Buying a new car is easy, as long as you don’t get attached to a particular car sitting on the lot. Remember, cars are commodities, your objective is to get the car for as cheap as possible.
Most people assume that all vehicles have $10,000 or more in markup– they don’t. Markup varies from make and model. Cheaper cars such as Civics and most Scions may only have ~$1000 in markup.
Bigger American vehicles on the other hand may have higher markups. A $50,000 RAM may have in excess of $10,000 in markup.
Because invoice prices are easily found by consumers, a common tactic employed by manufacturers and dealerships is called holdback. This is basically a rebate ranging from 2-5% of invoice price that is reimbursed to the dealership each quarter after a vehicle is sold. Think of holdback as a safety cushion for dealerships. Even when they sell a car at invoice, they still get something.
For example– if a dealership sells a 2014 Honda Civic at an invoice price of $20,000. Since Honda has a 3% dealership holdback on average, the dealership wouldn’t make any profit initially, but they would receive a nice $600 rebate (3% of $20,000) at the end of the quarter. This assumes that dealerships are willing to sell a car at or near invoice, rather than MSRP and exclusive of delivery, destination and documentation fees.
This is an important figure to understand during your calculations, but most dealerships will not openly discuss or acknowledge holdback policies during negotiations.
Rebates are manufacturer discounts intended to reduce the invoice price of cars.It is essentially a discount in price on certain vehicles, sponsored by the manufacturer. Always research available rebates before beginning any negotiations. Googling “current ford rebates” or visiting the manufacturer’s website are the best ways to learn about current offerings.
Now that you have a background, you can actually start shopping for cars. Pick a starting dealership and go on a test drive. If you like the vehicle, tell the salesman you’ll pay 3% over dealership invoice, any more and you’re going to the next nearest dealership. 3% above invoice is a commonly accepted reservation value for most dealerships, meaning it is the minimum for which they will sell a car for. At this point, you can submit a formal offer, typically entailing signing a paper and getting a credit score. Do not get attached to the car or the fact that you’ve spent so many hours at this particular dealership. Depending on the salesperson, they will typically take this offer to their finance manager and come back with a counter-offer. Don’t be afraid to leave if it isn’t remotely close to the 3% above invoice offer. Car salespeople realize that if you leave, chances are you won’t be back. In many cases, they will scoff at the 3% offer while on the lot, but you will get a call the next day saying come on in and we’ll do the 3%. If you are satisfied with the offer, get it in writing and say you need to think about it first.
Getting the Better Deal
Hopefully now that you have an agreement at the first lot for a car at 3% over invoice, you can start contacting other dealerships in the area. Start visiting other dealerships with the same car, tell them that you have a deposit at another dealership, but will buy from them if they can beat the price. Salespeople will be thrilled, they won’t have to do any work besides trying to get a lower price. If they can’t beat the first dealership’s offer, move on to another dealer. Dealership #2 may offer 1-2% over invoice, at this point you can settle for dealership #2’s offer, or call the original dealership and explain that they can beat the price of the 2nd dealership or get nothing at all. Because they have invested time already and know you’re ready to buy, 9/10 times they’ll beat the 2nd dealership. At this point, you’re at or below invoice. (The dealer will make their profit in holdback or addons as discussed later.)
Don’t disclose that you will be financing a vehicle until you have negotiated a price. Always negotiate price, never negotiate monthly payments. Interest rates, loan lengths and payment terms can be easily manipulated.
In some cases, dealerships utilize “bumps.” Bumps are dealerships rounding up monthly payments early in the sales process. For example, on that 2014 Honda Civic mentioned earlier, with a 5 year note on a $20,000 sale price and interest free financing, the monthly payment works out to $333 per month. The salesman may tell you that with those values, your monthly payment is going to be $350, nearly $17/month higher than it actually is. When you go to the finance office to be sold warranties and accessories, you may be offered a $1,500 warranty that will only increase your monthly payment by $1.50/month, to $351.50/month, but in reality that warranty increased your payment by over $18/month! If you opt out of all of the finance office’s offers, you’ll be given your true monthly payment, in this case, $333 per month.
Finally, you’ll get a barrage of offers of things to protect your new “investment.” Bug shields, undercoating, bed-liners, remote starters, window tint, etc. The margins on all of these products are fantastic, from 50-100% in most cases. If it is something you’re genuinely interested in, negotiate the price! If that bug shield is listed at $200, offer $100 and go from there. The office manager knows the markup on these products, and is willing to come down in most cases to make the sale. Remember though, in most cases these add-ons will be added to the loan amount, meaning you’ll be paying interest on a product you could easily have bought aftermarket without much hassle.
Ask questions that you already know the answer to. This is an easy way to gauge if your negotiation partner is honest or unscrupulous.
Don’t let on how much you know from the start. Know it alls and pushy negotiators can lead to standoff-ish relationships.
Don’t go by dealership trade in values. Get a Kelly Blue Book and/or NADA value before you visit any dealership. Dealers will happily sell you a car for $5,000 below invoice if they can make it up by giving you $12,000 for your trade in that can be sold for $20,000.
Car dealers aren’t your friends, no matter how friendly they are, their main objective is to sell you a car for as much as possible.