Thursday, February 28, 2013

Car shopping thoughts.

Every once in a while I get a question from someone about cars, or the buying process.  Since I spent every day on a car lot, I forgot how intimidating it really is for a lot of people to go shopping....but I certainly dealt with the side-effects of the stress...

Customers, for example, would react to a friendly introduction and outstretched hand by turning, walking away, and throwing a 'fuck off' over their shoulder.  No kidding, that happens lots.  But salesguys know this, and are actually trained how to deal with it.

In my view, it's better to have an educated customer who is more at ease with the process, but lots of the articles on the process are written by non-salesmen, usually adversarial in nature, and geared toward getting you the 'best deal'.

I'll let you in on a little secret...if you grind the salesman down to the last penny, everywhere you can, then I can guarantee you there will be no 'goodwill freebies' down the road.  I can guarantee you will be paying full retail for anything they can sell you after that, and should something go wrong, you can bet they will make you pay every dime of the cost they can.  It's not to be mean (although nobody likes to be told their work is worthless, which is what you are telling a commission salesperson when you complain about price), it's because they have to make up lost profit somewhere.

There's more dollars of profit in your average laundry pair than there is in a small car, after all.

So what is the result of these negotiations?  Well, let's see...

If you are looking at buying a new car, you are 80% (at least) likely to be a 'payment buyer'...aka, you are financing the car somewhere along the line.  At 0% interest, the rule of thumb is 15 dollars for every thousand in purchase price, over a term of 60 months.  The average right now is actually closer to 1.9% over a term of 72 months (in Canada), but if you are that price sensitive, you can always find a car for 0% that will serve your needs - although you will have to shop several brands.  In Canada, Mitsubishi and Hyundai group are the best bets for 72, or even 84 months at 0%.

So, how much profit is in a car?  Well, a Chevy Impala, here in Canada, has 2200 dollars from full MSRP to dealer cost.  Yes, there are holdbacks and all the rest, but I have yet to see a dealer willing to include those in commission for all intents and purposes they don't exist.

Chances are there will be a manufacturer or two offering 'stackable' incentives (meaning they can be used concurrently with subvented (0%) interest rates) in the neighborhood of 1000-2000 dollars, and this is BY FAR the biggest type of discount available.  I've had some guys come in from a competitor's store demanding we price match an 'equivalent model', and this is again faulty thinking, that makes shopping suck a lot.

Here's how to decide on a car if you're that price sensitive...

Pick a budget, walk into a dealership and essentially ask "what can I get for this much?".  You can try and hide what the real number is, but the salesman is trained (well) on how to get that out of you (not to mention he will mentally select a car 25-50 /month less than the number you specify).  Better to just be straight up.  More often than not, I found myself shortening the term at initial presentations, because the cars were LESS expensive than the customer thought, and perceived value must be maintained.  Even my fully loaded hit figures were often lower than their real budget, unless I shortened the term an extra year.  I had a customer once tell me I was a 'fucking liar', and there was no way we were going to actually sell a car for that little per month without 'fucking him somewhere else'....

As for spending way too much, I have almost never seen a car salesman push a customer into a car too expensive for them, unless the customer essentially made the salesman do it.  If you think this is bullshit just remember...most salesmen get paid a set amount per car sold (not enough profit for percentage commission to be reliably worth it anymore), but they get 'spiffs' (cash incentives) for pre-selling things like Insurances, Undercoating, Paint protector, etc.  They would FAR rather the actual car come in way under budget, so they can fit a fully loaded deal under the wire.

Some of that has value, some of it doesn't.  Better in my eyes to buy more car, than more box-of-air (slang term in the car business for Insurances and Extended Warranties).  You want to throw one over on a salesman?  Tell him your budget flat out first time, and let him think you're just like everyone else and giving a figure 50 bucks a month less than you're really willing to go.

Then, when he sets up the deal to include boxes of air assuming you will move in negotiation, he will likely have set up the deal where if you strip out the crap the car itself will be slightly less per month than you are willing to commit to, and since you already told the salesman your budget, you can look at him and say:

"I told you my budget straight out, and you made me fall in love with this great car and now I want it.  I guess I'll have to buy it without that warranty/car starter/window tint and just get it done somewhere else."

