The following post is by MPFJ staff writer, Melissa Batai. Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food. She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.
I hate the whole car buying process. From haggling to sitting in a dealership for hours, I just hate it. That’s probably why my husband and I have not bought a car since we bought our current car 12 years ago. However, the time had finally come when sharing one car was no longer working for us, so we set out on a search for a second vehicle.
Although our search lasted only two weeks, the entire process was annoying and stressful. We did learn a lot, though. If you plan on buying a car anytime soon, let me share with you what we learned.
Cash Is Not Always King
The old rumor used to be that you’ll pay less for a car if you pay cash. While it is true that you’ll pay less for the car because you won’t be paying the interest over the life of the loan should you finance a car, paying cash won’t give you a lower price at the dealership. When I asked one salesman about this, he said that dealers now prefer that you get a loan through them.
Why? When you get a loan through the dealership, “an auto dealer actually acts as a middleman for car lenders. To make money off the loan, some dealers will then offer you an interest rate higher than what they are paying the actual lender—or the financial institution that is backing your loan. This rate increase is typically called the ‘dealer markup’ and can be an additional 3% in interest—significantly increasing the cost of your car. This is perfectly legal most of the time, with only a few states limiting how much a dealership can markup rates” (Fox Business).
Know Your Credit Score
Before you even set foot in a dealership, make sure you know your credit score. The higher your score, the more power you have to get very low interest rates.
Get Pre-Approval First
An easy way to learn your credit score is to go to your bank and seek pre-approval for a car loan before you begin your car search. The bank will run your credit report and tell you how much you’re approved for. This will give you a baseline number when dealing with the dealership. It will also help you determine how much your monthly loan payments will be at different price ranges.
For instance, my husband and I were approved for by our credit union for a loan at 4.5% interest, which was more than we needed to pay. Dealerships we visited offered us 3 to 3.5% interest rates, which we knew were a better deal than we could get at the credit union.
Know What Monthly Payments You Can Afford
I was surprised that our credit union pre-approved us for a loan amount with monthly payments higher than we felt we could comfortably afford. Instead, we choose a car that was $6,000 less than our pre-approved amount—at that price, we could comfortably afford the monthly payments.
Just because you’re pre-approved for a certain amount doesn’t mean you need to use the full amount.
Don’t Negotiate Based on Monthly Payments
Every time we stepped on a car lot, we were always asked, “What is the monthly payment you’re looking for.” Not, “How much do you want to spend for this car?” Most Americans already have debt, so they’re comfortable evaluating the price of the vehicle based on a monthly payment amount, and the sales people use that to their advantage.
If you negotiate based on the monthly payment, not the overall price, you’re giving the salesman a tremendous amount of leverage. “A dealership can easily meet your maximum monthly payment by stretching financing out over an additional year instead of actually reducing the price” (Money).
You may be surprised, as I was, to find that now banks and credit unions are willing to offer up to 72 month loans for used cars! Am I the only one who thinks that’s crazy?!
Check the Blue Book Value
Once you have a car in mind, make sure to check the Kelly Blue Book value, either at home before you ever step foot on the lot or on your smartphone while walking around the lot. My husband and I always searched the Internet for cars we wanted to look at in the dealership before we went on the lot. At home, I checked the Kelly Blue Book value of the car we were interested in. This let me know if the car was priced fairly or not. It also helped me consider how much room I had to negotiate the price.
Be Aware Online Prices Are Not Always As They Seem
This was probably the biggest lesson I learned from our car search. Internet prices are subjective. We drove two hours to a dealership because we were very interested in a car that was in our price range and had fairly low mileage. We took a test drive and were ready to buy the car. When we sat down to negotiate, imagine our surprise when the dealer tacked on an additional $2,700 in “dealer extras” that were not listed as part of the Internet price. That’s not even including the additional cost for plates, title, etc.
What were the dealer extras? Applying a special exterior coating to keep the paint from fading or peeling and a special coating inside on the upholstery and flooring to repel stains. We called foul and left the dealership. That was a whole day wasted from what I called false advertising.
When we called the next dealership, we were on to this game. I asked if the Internet price had any additional fees added on. It didn’t. That dealership was upfront with their Internet pricing, and we ended up buying from them.
Negotiate Up from the Dealer’s Cost, Not the Sticker Price
When you begin negotiating, you have a powerful tool if you don’t start your negotiations based on the sticker price. Money states, “Consider starting around the invoice price, or the price a dealer pays the manufacturer for the car. Edmunds.com notes that a popular strategy is to ask to see the dealer’s invoice and offer an amount, say $500 over that. Invoice forms can be difficult to read, so spend a little time looking over one before testing this strategy out.
“While getting a price at or below invoice is ideal, be prepared to spend an amount somewhere between the sticker and invoice price. Ideally, you’ll at least pay no more than the average sales price you were supposed to look up on sites like Edmunds and Kelly Blue Book.”
Don’t Be Afraid To Walk Away
People always say, “Don’t be afraid to walk away,” and I found that to be true. I couldn’t believe how many sales people would call us at home and continue to negotiate. I wish that they wouldn’t say, “final offer” when it’s not really their final offer, but keep in mind if you walk away, you likely still have room to negotiate. The sales person will likely be calling you to further negotiate.
Car buying is not fun for me, but I wish it had been easier. With these tips, you can hopefully have a smoother, less eventful car buying experience than we did.
How about you all? What other tips would you add to help make the car buying experience smoother?
Share your experiences by commenting below!
****Photo courtesy https://www.flickr.com/photos/rubelroy/9096822638/
