Spend a day in a dealership and you can feel the intensity. Salesmen are placed under enormous pressure to succeed and must make targets to receive bonuses, maintain employment or receive perks and benefits. Because of this, the pressure flows down to the consumer. Salesmen are looking to get you into a car that maximizes the money that they and their dealership makes.
There are a couple common tips and tricks that they use to try to subtly nudge consumers into decisions beneficial for the dealership. Remember: dealers make money off of warranties, loans and maintenance and very rarely (although they still can) off of the actual sale of the car.
“Up to” is an old sales gimmick that makes the consumer negotiate against themselves. If somebody interested in a vehicle comes in looking to purchase a car “for $20,000”, the salesman will ask “OK. $20,000. Up to?” hoping that the consumer will back off and say “$25,000”. Notice how the salesman will write down $25,000.
“I am looking for a payment around $350 a month.”
“I am looking for a warranty on my first 60,000 miles.”
“Fantastic choice. Looking for 60,000 miles, up to?”
“I have $1,000 I am willing to put as a down payment.”
“I think our lenders will appreciate the $1,000. Up to how much money can you place?”
Consumers are notoriously bad at doing payment, APR and loan amount calculations in their head. To exploit this, dealers often negotiate all the terms of the agreement using monthly payments, because it’s easier for consumers to understand. What they hide is what is important, however.
When you are sitting in that hot seat across from the dealer, here is an example of what is going through the F&I guy’s (finance and insurance guy, the somewhat sexist title often for the person behind the desk from you).
“I can offer you this vehicle with no warranty at $377/month. But, for only $8/month more, I can get you a 80,000 mile warranty, full expenses paid and a maintenance package.”
(in his head):
I can offer $20,000 for 60 months at 5.0% APR (which creates a payment of $377/month) . I make a lot more money on maintenance and warranty packages. I can make the lender more money too. If I offer $24,000 ($4,000 for warranty and maintenance package that is mostly profit for dealership and insurance company) for 75 months at 6.0% APR (which creates a payment of $385/month), they may not understand that I am increasing the term.
Never, ever negotiate from monthly payment. Always purchase price.
Dealers will extend the term, increase the APR and increase the purchasing price to keep the monthly payment looking affordable.
Extended warranties make great money for the insurer and the dealer. Insurance companies predict how often new (or used) cars will require certain maintenance. Based on the make, they usually estimate it right before a major transmission or engine malfunction known in the make is able to occur. Ever wonder why Toyota and Honda warranties are for longer than Hummer and Jaguar warranties? It’s because the insurance company knows that you won’t need major maintenance until >100,000 miles for Toyota/Honda but will need it in the 80,000 – 100,000 mile range for Hummer/ Jaguar. Thus, they give you a warranty for 100,000 miles for Toyota/Honda and 80,000 miles for Hummer/Jaguar.
Avoid the extended warranties unless you value the piece of mind of not having to pay for major repairs. RewardBus has a full section on various forms of insurance and their benefits.
Every car has dings and scratches. Dealers know that. They also know how much anxiety people have in their own cars. Will it meet the intense dealer standards of maintenance, performance and reliability?
As you go in to trade, notice how the dealer looks at the vehicle. He will squint his eyes, furrow his brow, lick his finger as he touches a little scratch on the bumper. He’ll ask you how are the shocks. He will comment on the little ding on the door from the shopping cart. It’s all a ploy. He knows you are sweating and negotiating downwards. You came in looking for $10,000 for that vehicle but now you don’t know how you could have ever thought it was worth more than pennies. His hope is that you will fall over backwards when he comes in with the “generous” offer of $6,000. Don’t fall for this ruse.
Go to CarMax to get a fair, as-is offer of appraisal. Then you can negotiate with a dealer knowing this number is in your back pocket. If they can beat it, great. If not, then you can always trade in your car at CarMax and purchase the vehicle elsewhere. Make sure to get top dollar when selling your vehicle!