I read a really good tract that my credit union gave me years ago written by a former car salesman about negotiation tactics with car dealers. Wish I could find it again, but I remember a few of the main points.
1) Never negotiate based on the monthly payment amount.
Car salesmen love to get you into thinking about the monthly loan payment and often start out by asking what you can afford for a payment. They know that they can essentially charge you whatever they want for the car and make the payments hit your budget by tweaking the loan terms (length, down payment, etc.)
2) (New cars only) Don't negotiate on the price directly.
It is extremely hard to compare prices between dealerships because it is very hard to find exactly the same combination of options. Instead negotiate the markup amount over dealer invoice.
- For common cars that they have a lot
of competition on or
too many of them on the lot, you
might be able to get away with as
little as $100 over invoice.
- In most situations you will pay between $300-$1000 markup over invoice.
- For high-demand or special order cars you
might have to pay several thousand
over invoice.
- Ask to see the actual dealer
invoice for the car before closing
the deal. Sometimes they will claim
they don't have it or can't show it
to you. This is a lie. Walk away if
they insist that it isn't available
to show you. Something crooked is
afoot.
- Don't listen to sob stories about how
much it costs to market and sell the
car. The car dealership will 90% of
the time make more money on the deal
than the difference between the
dealer invoice and the purchase
price. The manufacturers have
"holdbacks" which are extra bonuses
for selling the cars, also they make
money on the financing and other
aspects of the deal.
- This tactic requires you have a reasonably good idea of the invoice price walking into the deal so you aren't negotiating blind. Luckily this information is available in numerous places like NADA and Edmunds.com
- This tactic also basically requires you to pretty much know what car you want when you walk into the dealership, or at least that you narrowed it down to a few. If you are still making up your mind, do not buy the car that day. You are at too much of an information disadvantage. Decide what you want; go home and research it on the Internet; then go back and buy it.
3) Negotiate one thing at a time
A favorite shell game of car dealers is to get you to negotiate the car price, trade-in price, and financing all at one time. Unless you are a rain-man mathematical genius, don't do it. Doing this makes it easy for them to make concessions on one thing and take them right back somewhere else. (Minus $500 on the new car, plus $200 through an extra half point on financing, etc).
To keep them from trying to mix the financing in the deal, just tell them you already have your financing worked out or are paying cash, even if you don't. It isn't like they are going to complain if you change your mind after agreeing on a price for the car to go with them for financing.
Update: This may backfire, with the hyper-competitive information rich environment, dealers are increasingly relying on the financing to earn their profits on the deal. Car dealers might be less willing to negotiate on the car price if they know you are a cash buyer.
Don't let them re-open the negotiations on other items when discussing the trade-in, new car price, or financing terms.
- See handling the trade-in below
4) Handling the Trade-In
- Before you even look at a new car, get a firm written quote for your trade-in.
- Alternately, you can do the same trick as the financing and claim you aren't trading in a car until you have completed negotiation on the new car price.
- It is a good idea to bring with you quotes on your trade-in from other dealers to help your negotiating power.
- Most car dealers will buy your trade-in even if you don't buy a car from them. They will argue that you will save on sales taxes by doing both transactions at the same time (reducing the purchase price by the trade-in amount). It is true that you will save money, but when you do the math the amount is trivial.
- They want your trade more than they want to sell a new car, they make a much higher profit on turning around used cars than new ones.
5) 99.9999% of the time the "I forgot to mention" extra items are a ripoff
They make huge bonuses for selling this extremely overpriced junk you don't need.
- Scotch-guard you can buy for less
than $20 a can at a auto-parts store
and spray on the seats yourself. You
are a sucker to pay for it.
- Rust proofing - Often just an overpriced wax job. If you read carefully the factory warranty usually protects you against rust for a number of years anyway.
- Pin striping - Usually just a decal applied to the car, also very cheap to have done elsewhere.
- Extended warranty - Usually a rip-off, but not as frequently as the other items mentioned. If it is 3rd party , not from the manufacturer, it is always a rip off.
- Financing "Insurance" - For a few dollars more a month, they will give you insurance to make your car payment in case you become disabled or unable to make your payment for some other prescribed reason. Think about it, YOU are paying for insurance to prevent the LOAN COMPANY from losing money in the event you get into trouble. Not worth the money.
6) Scrutinize everything on the sticker price
I've seen car dealers have the balls to add a line item for "Marketing Costs" at around $500, then claim with a straight face that unlike OTHER dealers they are just being upfront about their expenses instead of hiding them in the price of the car. Pure bunk. If you negotiate based on an offset from the invoice instead of sticker price it helps you avoid all this nonsense since the manufacturer most assuredly did not include "Marketing costs" on the dealer invoice.
7) Call Around before closing the deal
Car dealers can be a little cranky about this, but they often have an "Internet sales person" assigned to handle this type of deal. Once you know what you want, but before you buy, get the model number and all the codes for the options then call 2-3 dealers and try to get a quote over the phone or e-mail on that exact car. Again, get the quote in terms of markup from dealer invoice price, not sticker price. Going through the Internet sales guy doesn't at all mean you have to buy on the Internet, I still suggest going down to the dealership with the best price and test driving the car in person. The Internet guy is just a sales guy like all the rest of them and will be happy to meet with you and talk through the deal in-person.
Update: After recently going through this process again and talking to a bunch of dealers, I have a few things to add:
7a) The price posted on the Internet is often the dealer's bottom line number. Because of sites like AutoTrader and other car marketplaces that let you shop the car across dealerships, they have a lot of incentive to put their rock-bottom prices online where they know people aggressively comparison shop.
7b) Get the price of the car using the stock number from multiple sources (Autotrader, dealer web site, eBay Motors, etc.) and find the lowest price advertised. Then either print or take a screenshot of that price. Dealers sometimes change their prices (up or down) between the time you see it online and when you get to the dealership. I just bought a car where the price went up $1,000 overnight. The sales guy brought up the website and tried to convince me that I was confused. I just pulled up the screenshot on my iPhone and he stopped arguing. I'm not certain, but I got the feeling that there is some kind of bait-switch law that says if you can prove they posted a price they have to honor it. In at least two dealerships they got very contrite and backed away slowly from their bargaining position when I offered proof that they had posted the car at a lower price.
8) The sales guy has ultimate authority on the deal and doesn't need approval
Inevitably they will leave the room to "run the deal by my boss/financing guy/mom" This is just a game and negotiating trick to serve two purposes:
- To keep you in the dealership longer not shopping at competitors.
- So they can good-cop/bad-cop you in the negotiations on price. That is, insult your offer without making you upset at the guy in front of you.
- To make it harder for you to walk out of the negotiation and compromise more readily.
Let me clarify that last point. They are using a psychological sales trick to make you feel like an ass for wasting the guy's time if you walk out on the deal after sitting in his office all afternoon, especially since he gave you free coffee and sodas. Also, if you have personally invested a lot of time in the deal so far, it makes you feel like you wasted your own time if you don't cross the goal line. As soon as one side of a negotiation forfeits the option to walk away from the deal, the power shifts significantly to the other side.
Bottom line: Don't feel guilty about walking out if you can't get the deal you want. Remember, the sales guy is the one that dragged this thing out by playing hide-and-seek with you all day. He wasted your time, not the reverse.
