Step 3: Research And Preparation
*The Most Important Piece Of The Puzzle: Knowing True Market Value
Every new car buyer needs one essential piece of information in order to negotiate effectively: True Market Value. True Market Value is the price at which the cars are currently being sold in the marketplace. This is not the invoice price (what the dealer paid for the car) or the Manufacturer's Suggested Retail Price (what the dealer would like you to pay for the car).
True Market Value is the price at which you should buy the car (plus the cost of the options-to be discussed later).
To give you a little background, new cars will always have a price tag in the window that is clearly visible, hence the name "window sticker." The total price listed is the MSRP. As with any other high-priced piece of equipment, the MSRP is what the manufacturer suggests the retailer charge the customer. Salespeople will eagerly quote the MSRP to you, because if they can get you to pay MSRP for a new vehicle, they're taking their family on a vacation with all the money they're suckering out of you.
Fortunately, we live in a free market economy that is governed by supply and demand, and, of course, taxes. And with capitalism, there usually comes competition. Supply, demand and competition are the factors that allow new car buyers to pay less than MSRP for a vehicle (in most cases). But simply paying less than MSRP is not going to get you into the Negotiator's Hall of Fame. Buyers have to be aware of how the dealer-manufacturer relationship works to avoid paying too much money for a new car. So, the thing to know is the True Market Value price. Once you are armed with this, you can negotiate a fair deal.
Figuring out your target price of a new car:
1. Start with the True Market Value price on the Edmunds.com website.
2. Figure out what how much of a discount this is from the listed MSRP. Is it a three percent reduction? A five percent or six percent reduction?
3. Total the options on the car that you considering.
4. Reduce the options by the same percentage as the vehicle. In other words, if the vehicle is reduced by five percent, reduce the total options by the same figure.
5. Reduce the True Market Value price by any current incentives and/or rebates. (Incentives are reduced now-but rebates come after tax is added.)
6. If you agree to pay an advertising fee (remember, this fee is negotiable), it should equal no more than one percent of the car's value, or $200, whichever is less. The advertising fee is what the dealer pays to various local and regional dealers associations for brand advertisements and sometimes passes on to the consumer. Some manufacturers directly charge dealers an advertising fee and some do not. Many dealers successfully pass this fee on to the uninformed consumer, but you should know that the dealers sometimes negotiate the cost of an advertising fee and can write this business expense off as a tax deduction, anyway.
7. You now have your target price for the vehicle you want to buy. This is the price you can offer to a dealer. Not only does this represent a fair profit for the dealer but also it is a good deal for you.
8. Add sales tax and applicable fees. (Sales tax is figured on the taxable total, which does not include licensing and registration fees.)
At this point, for each of the three cars you're interested in, you should have calculated target purchase prices. This is what you should shoot for during negotiations. That means starting off your bidding lower than that price and working with the salesperson to reach that price as a compromise.
Taking Test Drives
With all of the information you now have, you may be able to decide which of the top three cars you're going to pursue based on the comparisons of price, equipment and vehicle specifications. However, we recommend that you test drive the cars before making a decision, so call ahead to a few dealerships and set up appointments for test drives. Drive the cars back-to-back if possible to draw more clear conclusions about your likes and dislikes for each model.
Before or after the test drive is the time to ask questions about certain features the car may have and how to use them. The salesperson may have a pitch about the car that could include information you weren't aware of. If you're looking at a car with folding seats, you might want to try them out to see how easy or difficult they are to maneuver. Feel free to touch the controls; notice if they are comfortable in your hand. Are they too big or small? Do they feel ergonomically correct? Also look for build quality issues, such as exposed screws, misaligned body or interior panels, etc.
Insurance
Before you buy a car or truck, find out how much the new insurance premiums will cost. We recommend that you get quotes on the vehicles you are interested in from your current agent, or call a direct marketing insurance company such as GEICO, 1-800-555-2758, to find out how much your insurance premiums will change with the new vehicle. If you do not currently have car insurance, call a reputable company with a large national network such as GEICO and shop coverage with them over the phone.
If you plan to lease, you need GAP insurance. This insurance covers the difference between the value of the car and the total of lease payments due in the event that the car is wrecked during the course of the lease. Most leases include GAP insurance in the payment, but it doesn't hurt to pre-arrange this policy if your agent handles such coverage.
