Looking at new cars may be exciting, but the actual buying process is full of high pressure sales at the dealership.
Shopping for a car is normally a dreadful process of back and forth negotiations. It is inevitable that most of us will have to buy a new car at some point.
To get the best deal possible, don’t give up all your leverage when you walk in to that dealership. Following this guide will save you time, money and stress.
Get Pre-Approved For an Auto Loan Before Walking In
Securing financing for your car purchase is big business for the dealership. Many shoppers walk in unaware of what type of loan and interest rate they qualify for. Often times, the buyer thinks they have worse credit than they do. Or they think that only a dealership can get them a car loan. This is not always the case!
Finance departments take advantage of unprepared buyers by marking up your interest rates. If the bank offers the dealer a buy rate of 4%, they charge you 6% and make 2% on the total interest you pay. This is called the sell rate. You pay 2% higher for your auto loan by giving full control of the financing to the dealership. This spread can cost you thousands of dollars over the term of your loan. Some banks have even gotten sued for discriminating against customers and charging a higher rate to different customers with similar qualifications.
The Best Places to Get Pre-Approved
The best place to get pre-approved for an auto loan is at a local credit union. If you are already a member of a credit union, you can walk-in or call them to start the process. This usually takes a day or two at the max.
If you are not a member of a credit union yet, you can still get pre-approved. If you decide to use the loan from a credit union, they will make joining a part of your loan process. This usually means opening a savings account with $5.
Feel free to apply to different credit unions to look for the best deal. Applying multiple times for a car loan will not affect your credit score is not worse than applying once. As long as your auto loan applications are within a 14 day time-frame they will count as one inquiry. The credit bureaus know you have to shop around to get the best deal so they do not penalize you for shopping around. Take advantage of this!
Check out Lending Tree, they work with various lenders:
Research Auto Maker Finance Offers
Dealer financing isn’t always all bad. Often times car makers will run finance specials throughout the year. These deals are better than any credit union or bank can offer. The finance offers are sometimes as low as 0%. This means you pay ZERO interest over the life of the loan.
Keep in mind, accepting special financing terms often means sacrificing cash incentives. These cash incentives are often free money used to lower the price of the car.
Sometimes it makes sense to take a higher interest rate loan. The total interest on a higher rate may actually be lower than the cash offer available.
|Purchase Price||Interest Rate||Total Interest||Factory Incentive||Net Price|
|60 Months @ 4.9% |
Even though you are paying a higher interest rate under Option B, you actually save $1,762.
Now, If the dealer will allow both special financing and cash incentive, take advantage!
This is why it is important to shop around for loans ahead of time.
Similar to the home buying process, the first step is to know your credit score. There are 3 credit reporting agencies. This means that you have 3 different credit scores. Make sure you have an idea of where all 3 scores stand.
The Importance of Knowing Your Credit Score Before Car Shopping
It is important to know all three scores to ensure you’re not misled on the status of your credit. Most dealers work with various banks which all use different credit bureaus when making loans. Your credit score, among other factors are what determine your interest rate.
It is not unusual for your three scores to be completely different. Dealers will use this to their advantage if given the opportunity to make you think they are doing you a favor. It is one of their negotiation tactics often used to milk profit from deals.
How Your Credit Scores Can Be Used Against You Even If You Have Good Credit
One time while shopping for my Jeep, a finance manager tried to pull this stunt on me. We were in the negotiation phase and he mentioned that he could not go any lower on the interest rate because my credit score was 680.
He mentioned that the higher rate wasn’t much and only resulted in a $20 monthly difference. Now most people would agree that a $20 difference in monthly payment is not much. If you can afford a $430 monthly car payment, the chances are you can afford $450.
Don’t fall for this trap. Do not rationalize excuses for paying more than you should.
Getting a 3.9% interest rate instead of 1.9% is “only” a $22 difference on a $25,000 car.
What you don’t realize is, you’re paying $1,331 in extra interest over 60 months. That $22 difference is money in the dealers pocket every month.
$1,331 to be exact.
Don’t give your hard earned money away.
The finance manager showed me the disclosure print out of my credit score from Equifax, one of the three credit bureaus. Little did he know, I had checked all three credit of my reports before beginning my car shopping.
I knew my Transunion and Experian credit scores were at least 30 points higher. These other two scores were high enough to secure the best interest rate possible.
When I pointed this out to him, he was miraculously able to offer me the best rate possible “after pulling some strings” with the bank.
If you let the dealer control the buying process, you will never get the best deal. No matter how nice the person you’re working with is, their goal is to extract as much profit from your purchase. You should do everything in your power to not give away any of your leverage.
