Purchasing a New Car? Read This First!

Buying a car for most people is an arduous process; it does not need to be. Last month I purchased a new car for myself and assisted a friend with his purchase. In both cases we paid significantly under the MSRP pricing (in both cases between 6% and 10% less). I recently shared these strategies with the students in my negotiation class and they suggested that I post this to my network as they found my tips helpful.

Note - this guide is intended to help in the purchase of a new car from a dealership and does not cover leasing OR purchasing from a private party (different guides will be needed to cover those strategies).

Step 1: Understand HOW dealerships make money. Dealerships make money several ways and it is important you understand this to know if you are getting a good/bad deal:

• METHOD 1: MSRP price minus INVOICE price: This is the most obvious one people know about. MSRP is what the factory suggests the dealers sell the cars at (Manufacturers Suggested Retail Price). This is what the official car manufacturer websites advertises when you configure your ‘ideal’ car. The INVOICE price is what the dealer pays the manufacturer. When you subtract the two, that is the dealer profit. In many cases, you can purchase a car at or below invoice price due to all the below additional methods a dealer can make money, which are listed below.
• METHOD 2: HOLDBACKS: After the dealer sells you a car, the manufacturer will send them a check for the sale of the vehicle. This is above and beyond what the dealer makes on top of the MSRP – INVOICE price. It is very difficult to determine what that amount is because it is not typically published. Since many people these days know that cars can be purchased at or under invoice, this is one way for the factory to ‘make things right’ for the dealer if the customer plays hard ball and gets the car for close to the invoice price.
• METHOD 3: SALES INCENTIVES: The manufacturers love incentivizing dealers to hit sales goals, i.e. if the dealer sells X vehicles in Y amount of time, then, at the end of the quarter or year, the manufacturer will write them another bonus check. This is also very difficult to determine since this information is not public and varies dramatically based on the dealership’s sales. Many dealerships will at times even sell vehicles at a loss in order to hit these goals.
• METHOD 4: LOANS: Virtually all car manufactures now have their own financing companies. As such, when you get a loan for the vehicle, the manufacturers will pay the dealership a commission or a ‘finder’s fee’ for having the client finance the vehicle through them. When car values are in the tens of thousands of dollars, these commissions can be quite lucrative for the dealer.
• METHOD 5: TRADE INS: Dealers really rake in the profits here. Most of the time, dealers will offer you a very low price for your trade in knowing they can resell it for much, much more. Before you offer your car as a trade in, use Kelly Blue Book to determine a fair price. As an additional step, I would also take your existing car to CARMAX where they will give you FREE quote to buy it from you on the spot (which you can always decline). You should have these two pieces of information BEFORE you consider trading in your vehicle to the dealer.
• METHOD 6: POST-NEGOTIATION EXTENDED WARRANTIES/SERVICE: After you have negotiated your vehicle and have settled your purchase terms, they will typically put you in a room with their finance manager where he/she will try to upsell you on additional warranty and protection plans. These can include wheel/tire protection, theft and even extended warranties.
• METHOD 7: SERVICE: This is in many cases the dealership’s #1 money maker. If your car is under warranty and you bring it in for service, they charge the manufacturer a pre-determined fee for all service performed on the vehicle. If your car is OUT of service, then they will charge YOU at much higher margins than what they charge the manufacturer. Thus, while they might not make money from you at the sale of a car initially, they most definitely will AFTER if you bring it in for service to them.

Step 2: Figure Out What You Want. First you need to determine exactly what car you want. After test driving a few cars at a few different dealerships, I zeroed in on the specific car that I knew I wanted. You do not need to test drive the car at the dealer where you plan on purchasing it. Schedule the test drive with the dealer before you visit their showroom. Do not just show up. Inform the sales agent that you have an appointment immediately after the test drive and cannot stay. That will remove all pressure from getting them to try to close the deal right then and there. This also takes away the opportunity for you to ‘impulse buy’ the car after you fall in love with.

Step 3: Do your homework. BEFORE you negotiate with a dealer, you MUST do research. The internet is an amazing resource. What you need to find out is the MSRP pricing and the INVOICE price. Figure out the difference between the two to determine the margin. It is important to note that many luxury cars have between 6% to 10% in margin whereas more economical cars have much less margin since they do more volume (margins can range from 2% to 5%). Once you determine the average invoice price from multiple websites, target the markup you are willing to pay.

Don’t feel bad demanding the invoice price for a car! Also keep in mind that dealers (and manufacturers) make more margin on all the extra options and accessories that you add to the car. In one example, the base car might have an average margin of 6% to the dealer if sold at MSRP. However, when you add all the options to it (sunroof, leather, upgraded audio system), they could make over 10%. Keep this in the back of your mind when you are negotiating. The more loaded the vehicle, the more margin they are making.

When possible, consider purchasing the prior year's model car. Once the current year model is released, both the manufacturer and the dealerships become HIGHLY motivated to get rid of their older inventory. I have seen brand new prior-year model cars marked down over 20% in some cases. Note that cars typically have major generational changes every 5 - 7 years and minor cosmetic changes every couple of years. Therefore, when buying a vehicle, try not to purchase one that is due for a major generational change as the value of the older style will drop precipitously.

