Purchasing a new car is a big deal and you want to get the best possible deal, right? While the vehicle itself will lose monetary value over time, it’s possible to take proactive measures that will improve both the long term utility of the vehicle as well as the financial value that you receive from the car dealership itself. Especially when dealing with highly experienced sales representatives of the car companies, it’s important to know exactly what you’re purchasing when looking at a new vehicle, and how you can get the upper hand.
The Structure of a Car Price
When looking at purchasing a new car, the first thing that comes to mind is usually price. Cars are an expensive asset, and need to be carefully structured into a personal budget. However, when purchasing a vehicle, it’s important to recognize exactly what we you’re paying for, and how these price aspects deliver value to the consumer.
The largest part of a vehicle’s price is called the “Invoice Price”, and represents the tangible value of the product itself. Invoice Price is the price that the manufacturer charges the dealer itself, and represents the fundamental cost of the parts and assembly. The invoice price can help us by acting as a benchmark for value between models. A high invoice price from a good brand may represent that the car is of particularly high value, or that the manufacturer has taken its time to make sure that the vehicle is in good working order before delivering it. These invoice prices can be easily researched and compared online, and can help a consumer establish a baseline of what products are within their budgeting range, so long as the consumer remembers that the actual price will still be about 10% higher at the dealer.
The next aspect of a car’s price represents the dealership markup. Contrary to what most people believe, dealership markup does not make up for a great deal of the price of the car itself. For example, on a brand new Honda Civic that would normally cost about $16,000-25,000 (depending on features), there is only about $1,000-2,000 in markup on the price of the car. This means that less than 2% of the cost of the car is actually made up of dealership markup. This is used to a sales representative’s advantage, because it gives the customer the perception that there is not actually all that much room for negotiation on the price of the vehicle itself.
While a dealership does not make a great deal of profit from the markup of a vehicle, it’s important to recognize that many manufacturers charge their dealers what is called a “Dealership Holdback”, with the intentions of returning that amount to the dealer as a rebate once they have actually sold the car. The reasoning behind this concept is that it will create an incentive for the dealership to sell more vehicles, and place more orders. From the dealer’s perspective, it allows them to give the appearance of having less room for negotiation than they actually do.
For example, that same Honda Civic would be anywhere between 2-4%, meaning that there is room for an additional $1,000 for the dealer to negotiate with. Granted, discounting the car by the full $1,000 would not happen, because it would make for an unprofitable sale, but it means that the dealer is able to sell the vehicle below its listed invoice price, and still make a profit. For consumers, this means that we are now operating with the same pricing information as the sales representative, and are no longer at a disadvantage during the negotiation process itself.
The Art of Negotiation
When negotiating the price of the vehicle, there are a few different strategies that you will find to be successful. The first approach that many people choose is to use a percentage based offer. By offering as a percentage price over invoice price, a consumer is able to put the offer price into the contexts of the sales representative’s target numbers, and ideally create an agreement that meets everyone’s best interests. By offering on a percentage basis, the consumer is expressing that they have sufficient knowledge about the nuance of purchasing a vehicle to negotiate under the contexts of a professional.
In doing so, it’s very important to be sure that we know exactly what kinds of numbers you are dealing with, and are also able to respond to the sales representative’s counter offers. If not, you might not realize that you’re actually making the process more difficult because you’re making unrealistic offers. For example, many car dealerships see a 3% profit as being an acceptable benchmark for a transaction. By offering to pay 3% over the dealership invoice, you’re negotiating a win-win-win position that saves them money, makes the sales representatives target numbers, and ensures a respectable profit margin for the dealership itself.
After placing an offer for purchasing at a percentage point of the invoice price, a sales representative will generally require a written commitment of some sort to the offer, simply because it still does represent a relatively hard purchasing price for them to meet. However, it’s important to ensure that the dealership has provided a quote as to what the full value of the transaction would be, as well as proof of the invoice price to avoid being misled into purchasing at a percentage beyond the intended value. You should also recognize that you’re not obliged to make a purchase at that point in time. Acknowledge that the sales representative has been extremely helpful in this process, and take a day to sleep on the decision.
After getting a quote from the original dealership, you can now check if there are any other dealerships that would be willing to beat this offer. By calling other dealerships and asking for a better price, you will likely find youself with a collection of fairly attractive deals that further reduce the percentage margin that was initially offered. The other sales dealers know that you’re already at the purchasing stage of the sales cycle, and that they might be able to make an easy sale at the expense of their competition.
After getting these offers, you’re able to return to the original dealer and attempt to drive an even harder bargain on the vehicle. From here, it is possible to agree upon the actual price of the vehicle and begin discussing options such as trading in and financing.
Realistically, the best way to purchase a vehicle is in full with cash. You would be saving money on interest payments, you don’t need to worry about having to negotiate around warranties and insurance payments. However this isn’t an option for most people so you will likely be financing the vehicle. While using debt to make such a purchase isn’t necessarily a bad thing, it is again important to understand all of the aspects of such a transaction, and they impact the final cost you will end up paying.
Today, car financing programs have become so competitive that there are plenty of options available for you to make purchases with 0% interest financing for a certain period of time. These programs are always the best deals available, because there is no cost for the loan itself. However, after reaching this agreement, you will need to consider how the loan insurance add ons will create both value and costs within the agreement.
For example, many consumers will want to purchase a warranty for the term of the loan, so the value of the car is insured against defect. Without the warranty, the you might find yourself needing to jump through quite a few hoops to deal with manufacturing defects, even though their loan period is still decreasing.
While dealership financing agreements provide good rates for initial financing, they tend to come with shorter period terms, meaning that the payment amounts might still be fairly high for you to make in full over such a short amount of time. After reaching the end of the term you may want to contact a bank about financing the remaining amount of the car’s value through a “Time Planned Personal Loan”. A TPPL is a fixed term and fixed payment loan that would generally be based on your credit, as opposed to the value of the car.
This is because car values depreciate so quickly, making them a fairly poor piece of collateral from the bank’s perspective. However, because a great deal of the car is probably paid off by now through the dealership financing agreement, the total amount of the loan should be relatively manageable, and can generally be reached with an interest rate of prime +3%.
After reading about all the various cost factors that make up a vehicle purchase, you should have a better grasp on exactly what sort of value you’re receiving out of a new agreement, as well as what sort of additional costs you might come face throughout the process. By tracking value from purchase to financing, a consumer is best able to understand their negotiating position, and maximize the value they receive from the purchase as an investment. Lastly, by keeping in mind that all participating parties in the transaction benefit, you’re able to negotiate from a standpoint that creates the most favorable outcomes for everyone involved, and better plan for the expenses involved.