If you do this, you will have just opened up the REAL negotiations and in a manner that gives you, not the dealer, hand.  Now, if you want undercoating or a warranty, they will have to come forward with a wicked deal to convince you to stretch your budget.  I'd say try and fake this...but everyone does, and honesty is easy to spot in F&I.  If you go into it with the attitude that you're going to fuck the dealer, you will get owned.  But if you go into it thinking "I want a car, for this much, and if they want to sell me anything more they'll have to work at it", you'll have a much easier time.

You might even have fun.


  1. Thanks for the informative article! The attitude I go in with when buying a car is that I want to pay a price we (i.e. I & the dealer) can both live with. While I don't want to pay any more than I have to, I also realize that the salesman has to eat, the dealer has his overhead (he has to pay for the building, lot, etc.), and so on.

    Having said that, I haven't bought new in a long time; buying a late model used car alone can save a buyer THOUSANDS of dollars. I bought my last car through a car rental company; they had no-haggle pricing, so I knew up front what the price would be. The car had 30k on the clock, was 1.5 years old, but I saved about 4k over what I would have paid for it when new; I didn't get whacked with depreciation. When my mom died, I took her car; since it's a Nissan, it'll last a good, long time. When I'm ready to buy again in a few years, I'll do late model used again...

  2. That's the common way to sell used cars (which was where I usually was). Problem is, you need to look at the actual cost. When most people (90+%) buy a car, they finance it somewhere. Used cars have a lower price, it's true. But they also have a 7-9% interest rate attached to the loan, as opposed to 0-1.9% on new. This usually results in a new car actually costing LESS per month than a comparable used car.

    There are a couple caveats tho. One, you may have access to unusually low rate financing (although they tend to be 'variable rate' in nature, with huge penalties for paying it off early (which REALLY matters if you trade it in before it's fully paid off in the future)), and two, you may be buying a long in the tooth Domestic. I say long in the tooth because, here in Canada at any rate, interest rates are better on imports except in the case of cars like the Impala, or Dodge Charger.

    It's the total amount, month to month including taxes...and NOT the total purchase price of the car, that matters.

    An easy way to make a comparison, is to shop a used car where they also sell them new. Try out the newest model in the used inventory of the type you're interested in, and beforehand have an idea of the going market value of that model (read Auto Trader for five minutes). Then, when you go inside to find out what it costs, ask the salesman to run an apples to apples comparison to a brand new car with similar equipment.

    A great way to know the 'actual cost' is to ask two questions.

    1. What is my total monthly payment, including taxes and any fees?

    2. How long is the term of the contract?

    Payment x term = total cost.

    For example, 297/month for 72 months equals total actual cost of the car - $21,384

    That's really the only stuff that matters. All that talk about depreciation and stuff is crap usually, but not always.

    Here's how it matters... If you buy a car with low depreciation, you get more for it when you trade it in. A lot of salesmen twist this basic math, the easiest way to get around it is to do the math...again.

    A Cavalier in 2005 cost $15,585 +tax, with a cash purchase price of $10,895. The new car was 0% and the cash purchase dealer finance (which, contrary to popular belief, is usually a MUCH better rate than most people can get) was 7.99% fixed, for terms 60 months long.

  3. (CoNTINUED)

    But the 15,585 doesn't include the 2500 in stackable retail credits (the Cobalt had come out, GM wanted the J body gone like the wind) because keeping that a secret until negotiations allowed the dealer to avoid giving up much of the 800 dollars in profit on the car.

    So, how does the math work out?

    Cash purchase financed at 7.99% for 60 months

    10895 + tax (PST and GST) of 1089, plus 120 in tire and air tax
    equals - 12104

    $12,104 at 7.99% over 60 months is $245.37/month

    245.37*60 = $14,722

    New car at 0% over 60 months

    15,585 -2500 stackable credit (some are afeter tax credits) = 13,085

    13,085 + 1308 + 120 = $14, 513

    14, 513 over 60 months at 0% is a payment of $241.88/month...but since it's 0%, the actual total cost of the car is 209 dollars LESS than the cash purchase.