Financing & Loans
At this point, you should know which car you want to lease or buy. But before you run out to a dealership to do the paperwork, there are certain financial issues that must first be resolved. You should get at least two quotes for financing; one from an institution such as your bank or credit union and one from another source like Peoplefirst.com. These quotes can usually be given over the telephone.
Request your quote based on the vehicle's MSRP, so that the quoted payment represents a maximum number. Later on, price negotiation with the dealer on the price you actually pay for the car can only lower your monthly outlay. If a payment based on MSRP fits your budget, you can rest assured the vehicle is affordable regardless of the final price you pay.
Using the best quote you were given, look at your estimated monthly payments and insurance costs. If the monthly payment is less than 20 percent of your monthly income, congratulations--you have used good judgment. You are ready to move on. If the monthly payment is too high, you should reevaluate what types of vehicles will fit into your budget, or determine how much you will need to haggle with the dealer to make the car fit your budget.
Warranties
Some consumers will not buy a new car without an extended warranty. Prices for extended warranties can vary according to the predicted reliability of the vehicle, how extensively vehicle parts are covered, how the coverage applies during a repair visit, and whether or not a deductible is charged, among other variances.
You can haggle plenty off the price of a warranty offered by the dealer. Extended warranties are huge profit makers for dealerships. Better yet, shop for a warranty on your own. Some companies, like 1Source Auto Warranty, offer warranty coverage directly to consumers, bypassing the middleman who wants to make money from the sale.
However, beware coverage fine print! One good indicator of a strong extended warranty is protection in the event the vehicle overheats. If the warranty you're considering will pay for damage associated with overheating, you're in pretty good hands.
To learn more, read Edmunds.com's SM Warranty and Roadside Assistance Coverage information.
Customer Incentives and Dealer Money
Incentives and rebates are programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Incentive or rebate programs are offered for a limited time, after which the marketing department gets together to decide what kind of an effect the program had on sales volume for that month. Usually, if an incentive or rebate is offered for a limited time, there's no need to rush right out and buy. Odds are good that the rebate will return, or a better program is on the way.
Rebates can take the form of either direct cash back or low-rate financing offers. If both financing and cash are offered for the same model, the buyer must choose which he or she would prefer. To decide, simply use a loan calculator to figure your loan on the car (with the interest rate your bank would charge), minus the rebate. Then calculate the full price of the car at the subsidized interest rate, which is always a better rate than what you'll get at your bank. If the loan will end up costing less with the low-rate financing than it would with the incentive money, then go with the low rate. If, on the other hand, you just want to increase your down payment, then go with the rebate money.
For example, let's say you want to buy a $20,000 Ford Taurus that has a $2000 rebate or 4.5 percent dealer financing. Your bank is offering you eight percent financing on the loan. If you take the rebate, you'll end up paying $18,000 at eight percent interest, which comes out to $364.98 per month for a five-year loan. At the end of the loan, you will have spent $21,898. If, however, you take the dealer financing, you'll end up paying $20,000 at 4.5 percent interest, which comes out to $372.86 per month over a five-year loan period. At the end of the loan, you will have spent $22,371. So, in this case, you will probably want to take the rebate. But it's important to do the calculations for every car to see which is the better deal.
Also, keep in mind that some low-rate financing programs require a shorter 24- or 36-month term, which can boost payments beyond the buyer's budgetary requirements, putting the vehicle out of financial reach.
Sometimes a "national" program may exclude certain regions. If a particular car is selling extremely well in your region, the rebates may not be available. To validate whether or not an incentive is being offered in your region, call several dealerships in your area. If nobody's heard of that great deal listed on the incentives and rebates page at Edmunds.comSM, the odds are it doesn't exist in your specific area.
Holdback
Holdback is a percentage of the MSRP or invoice that is pre-arranged for inventory assistance by the manufacturer. That money is targeted for the dealership's financing of the vehicle, and it is non-negotiable. However, by knowing about the holdback, you can use it as a negotiating tool. First, a little more background:
The total invoice cost of the car is due to the manufacturer, payable by the dealership, when the vehicle is ordered, not when it is sold. Since car dealerships (or any retail operation, for that matter) must have an inventory on hand, they must borrow money from the bank to pay for that inventory. The manufacturer pays for financing and maintenance for the first 90 days the vehicle is on the lot, in the form of a quarterly check called "holdback." After the first 90 days, the dealership dips into its own pocket, and into its own profit to finance the car. Fortunately, most cars don't stay on the lot for three full months.
