conditions takes analysis, so here are some general principals.

a)  It is easier to get a reduced price at the end of the model year.  Dealers and manufacturers want to make room for the new model-year vehicles.

b)  Manufacturer incentives indicate slow sales.  This means that dealers are also more willing to reduce their prices.

c)  Popular models are often sold at above the Manufacturer Suggested Retail Price.  In order to do so, dealers are required to indicate on the vehicle that the price is increased.

d)  Areas with large numbers of dealerships are likely to have lower prices.  For example, cars in Los Angeles are generally less expensive than cars sold in Central California.  This also applies to more localized areas within Los Angeles.

e)  A slow economy means dealers are more willing to reduce their prices and vice versa.

An understanding of market conditions will give an accurate estimate of how far below MSRP (new car) or market value (used car) a dealer is willing to go for the vehicle you want.  This will be your target price.  In the case of a popular model in a seller’s market, the target price may be above MSRP.  As a basic principal of negotiations, you should begin discussions with the dealer by demanding a price below the target price.  (See “Car Buying Part 4: Negotiations”)

You now know the vehicle you want, the financing terms available, and your target price.  Your position is now set and you must keep it in mind throughout the negotiation process.