Know What Other People Are Paying
Some people love the feeling of completely winning a negotiation.
The truth is you will very rarely negotiate a one-sided deal in your favor from a dealership. It’s not how good businesses stay open.
I’m not saying it’s impossible, I just prefer to not spend 12 hours at a dealership negotiating.
Do Some Research to Save Time and Gain Leverage
To speed things up, I always start contact with the dealership online. This signals to the dealer that I am most likely shopping around and doing my homework. Dealers are less likely to try to pull shady sales tactics if they know you have done your homework.
A lot of people think about buying a car for a while without doing any actual research. One day they decide to stop by a dealership and “start looking at cars.”
The dealership is the worst place to begin your car search. Once you are the dealer, you are very likely to leave with a new car… and a bad deal if you go unprepared.
This is the most profitable type of customer for a dealer. If this was you before, don’t stress. I was that customer the first couple times I bought cars.
My parents also shopped for cars this way as well, chances are your parents did too.
You can gain leverage in the buying process and save time by seeing what others are paying for similar cars in your area. Truecar.com shows you the average price range paid for by other buyers for the car you are considering.
Use Your Existing Memberships To Save Money and Time
Another great resource is the Costco Auto Buying Program. Costco has pre-negotiated prices on many car make and models for you if you are a member.
You can request information from dealers through the program to get the price quote. This quote shows the discount that Costco negotiated for its members.
Almost all the quotes I received when trying out their service were below invoice price. Invoice price is the price paid by the dealership for the car.
Dealerships receive kick-back incentives on how many cars they sell. So the more cars they sell, the higher the kick-back for each car sold. This is why they will often sell inventory below what they buy them for.
Set Realistic Price Target Ahead of Time
Instead of worrying about trying to kill the dealership in a deal, I am happy with simply paying below invoice for a car. Even if its only a couple hundred dollars below. I also make sure I am paying at or below the low range of what others have paid according to TrueCar.com.
If you enjoy spending 12 hours at a dealership negotiating back and forth more power to you. If you’re a Millennial like me, you’d probably rather be planning your next vacation.
Whenever in Doubt Walk Away
Walk away even when you don’t have any doubts.
If you take advantage of any of the tips in this guide, this is the one action you should always take: walk away.
Never be afraid of walking away.
As someone that has been in sales and worked retail, I used to feel bad about thinking that I was “wasting someone’s time.”
Because of this, I made sure to reward great service with loyalty. If the original salesperson provided great service, I will always return. I provide them the opportunity and courtesy to at least match the deal if they can’t beat it.
The truth is, people rarely make the best decision on the spot under pressure.
This is why the dealer will try at all costs to keep you from walking out that door.
The longer you spend negotiating, the more likely you are to give in to smaller demands that costs you money. This is due to a phenomenon called decision fatigue.
Don’t Be Afraid of Getting a Worse Deal
If you are at all uneasy about any step during the process, feel free to ask for the business card of the salesperson. Let them know you are going to take some time to think about the purchase.
Thanks to the internet and dealership down the street, you will not get a worse deal than the one currently in front of you.
It’s simply too easy nowadays to get dealerships to bid against each other. That’s why the dealer will try and say anything to get you from walking away. They don’t want you taking their offer down the street to another dealer.
They will tell you they can’t do the deal offered when you come back. Thats ok, the dealer down the street will match it, if not beat it.
Skip the Extras, or At Least Negotiate Them
Extended warranties, extra keys, maintenance plans are all high profit items with large markups.
These are the “smaller demands” I mentioned earlier. You are likely to give in to these up-sells after a long day of negotiating.
Like your car price, the first price offered is always the worst. Every time you reject these extras, a reason will be provided on why you need it. The reason given is usually fear based and meant to scare you into why you should buy.
The more times you decline, the closer you are to “receiving a special deal” and being offered a better price.
If you do decide to buy an add-on, you should never finance it into the loan. The interest you will pay over the length of the loan will outweigh the cost-saving benefits.
Save some money with simple Google searches. Many add-ons such as extended warranties or an extra set of keys are often available at lower prices online:
- Check Your Credit / Get Pre-Approved
- Research Finance Offers From Car Makers
- Find Out What Other’s are Paying for Similar Cars
- Use Services Like the Costco Auto Buying Program to save time and money on negotiations
- Set Realistic Price Target Ahead of Time
- Walk Away For a Better Deal
- Avoid Decision Fatigue and Buy Extras Such as Key Fobs Online
Disclaimer: I may receive a commission for services you sign up for, or purchases you make through links I have posted. Your purchases through links posted, allow me to support and invest time in this blog.
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