This amount is "invisible" to the consumer because it does not appear on the dealer invoice. Therefore, the dealer is guaranteed a profit even if they sell the car to you at cost (if, that is, the car is sold within 90 days). Because of holdback, the dealer can advertise a car at $1 over invoice, and still make hundreds of dollars on the sale.
For example, let's say you're interested in a Ford with an MSRP of $20,000, including optional equipment. Dealer invoice on this hypothetical Ford is $18,000, including optional equipment. The invoice includes a dealer holdback that, in the case of all Ford vehicles, amounts to three percent of the total MSRP. The destination charge should not be included when figuring the holdback. So, on this particular Ford, the true dealer cost is actually $17,400, plus destination charges. Even if the dealer sells you the car for invoice, he would still be making $600 on the deal when his quarterly check arrived. That $600 is profit to the dealer only; the sales staff doesn't see any of it.
However, the true "profit" of holdback money depends on how long the car has actually been on the lot. If our hypothetical Ford had been sitting there for 45 days before you bought it, the dealer's holdback profit is only half of what it could have been, or only $300. And the dealership is not going to tell you how long a vehicle has been on the lot, so the odds of you actually getting any of the holdback money are zip.
So how can you use this information? Well, if the dealership doesn't have that pretty green color you're after, and they can't trade for it with another dealership in the area, they have to order it directly from the manufacturer. If that's the case, make sure that they know that you know about the holdback. If a vehicle is special-ordered, holdback money is pure profit.
Choosing a Dealership
Pricing several dealers is a good idea. Something to note is that the size of the dealership doesn't affect dealer cost. All dealers pay the same amount of money for a particular vehicle, no matter where they're located or how big they are. However, sometimes manufacturers offer volume bonuses for the number of units sold, and if such a bonus exists, the volume dealer may be able to undercut competitors on price. Some people believe that small-town dealers treat customers better because they have more riding on their reputation in the community, but you cannot be sure that is how every low-volume dealership looks at it.
When to Go to the Dealership
There's as much advice about when is the best time to visit a dealer as there are days in a year. Our advice is don't buy a car until you need one. That's usually the best time to buy. By then you have saved enough for a substantial down payment, and you've had plenty of time to do your research for the lowest interest rate, and you know all the current incentives and rebates.
Alternative Ways to Negotiate
Using the Telephone
Let your fingers do the walking. This is the simplest - and often most undervalued - way to shop for a new car. Simply call every dealership in your area that offers your choice of car, talk to the fleet or sales manager, and ask for a quote over the phone (detailing exact options and color required). Explain to them that you want the absolute lowest price they can quote you for that car and the lowest financing available. This will allow you to comparison shop right from your living room.
Using the Internet and/or Fax Machine
The power of the written word translates better by fax machine or email than it does over the telephone. Courier or overnight mail is also more effective than the telephone in getting a dealer to respond. As the Internet becomes seen as a standard rather than simply a different way to handle business, its use as an effective negotiating tool is sure to increase as well. So why not push the envelope?
You may need to call a dealership to discover its fax number or email address, but once you begin the communication in this manner, keep it up. Let them know that you handle all of your business this way because it's more efficient than trekking all over town to five or six different dealerships. But don't state in your cover letter that you're simply going to the lowest bidder. Let them know that you are prepared to buy a car right away if the price is fair and if negotiations can be handled quickly via email or fax.
It's important to keep the email or fax negotiations proceeding rapidly, and the entire process should take no more than one to three days. If the process goes much longer than that, you're obviously in no hurry to buy a car or the dealer is in no hurry to sell a car. If you fail to respond promptly, the dealer will probably end the negotiations for fear of wasting too much time. To avoid being taken lightly, you should try to set up a test drive from your home or office in the same manner, and possibly as a prelude to the negotiations.
Buying Services
More and more consumers are turning to buying services to avoid the hassle of new car negotiations. A buying service works in one of two ways. Free services like Autobytel.com charge a network of dealerships a membership fee in return for exclusive territory coverage. Services that charge the consumer a fee will shop multiple dealerships in your area for the best deal. Either type of buying service can be useful, but you will need to determine which will best suit your needs.
No-haggle Dealerships
In addition to Saturn, there are other "no-haggle dealerships" sprinkled throughout the country, where you simply pay a discounted price that is listed on the car. No-haggle prices are almost always higher than our recommended target price. However, some people value the benefits of the no-haggle buying experience and are willing to part with hundreds of dollars for a high-quality buying experience that concentrates on the consumer's needs, and not the dealership's income requirements.
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