    Now here's the funny thing. The used lot ALSO had Cavaliers that were previous rentals ('Buyback' means rental car, and a used car less than three years old is virtually ALWAYS a rental car, no matter the brand), and they were listed at 8900 or maybe 7900....

    So, take that 40,000km former rental car, and what do you save?

    7900 + 790 = 8690 financed over 48 months (because less than 10,000 is too little to support that long of a term for most banks) gives a payment of 245 dollars a month for 48 months.

    So, yes, you save about three thousand dollars initially, but you have the same monthly payment, and when you go to trade it in you've got 40 more K on the clock...

    40,000 km * .05/km in depreciation = 2000 dollars LESS in trade value than if you had bought new. For a grand total difference (if you're lucky) of 250 dollars saved per YEAR of ownership, or less than a dollar per day.

    They really do get you, coming or going. Might as well have a nice ride while you're making the payments.

  4. Incidentally, even without the stackable credit, the cost of a new car would only be about 25 dollars per month more than a year old one, and still quite a bit less than 300/month.

  5. Oh, and 'Low Depreciation' is 100% correlated with the incentives used to sell the car (for example, anyone buying a FORD truck at any time of the year but year end clearance (where 'employee pricing' knocks the shit out of the resale value of the truck for that year...again) is nuts.)

    Depreciation is driven PURELY by this question...

    Why should I buy a used one, instead of a new one?

    So, the cheaper the new one is, AT ANY POINT IN THE MODEL YEAR (I all caps'd that because it's really important to keep in mind), the higher the depreciation.

    For example, a FORD F150 is about 37,000 dollars for an STX 4x4 extended cab (about half the truck market in Canada fits this description). Even worse, they have 3.99% financing and no incentivves right now.

    You'd be CRAZY to buy and F150 right now, because next January, they are going to 'clear out' the models with huge discounts, and rates at 0%.

    How crazy? Well, since everyone knows they can get the outgoing model for 10,000 dollars off PLUS God knows what else, a truck you buy at full price (or close to it) will have it's 'resale value' go down by almost exactly the amount of discount FORD gives on the new ones.

    And it compounds in effect every year you keep the truck. And these incentives (cheaper new) are pretty much the only thing that drives crazy stupid depreciation, and also why nearly every manufacturer now has 'certified' programs in place...which make sure the car is mechanically sound, sure...but are REALLY aimed at controlling how low dealers sell used cars. All in the interests of keeping depreciation low.

  6. What if a buyer is paying cash, or is paying at least 75% of the cost up front, i.e. financing only a small amount of the list price?

  7. Then you weigh the potential income from investing (even a Savings account pays interest) rather than laying out the cash. If it's an interest bearing loan, then lay down the cash. If it's 0%, put it in a term deposit or locked account that accrues interest and set the payments up to automatically withdraw from it. You'll make more on interest by hanging on to the cash than you will 'save' by putting the cash down.

    Most of the time.

  8. It's really best o look at cars as a whole as a month to month expense, and deciding how much per month you are willing to pay, and how much car you want for the cash. Not just car payments, but insurance, maintenance, gas, etc also factor in. No car payment = lower monthly expenses, sure, but you have to take the whole picture into account, and most people have a car payment for their entire adult life.....they trade in their cars before they are paid off...over and over again.

  9. See, I've either paid cash for my cars, or if I had a loan, I paid it off early. One thing I absolutely HATE is being in debt; I hate it! I don't like owing people anything, because that means that they have a claim on you.

    I do like your idea of setting up a savings account, then withdrawing the payments from it. That makes a lot of sense...

  10. Well, each person has different priorities and all, I'm not trying to suggest there is only one way...but there is a general trend. It just depends on where your priorities lie. One thing I will say though, is that 'fiscal responsibility' and 'car ownership' are mutually exclusive. Cars are always, without exception, an expense...and an 'asset' that depreciates rapidly.