In this week’s edition of the Car Buying Series, I’m going to touch on some common misconceptions. These are things we’ve heard from various sources that aren’t exactly true about the car buying process. Now, I’m not saying they’re completely false, but it’s not good practice to go in thinking that they’re true in every circumstance. Not only will it make negotiations easier, it’ll make your car buying experience better and you’ll be able to build a rapport with your sales person, which is an incentive for you in case you need to do repeat business in the future.
1) More Money Is Made Off New Cars Than Used
I’m not entirely sure how anyone can think this is even remotely true. New cars come from the factory with a price. That’s what the MSRP is (for those who don’t know, MSRP stands for manufacturer’s suggested retail price). That number is public knowledge and vehicles are only ever priced over that MSRP if there are add-on’s to the vehicle or it’s a “limited edition” and there are only so many of that vehicle available for sale. At my dealership, when a salesman sells a new vehicle, they get $100. Occasionally they have additional incentives (like if there are too many of one model) and that number will double for the fifth sale or whatever, but that incentive for them is not part of your purchasing price.
Used vehicles, however, are in a gray area. The value of a used vehicle depends on the year it was made, the make, the model, the mileage and the condition of the vehicle. Kelly Blue Book and NADA can only give you a ballpark figure. They also don’t factor in any special features the vehicle may or may not have, which could increase or decrease the price. Like, if you’re trading in a 2013 F-150 but lifted it and put on an aftermarket grill, those things actually decrease the value of your vehicle to the dealership. For one, the truck they just bought for you that could have been a certified pre-owned vehicle can no longer be certified, because you broke the factory warranty on it by lifting it. It’s not as valuable to them as it is to you.
The price of a used vehicle is generally determined by how much the dealership bought it for (the trade value) and how much the repairs cost. Almost all vehicles traded in get new brakes and tires despite how good they were you traded it in. That right there brings the price up automatically. Then there’s also the fact that they need to make money off their investment, so they’re going to mark it up on the front end. So after all is said and done, if a dealership puts 3k into a car, they’re likely going to price it around 5-6k to try and make a bit of money off the car. Remember, they did put 3k into it, so in selling it for 5k, they only make 2k off it. I personally like them marking it up double what they put into it because that means there’s room for negotiation.
But they can’t mark up a new car like that, so when a car salesman tries to flip you from a used vehicle to a new vehicle, it isn’t to try and get more money out of you. It’s likely because the dealership can’t get you financed for a used vehicle and the only way you’re going to walk out of their with a new car is if you buy new.
2) Dealerships Will Never Sell A Car At A Loss
This sort of ties into the one above, mostly because I explained the pricing process. There are times that dealerships buy cars on trade (or at auctions) and have to put more into it than they initially thought. Those cars are then marked for just above cost and generally sit on the lot and don’t move for months. After we’ve had a used car for 90 days, we mark it down drastically in hopes to get it off the lot, even if it means taking a hit on the deal and not getting more than what we put into it. Why? Because we need to lot space for a car that we will make money off of.
As for new cars… due to the way they’re priced it can be difficult to take a loss on their sales but it is definitely possible. It helps if you come in knowing the dealerships weaknesses. Are they the only Ford/Dodge/Toyota dealership in your town? Threaten to take your business to a competitor, especially one you know will give you a better deal. It helps to have that deal in writing, so before you make that threat, I’d find that “better deal”. Taking hits is easier for corporately owned dealerships (the ones with multiple makes under the same name) because they can fall back on the sales of a sister dealership, but even the privately owned places have their weaknesses.
3) Dealerships Are Desperate To Sell Cars On Rainy Days
This one literally made me laugh out loud. True, rainy days tend to be slow, but there is no reason why a dealership would be desperate to sell a car on a rainy day. More willing to work with you? Sure, but not desperate. Now, the end of the month? Yes, they’re a bit more desperate. End of the year? Even more desperate. You see, whatever cars they own on January 1, they have to pay taxes on for that new year. Even if they only own it for a week. They’d rather be rid of it than deal with it in a year. The end of the month and the end of the year is all about making numbers.
4) Car Salesmen Don’t Care About You And Just Want Your Money
Most dealerships work off “draw” pay system. From my understanding of it, you get a monthly salary given to you at the beginning of the month. You are then obligated to pay that money back by the end of the month in sales and whatever money you make on top of that pay you get to keep. If you don’t pay all of that salary back, it goes into what’s called “the bucket” and it gets rolled into what you must pay back next month. I’ve known salesmen who got so deep in the bucket that they’ve been fired and the dealership just took it as a loss. This pay system is why I’ll never sell cars. I don’t have confidence enough in myself.
Understanding this system is important to understanding why most salesmen don’t just want your money. True, if they oversell you on a used vehicle they could easily make their draw in one go, but if they do that and you’re not happy with your purchase or their service, they loose you ever coming back and helping them out again. Or you referring customers to them. Being a salesman, you have to be personable. You have to care. You’re in a customer service line of work and if that customer isn’t happy, you lose money in the end.
This of course greatly depends on the market area. My area is decently sized but not so big that the sales people here can afford to burn bridges with customers. The market where I came from was huge and burning bridges didn’t mean anything. There were more than enough people in the city to make up for it. The important thing here is to follow your gut. If you don’t feel like your sales person is fighting for you when they go talk to their managers, don’t buy the car because they probably aren’t.
5) You’ll Pay Less Getting A Car From A Buy-Here/Pay-Here
This sorta ties into the last entry I did, though that one was mostly tied to private sellers. Buy-Here/Pay-Here lots are the ones with nothing but used vehicles on the lot. They get them from private sellers and auctions. They aren’t always the nicest vehicles, but they’re priced alright. The biggest draw for a BH/PH is that they often do in house financing. This means that they’ll give you your car loan as opposed to a bank or a creditor. This kind of thing is a huge relief to those with bad or no credit because they think that they can’t get approved for a loan. The only problem is that BH/PH generally go off a base percentage for their loans and that base percentage is generally in the 20’s or more. So let’s crunch some numbers.
Say you buy a car from a BH/PH lot for $6,000. Their in house financing gives you a 21% interest rate on a 24 month loan. Your payment on a 6k vehicle will be $787 for a total of $18,875.68 paid in the end. You just paid almost 12k more than was necessary all because you didn’t think you could get approved by a bank or creditor.
In the year I’ve worked here, I’ve seen Ford run several promotions for lower tier credit scores. I’ve also seen our sales reps bend over backwards to get their customers the financing they need and at a price they can afford. It’s going above and beyond like that that brings customers back time and time again. BH/PH contracts can also be tricky. Some of them have it in there that you can’t trade the vehicle to anyone but them, so that you’re forced to come back to them when you need another vehicle.
6) Dealerships Outsource Their Internet Sales (also known as BDC)
The dealership I currently works for does things in internet sales differently than I’m used to. Everywhere else I’ve worked, the BDC department does nothing but take calls, answer questions and set appointments. This one does all that as well as sells cars. When you call our BDC and talk to someone, they will be your sales person from start to finish unless they can’t complete your sale for one reason or another. As a general rule, it’s in the dealerships best interest to keep internet sales in house. That way questions can be answered immediately instead of having to refer you to someone else just to get a straight answer.
I really don’t feel like I even touched the surface of all the myths I’ve heard about buying a car, but this entry is getting a lot longer than I intended it to. What are some things you’ve been warned about when purchasing a vehicle?