Tuesday, February 14, 2012

How to buy a car

How to buy a car

Many people view buying a car with a certain amount of dread. They assume that every car dealer is "out to get them", and they approach the negotiation process as if they were going to war. But in reality, all you have to do is educate yourself, then getting a good deal becomes quite simple.

Lesson 1: How a car dealer works

An ugly plaid suite, a bad haircut, and a pushy sales pitch. That's the image that many people have of car dealers. But that's usually just a cliche. If you do happen upon a car lot like that, you should probably...run.

Most car dealers have a lot of money invested in their business, and it takes a lot of money to keep their business running. On average, used cars have a 20-30% markup, and new cars have just a 9-15% profit margin. Things like overhead, commissions, and reconditioning costs have to be subtracted from their profit margin. And don't forget, your car salesman doesn't get paid unless he sells a car. So there's a lot riding on your purchase decision.

Lesson 2: Know what you want

If you're going to get a good deal, it helps to know exactly what you want. So prepare to spend some quality time surfing the internet. Then, get out there and test drive a few competing cars, that way you can be sure you're buying the right car. Once you've settled on the right type of vehicle, educate yourself on the average price of that car.

Dealer Incentives:

These are sales inducing discounts offered by the manufacturer to either the customer, or the dealer. Spending a little time researching the current dealer incentives can save you hundreds, to thousands of dollars.


 Like dealer incentives, a rebate is a cash-back type offer, designed to spur sales. Often, the dealer will reduce the price by the amount of the rebate, so pay close attention when you're reading the sticker price.


The dealer holdback is sort of like a rebate (typically 2-3%) that's paid to the dealer by the manufacturer, once they sell the car. This is a secret profit holdout, designed to allow the dealer more room to move on the price, without losing their profit margin.

Used cars: 

Typically, used cars are bought for a wholesale price at a dealer auction. Then, the vehicles are cleaned up, inspected, and any necessary repairs are made. The average markup varies, but you can get a good idea of similar vehicles are selling for by simply surfing the internet.

Lesson 3: Get financing before you start shopping

If you haven't done it in a while, pull your credit file and see what's going on. Then, talk to your bank / credit union / finance company to see what kind of loan you can qualify for. This will usually save you thousands in interest charges. Plus it gives you the upper hand with the dealer, because you're not negotiating finance charges, or down payments. Just the price.

Lesson 4: Negotiate the price, not the monthly payment

Most car salesmen can easily take a car's price, and break it down into small, manageable numbers: "you can add leather & navigation for only $40 more per month". But that seemingly small number can add up to an extra $2,400 to your loan, plus interest.

When the salesman asks you "how much do you want your monthly payment to be?", focus on the total price, not the payment. If you did your research, then you already know how much the car you want will cost you per month. Plus if you've already arranged financing, you don't need to worry about the payment (if you want to comparison-shop the dealer's financing options, do it at the end, after you've settled on a price for the car).

Lesson 5: Stick to your budget

During your research, you should have determined what you can spend, and how much you're willing to pay for that new ride. But when you're at the car lot, numbers will start flying at you, making the line between necessity & desire somewhat blurred. If this happens, don't be afraid to just stop & regroup.

Slow the process down if you need to, and examine the numbers. If they don't match what you expect to pay, make a counter offer and stick to your guns. A 'no' is never the end of the world, it's an opportunity to find a better 'yes' somewhere else.

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