Because there are so many unknowns in buying used vehicles, many people only consider new vehicles even though, dollar for dollar, you can get more vehicle for your money if you buy used. For $300/month you can get a new economy car with only a few options, or, for the same payment, you can afford a wide variety of used vehicles much more luxurious, stylish and sporty.
However, not everyone comes out ahead when buying used vehicles. Mechanical problems are a possibility, as well as being convinced to pay thousands of dollars too much. You do not have to be a mechanic to get a good deal on a car, but you do have to understand the nuts and bolts of a car deal to keep from getting ripped off.
And don’t worry if you have no idea what you are looking at when the salesperson opens the hood; many salespeople are just as clueless. However, a good salesperson can get you to not only agree to, but ask for, terms to make the dealer a $5,000 profit on a used vehicle.
By understanding there are only three types of customers, salespeople can lock you into a pricing scheme taking away your negotiating power. The three types of car buyers are payment buyers, trade allowance buyers and difference buyers. Only difference buyers have the mindset to negotiate a good deal on a vehicle.
Salespeople use the same tactics whether they sell a new or used vehicle, but since law does not require a window sticker on used vehicles, the dealer can hide or adjust the price at will.
Salespeople love payment buyers. Payment buyers are customers whose only financial requirement is that the monthly payment fits into their budget. They are typically impulse shoppers and buy the first car catching their eye. Because they agree to buy a vehicle based on the monthly payment, the price of the car itself gets ignored, which means they pay what the dealer asks for the car, commonly referred to as sticker price.
Here is an example of how payment buyers are taken advantage of:
You tell the salesperson you are looking for a comfortable midsized car with some power options and have a monthly budget of $300-$350 a month for a car payment with no trade or money down. After you see a few possibilities, you fall in love with a 2004 Impala LS with 45,000 miles, which you agree to buy if it fits into your payment range despite not knowing the price of the car.
Based on prices and interest rates when this article was written, you could take the Impala home for $335.94 per month.
However, as shown in Figure 1, if you get the dealer to reduce the price by $2,000, your payment drops to $275.30 per month and the total cost is almost $3,000 less over the life of the loan.
|Item||Sticker Price||Negotiated Price|
|Term||48 months||48 months|
Fitting a vehicle into your monthly budget is crucial, but if you buy based only on payment alone, you will walk away with less car or more payment than what you could have otherwise gotten.
Trade Allowance Buyers
The trade allowance is the amount the dealer is willing to give a customer for their trade, and consumers who focus solely on this number can be easily deceived. Trade allowance buyers are usually convinced their trade is worth much more than market value. Many times the desired trade allowance is the amount owed against the trade, or the figure an internet price guide suggested.
A salesperson can make your trade allowance much more appealing if they simply “bump” the price of every vehicle you are interested in.
If, in the scenario with the Impala, you were trading in a Durango SLT SUV, the salesperson could quote you a bumped price of $15,500 on the Impala, instead of the actual price of $13,500.
The dealer might appraise your Durango at $7,500, (which no one wants to hear), so with the extra $2,000 markup to be added to the trade allowance it would show as $9,500. Figure 2 shows that by inflating the sale price, the salesperson can hide the actual value of your trade, and make the trade allowance seem much more acceptable.
|Item||Actual Value||Bumped Price|
|Price of Impala||$13,500||$15,500|
|Minus Trade Allowance||$7,500||$9,500|
|Equals Final Price (difference)||$6,000||$6,000|
When salespeople bump prices, especially if the customer has received honest quotes, a trade allowance buyer will believe they are getting a great deal, even though are paying sticker price.
A difference buyer is the only type of customer who has a chance. As you can see in the above example, the difference is the price of the car, minus your trade. When you focus on difference price alone, you work with what some dealers call “real money.” Negotiating in terms of real money is the only way to be sure you are getting a good deal.
To determine a reasonable difference price, you must use price guides like Kelley Blue Book (KBB), NADA and Edmunds, which can all be found online. The only way to get a reliable difference figure is by subtracting the trade-in value of your current vehicle from the suggested retail of the vehicle you want to buy. The variations in retail price, trade value and difference shown in Figure 3 illustrates the importance of repeating this method with more than one price guide.
|Minus Durango Trade Value||$6,500||$8,350||$7,150|
|Equals the Difference||$7,765||$4,900||$5,290|
In this case, you would want to discard KBB’s numbers, since they obviously benefit the dealer more than the other two sources.
However, these guides are not always completely accurate or up to date. This is because they each use difference criteria and are based on averages. (Also, the price of used vehicles can fluctuate rapidly because of gas prices, recalls, body style changes and other factors.) For these reasons, these guides are only tools to help discover a fair difference price.
Aggressive and purposeful negotiations are the only way to find the lowest possible price, but unless you are negotiating with real money, you will probably spend more than necessary.
However, even if you work out a good difference price, the dealer still has one more chance to take your money.
The Finance Department
The finance department (or sometimes called F&I for finance and insurance) is the most profitable part of many dealerships. In addition to selling warranties or add-ons, the finance department can also make money by preparing your loan. You may have noticed in Figure 1 the negotiated payment used a 7% interest rate instead of 9%.
This is because lenders allow finance departments to increase your interest rate, which can cost you hundreds or thousands of dollars over the life of your loan.
You can prevent this by getting a separate quote from one or more lenders (banks or credit unions) before you enter the finance department. Allowing the dealer’s finance department to prepare your loan can be convenient, but they should match or beat the quotes you have already received.
Another benefit to getting a separate rate quote is you can find your monthly payment for various amounts borrowed over different payment terms. The lender can do this, or you can use online payment calculators, like the one at cars.com. Once you know your interest rate and desired payment range, you can do some market research and find out what kind of vehicles fit in your budget.
Like your interest rate, the price of all the products sold by the finance department can be negotiated.
The Importance of Research
Instead of relying on salespeople to inform you of the market value, reliability, safety, insurance rates or fuel economy of a vehicle, you should do your own research and get this information from sources that do not have thousands of dollars hanging in the balance. Payment and trade allowance buyers are taken advantage of because they do little, if any, research and rely on the opinions of salespeople to make their decision.
By knowing the difference number is the only real number in a car deal, you have the knowledge to potentially save thousands of dollars on your next vehicle. If you read up on negotiating techniques, you could save yourself a few thousand more; and, if you go all out, you could save thousands of dollars on repairs, gas and insurance premiums over the next few years.
When it comes to buying vehicles, knowledge is power; the more knowledgeable you are, the more prepared you will be to walk away with a great vehicle at a great price.
Patterson, a freelance writer and former car salesman, can be reached at firstname.lastname@example.org for questions and/or inquiries.