Five Things to Know About Car Deals

best deals on carsFive important things to know about car deals

1. Dealers must make a profit and therefore can’t sell cars below their wholesale cost (invoice price) — except when the dealers’ car companies (manufacturers) sweeten deals on particular vehicles, with incentives such as rebates and bonuses. Since the incentive money doesn’t come from dealers’ pockets, dealers can sell cars for less than invoice price and still make a profit. Therefore, automotive consumers get the best car deals when there are manufacturer incentives on the vehicle they want to buy or lease. Without incentives, however, dealers shouldn’t be expected to sell at or below their cost.

2. Dealers make money many different ways other than straight profit on vehicle selling price. Customers often think they’ve gotten a great deal when, in fact, they haven’t. A dealer can get cash from his manufacturer in the form of hidden factory-to-dealer rebates, holdbacks, and bonuses for making sales goals — all of which adds to profit. Dealers also make profit from boosted loan interest rates (“reserve”) and unofficial fees, such as “documentation”fees. Most of these items are not negotiable since they are not listed on sales contracts. Dealers do not make profit on official fees such as environmental protection, tax, tag, and title charges. One of the sources of much dealer profit comes from the Finance Manager’s office when he sells extended warranties, service contracts, credit insurance, life insurance, security services, and paint/fabric protection. These items are high-profit sales for dealers but overpriced and often not needed by customers.

3. When you trade a car in the process of buying or leasing a new car, you give the dealer a huge opportunity to make additional profit on your deal. It’s a fact that dealers make more profit on used-car sales than new-car sales. This means dealers have to offer trade prices as low as possible. You might negotiate a great deal on your new car, only to have the overall deal go sour when you get less than fair value for your trade-in. It’s always a good idea to know the value of your trade-in before you visit your car dealer. Use kbb.com or nadaguides.com to get average values based on your car’s age, mileage, and condition. If you get your dealer to come up on the price of the trade-in, watch out that the price of your new car hasn’t somehow increased as well. Since dealers only offer wholesale price for trade-in vehicles, you can get more money by selling the vehicle yourself. By selling yourself, you also rob the dealer of an opportunity to trick you into additional profit.

4. Most new-car purchases are financed. That is, most people who buy new cars get a loan, which creates additional cost to a car deal. For example, purchasing a $25,000 car with a loan for 48 months at 5% interest rate adds $2630 to the overall cost. For people with poor credit and low credit score (Get your score now with a purchase of your Experian Credit Report for $1 with enrollment in Experian CreditWorksSM!), the interest rate will increase, which increases total cost. Increasing the length of a loan also increases total cost since finance charges apply over a longer term. It’s always a good idea to shop around at local banks and credit unions for the best loan rates. Compare those rates to those from your dealer and go with the best offer. Make as much down payment as you can afford and keep your loan term (months) as short as possible.  So that you know, offering a dealer cash for a new-car purchase doesn’t get you a better deal.

5. Buying cars with high future resale values (residual values) makes the best overall deals. A typical car will lose 50% of its initial value in 3 years.  It’s called depreciation. However, different car makes, models, and styles depreciate at different rates. For example, the typical Honda or Toyota loses less value than the typical Dodge or Ford. This means, with a Honda, you’ll get back more of your money when you decide to trade or sell at a future date. Long-term, the Honda is a better deal due to higher resale value.

You can get free online price quotes for any make/model vehicle. These prices are typically better than you might get by visiting and haggling with a dealer. We recommend Edmunds because they show you price offers that will be honored at dealers in your area.

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