The OP asked about tips for buying a car for low cost. I sold new cars for a year and can give some pointers. First, as a rule, dealerships don’t make much money on new cars as they are too easy to cross shop from multiple dealers. Of course dealerships will try to make money on a new car, and occasionally do, but generally they don’t expect to make much. For new car sales, dealers generally make money in only a few places:
- Financing (a spread on the loan interest between the bank rate and what you pay), service contracts, GAP insurance, etc.
- Obtaining the trade below value
- Dealer and Handling (D&H) fee. This is often non-negotiable
- Manufacturer incentives for unit count
- Manufacturer incentives for high satisfaction scores
The last one is the most important to the salesperson: survey satisfaction scores. Much of the leverage you have in a negotiation for a new car is increasing the unit count of the dealership and giving a high satisfaction score on the manufacturer survey. In general, dealerships do not retail their own trades. There are exceptions, but the dealer already knows the trade wholesale value and expects to receive that. The wholesale value is known as ACV (Actual Cash Value). In general, any customer who is not face-to-face with a salesperson is just kicking tires. The best way to negotiate is to go to the dealership and talk in person. For the best effect, schedule your visit to the dealership so that the salesperson is available. Schedule on a slow day, such as Thursday. Thursdays are notoriously slow for car sales and are known as “Suicide Thursday” because so few sales happen.
In general, sales happen first by “landing the customer on a car,” which means finding the car the customer can get excited about owning. If the customer is not excited about owning the car, nothing else matters. Once an appropriate car is found, the customer is enticed to fall in love with the car, called “licking the paint.” The test drive is one tool to get the customer excited. Once the customer is licking the paint, then it is time to negotiate.
By this time, the salesperson should know what car the customer wants, what the customer is willing to pay, and what the customer is able to pay. The salesperson should also be aware of the primary value triggers the customer has, such as total cost vs. utility, amount saved below blue book or invoice, or monthly payment amount vs. utility. By the way, as a buyer, you should be keenly aware of your own value triggers before you step foot in a showroom floor. No value trigger is inherently more valid than any other, but we all tend to favor one of them.
Armed with all of that knowledge and a customer who is excited about a car, the negotiation begins. The salesperson will ask for a commitment on what you will do to buy the car right now. Before you go to the dealer, you should have thought this through and have this number firmly planted in your mind. If you will not commit to a purchase, then you are not a serious buyer. The salesperson knows that. Do not be afraid to make that commitment. After all, you already made that decision before you drove to the dealership. The salesperson will take your commitment to the person working “the desk” which is often an intimidating area surrounded by glass. The desk manager will respond with the first offer, called “first pencil.” The first pencil will not
be what you committed to; the dealership is trying to make some money. You and the salesperson will go back and forth, you reiterating your offer, the salesperson explaining why the dealership offer is appropriate, until the salesperson asks for a compromise between your original offer and the offer from the desk. The salesperson will return to the desk and explain to the desk manager what is happening in the negotiation then return with the second pencil, which will be a number between what you compromised on and the first pencil. You will go back and forth again (unless you agree) until the salesperson asks for another compromise. When the third (and final) pencil comes back, the floor manager (or sometimes even the desk manager) will be there to try to close the deal or to thank you for coming in. In general, the third pencil has all of the profit removed, and sometimes is at a loss for the dealership.
Since everyone seems to think that their trade is worth more than the dealer is offering (and usually the dealership does not want your trade anyway), at any time feel free to suggest that you “kick the trade” which means to exclude it from the negotiation. Many dealerships are relieved when a customer offers to kick the trade. At the same time, if you have done your homework and know the true ACV of your trade, feel free to ask the dealer to “step up on the trade” which means to increase the amount offered.
OK, with all of that in mind, here are some tips to get the best price on a new car.
- Do your homework to learn what you want and what you are willing to pay. Be realistic; there are no free lunches here.
- Understand your own value triggers.
- Arrange your own financing, but do not mention that until you get “in the box” which is where you are talking to the finance person.
- Go to the dealership. Negotiation on the phone or via email is seen as a waste of time for the dealer.
- Schedule your visit on a slow day.
- Very early in the discussion, tell the salesperson that you will rate them as perfect across the board on the survey if you buy a car.
- As a person of integrity, actually follow through and rate the salesperson as perfect when you receive the survey.
- Be honest and tell the salesperson what you want and what you are willing to pay. Do not play games here. Be honest.
- Close on the first or second pencil if you can live with the numbers.
- Feel free to walk away at any time. State that you think the numbers are too far apart. Sincerely thank the salesperson for his or her time, stand up, then walk out..
Good luck on your next vehicle purchase,