Step 4: Check Loyalty Programs: Determine if the manufacturer offers any rebates. Many car manufacturers have loyalty discounts if you already have another vehicle of theirs in your household. Other loyalty discounts include savings for recent college graduates or even veterans. These are rebates that the car manufacturer pays for and for which the dealer is sent a check. If you do qualify for a manufacturer rebate, be clear that this is NOT coming out of the dealership’s pocket. Do not let the salesperson complain that you are already getting a good deal because of the rebate. That has nothing to do with the dealership so do not even let them try.

Step 5: Know Your Credit Score. If you are planning on financing the car, then it is very important that you know what your credit score is:

• Good: Between 670 to 739
• Very Good: Between 740 to 799
• Excellent: Above 800

If you have anything less than Very Good, then I highly recommend you get a co-signer with Very Good or Excellent credit to take advantage of good interest rates.

• Good: Between 2% to 3%
• Very Good: Between 1.5% to 1.99%
• Excellent: 1.4% or Below.

I use both Experian and Credit Karma and watch my credit on a regular basis. If there are discrepancies on your credit report or it could use some improvement, I highly recommend you find a credit repair agency that can help you bring your scores up. Sometimes it is as easy as having them write a letter to your creditors to remove negative items that can increase your score. Also, Experian has a “boost” feature that can immediately boost your score by a few points by looking at your bank account and finding reoccurring utility payments and giving you credit for those. Check that out!

Step 6: Get Pre-Approved. Before you even consider negotiating with a dealership, go to your bank and ask them to get you a pre-approved loan for the car. Most banks will offer you a fair interest rate. What this will do is give you a minimum rate to go shopping against. Once you tell the dealer that the rate the bank gave you was X% then they know they need to beat that to win your business (SPOILER: Most of them will).

Step 7: Start Shopping. Use the Internet to determine all the dealerships in your area that you are willing to visit physically. Some of their websites will show you which cars they have in stock. Once you find a car configuration you like, call up that dealer and get in touch with a salesperson (do not visit). Work with them to get them to send you a written quote for the vehicle via email/text. Tell them that you want to pay invoice price and make sure to mention any loyalty discounts for which you qualify. You not only need to negotiate the purchase price of the vehicle, but you ALSO need to negotiate the interest rate on your financing. Most dealerships do not like doing this and will ask that you come in person. Give them whatever excuse you need to do this over the phone. After some pushing, most will send you a quote. Once you have something written, use this to share with other dealers and shop around to get the best deal possible.

If you are negotiating in-person (which I highly recommend against). The salesperson will implement a few ‘dirty tactics’ to get you to agree to a deal. It is important you know what these tactics are. If you find that they are being used on you, tell the salesperson what he/she is doing, and you don’t appreciate it. In most cases, that will cause them to stop.

• Let me speak to my manager – This is by far the most common dirty tactic. It accomplishes a few things. First, it takes the negotiation out of their hands and thus they are powerless to agree to a deal with you. Second it allows them to waste your time (See below). To prevent this, tell them you want to deal directly with the sales manager and not wait for the back and forth.
• Time Wasted = $$$ Earned – The dealer purposefully wants to keep you at the dealership for the longest time. This tactic is to make you feel that you have invested your time and need to get a deal out of your investment. In order to prevent this from happening, explain to the salesperson that you have a meeting/engagement at X time and tell them if you aren’t able to close a deal by that time, you absolutely have to leave.
• End of Month – Dealerships love to support the fallacy that they must close deals by the end of the month and you need to agree to the deal then and there or you won’t get the same deal later. Most of the time this is not true. They are usually tied to the manufacture on quarterly goals not monthly.
• To get an interest rate quote, they are going to need to run your credit. Note that whenever someone runs your credit, it will negatively impact your credit score. The good news is that most credit agencies will count multiple car loan inquiries as one so long as they are all done within about 2 weeks. So, when shopping for a rate, I highly recommend you do so within this period. Also, only allow dealerships with which you are very close to completing a deal to run your credit. I only recommend you do this a maximum of 3 times including the 1st time with the bank.

Step 8: Understand what “Out the Door Pricing” is. Many dealerships will try to entice you to come into the dealership to close a deal with their “final price”. While this price might be enticing, keep in mind that that price is likely bogus. They love adding additional charges after their “final price”. These include dealership fees and vehicle registration or transfer fees. Understanding this, you need to negotiate the OUT THE DOOR pricing which includes taxes, tags, registration. Note: if you are transferring your title, you should pay less than if you are registering a new title. So, when you are negotiating, you must use the term “Out the Door Pricing” to make it clear what your bottom-line pricing is.

NOTE: On most vehicles you will see a DESTINATION CHARGE. This is a charge that the manufacturer charges the dealer to deliver the car. In most cases, this is not negotiable. However, there are times when the dealership charges their own DEALERSHIP FEE which is a cash grab so make sure to have them either remove it completely OR discount it off your purchase price.

Step 9: Not So Quick! The negotiation does not end after you agree to an “Out the Door” price and finance package. Don’t forget Method #6 on how they make money post-sale. Keep in mind most of these service and warranty packages are garbage and mean huge margins for the dealer. My suggestion is to kindly decline all of these unless they really, really make sense for you.

Let me know what you think of the suggestions above. Anything I missed? Would love to hear your feedback. Email me your feedback at nes@nestorv.com. 

Nestor Villalobos