• February 7, 2009
• Category: General
• Written By: Chris
• 2 Comments

This is a pretty common question, how to buy a car? Well the answer is easy, go to a dealership or private party and buy it! But the real question is how do I get a good deal? There are a million and one results on Google for how to buy a car and each of those gives you ideas on how to arm yourself as a consumer when buying a car. I’m going to take a slightly different direction and tell you how a dealership buys a car and how they think.

I spent some time in my life before this web development gig as a car salesman, in fact, a Honda/Acura car salesman. The dealership that I worked for will remain anonymous. During my time there I sold a lot of new cars, used cars, and took in a number of trades so I got to know the inner workings of the dealership pretty well. With this knowledge it gives me an upper hand as a consumer when I go out to purchase a new or used vehicle and I want to share these secrets with you in hopes you too, can get a good deal.

First off I’d like to give a little direction of what you as a consumer need to know before you consider going into the dealership. Know what car you want, what make, model, and mileage, then stick to it. Dealerships will take advantage of rogue customers who don’t know what they want and shoe horn them into something that is over their budget. This brings me to my second point, know your budget, know how much money you can spend and negotiate UP to that amount, this means never start your negotiations at the highest price you’re willing to go. If you simply cannot afford the car you want, then wait a while until you can afford it or re-evaluate what you want.

Research your vehicle, know all of the packages that come in the model you want, look up the invoice value on Kelly Blue Book (http://www.kbb.com). 9 – 10 times you will not get down to invoice but it’s always good to know what invoice is since it can help you determine a good deal from a bad deal. If you’re looking at a used car and you’re at a dealership look up the trade-in value on Kelly Blue Book (http://www.kbb.com), this is what you can expect to pay. For more consumer information just search Google.

Lets get into the good stuff, how does a dealership work. Most dealerships purchase their cars from the manufacturer at what we know as “invoice.” Generally a dealership has a large line of credit that they use to purchase these cars and they do make monthly payments on their inventory. This is true of used cars as well. The dealer is in-fact purchasing your car from you when you trade it in. Knowing this you can understand why invoice can be a pretty hard number to obtain, but with some work you can get damn close to it.

Dealers have a lot of wiggle room on used cars, this means that the MSRP you see on the window label has a good amount of mark-up attached to it. Generally speaking, most used cars can have anywhere from $3,000 – $8,000 of mark up attached to their price tags. This is like equity in your home, you can sell your personal home for less than a builder can sell a brand new home because you have equity in that home, meaning – you purchased your home for less than it’s worth at the date of sale.

So how does a Dealer take in a trade-in? Again, this is heavily based off of the blue book value of the vehicle. Trade-in value is always less than private party value and I’m not going to digress into why. In blue book there are 3 levels of vehicle quality, excellent, good, and fair. Fair being the lowest on the list means there is significant body damage and the vehicle is mechanically unsound or simply does not run. Good is average wear and tear for that car and excellent would be little old lady style. A dealerships goal is to take your car in for UNDER fair value. That’s where they’ll start their negotiations for your car.

Their vehicle on the other hand is always priced at Private Party value excellent. They claim this is because they detail every car on the lot, put new tires on it, gave it some sort of inspection and slapped a 90 day warranty on it. However; the truth to be known is that the dealership is generally at most into the car at blue book good condition, trade-in value. This would leave approx. $4000.00 or more on many popular vehicles in money they can negotiate with.

If you like to buy used, start your negotiation for that car at blue book fair trade-in value and bring in that document with you, you can print off a copy at www.kbb.com. Be sure your salesman understands that you are not about to pay private-party value for a vehicle they took in at trade-in value. Also be sure your salesman is aware you are ONLY concerned with the overall price of the vehicle and you are NOT concerned with payments at this time.

Financing is a hazy grey area that gives the dealership more room to move. You pick up a car at a 5-year loan at 6.5% interest on average and the dealership is able to play with some of that interest to change your monthly payment until they hit the bank wall. Example; if you went to the bank and qualified for 2.99% APR and then went to a dealership and tried to qualify for the same loan, they would most likely tell you that your interest rate should be 4.99% or higher assessing an additional 2.0% of interest as profit for themselves. Don’t be fooled by the smoke and mirrors, if your dealer tells you they can’t give you the car at the price you want but can get your payments to where you want to be you best stand up and walk out.

What about new cars? New cars are a bit different, remember the home equity analogy I used above? Same is true here. Say a dealer pays the manufacturer $20,000 for that car fresh off the assembly line, they are now in that car to $20,000 and will probably price it around $22,000 – $26,000 based on supply and demand. Every manufacturer handles this differently and so does every dealership, there are a few exceptions like Scions.

Research what people in your area are paying on average for that new car and then subtract an extra $2500.00 from that as your base for negotiations. You could walk away paying $1000.00 less or more below what others are paying for the car just based on that knowledge.

Dealers have manufacturer quotas to meet each month on different models of cars, if they miss those quotas at the end of the month it will effect their manufacturer allocation of more popular new vehicles the next month. What this equals to is that dealers are more willing to deal at the end of every month. Also, if a car has been on the lot for more than 30 days the dealer starts having to make payments + interest payments to it’s lenders on the car, and they hate to do that. Imagine if you sit on a car for one year, you took out a $20,000 line of credit to buy it, then mark it up $2000.00 to try and make a profit, by the end of the year you could end up owing more than the car is worth, and dealerships hate to be upside down.

On every show floor there is a spot where the managers sit, and in that spot there is generally a board charting the sales quantities of each sales person. Often times manufacturers and dealerships offer salesmen who sold a lot of vehicles rewards. If you’re in the dealership at the end of the month you may want to try and work with the salesman who’s ranked in the top 3 – 4 on that board because they may be chasing that reward.

Finally, one last consideration, dealerships pick up accessories for almost nothing. If every dealer you have worked with is unwilling to get to your price point but you still want the car and it’s not over your budget ask them to give you some accessories for free as part of the deal. Maybe some new wheels, racks, box, lip kit, etc… Let them know that you are dissatisfied with the cost of the vehicle but would still be willing to buy if you get some accessory at no cost. Often times the dealer will agree to these conditions to make the sale.

I could go on for pages about dealerships and the internal workings, but I hope this bit gives you some insight on how a dealership works and little extra ammunition for those intense negotiations. Remember, a dealership will deny up and down any of my allegations here but I can assure you they all operate the same.

If you have questions feel free to post them below and if you found this to be helpful share it with your friends or use the bookmarks below.

Good luck!