Don't Buy That Car!
Posted: Monday, October 18, 2010
by Darryl Einspahr
http://www.myautobuyingtips.com
Until you read this report!
Thinking of buying a new or used vehicle? Tired of the games car dealers play? I've worked in the car business for 15 years and have seen all the games. It's gotten much better for customers in the past few years, but dealers love to go back and forth when negotiating with customers, to get every ounce of profit they can.
Read this next paragraph, so you know what NOT to do. This is NOT the way to buy a car.
Let's start with your first trip to the dealer. Upon arrival, you meet your salesperson. He/she will greets you, asks you lots of questions, like do you have a trade, how much down are you working with, is there going to be another buyer with you making the purchase, how's your credit, and so on. All this information has to be turned over to the sales manager as soon as possible. Do not disclose that you have a trade-in, especially if it is paid off. A trade-in, on which you owe money, at least over $5,000, is a vehicle you probably need to trade. If you owe more than its worth, the dealer may not be able to make a deal. If you owe money, it's best to disclose you are trading, have the dealer appraise the trade and go forward. More on the trade-in later in this report. After you find a vehicle, the salesperson sits you down and goes to the sales manager. At this point, NEVER let the salesperson know how much you like the vehicle you have selected. Showing emotion makes the negotiation process even worse. The sales manager writes up a four square, showing price, trade value, down payment and monthly payment. The salesperson brings the form to you to see what numbers you agree with and which numbers you don't agree with. This is to determine what the dealer needs to work on to maximize the most profit. The dealer always wants you to negotiate on monthly payment. This is the easiest way to hide profit. The process is to keep going back and forth, grinding on you to wear you down. When the salesperson runs into too much resistance from you, then another salesperson comes out to talk to you, (saying they are a sales manager, but not really). Now they continue the process the previous salesperson went through with you until they can't get any more money from you. If the "sales manager" shakes your hand and says you have a deal, you are one-half way through the process. Don't be afraid to walk if you don't get the payment or price you want. There are plenty of new car dealers.
Next, you get to go to the finance office. You wait for at least 30 minutes, if you are lucky, but more than likely you wait closer to an hour to get into finance. The whole purpose is to keep you at the dealership as long as possible. The longer you are there, the more likely you will agree to purchase products you don't need or want, just to get out of the dealership. I'll explain a little later in this report, what goes on in finance. One way to speed up the process, with very little salesperson interaction, is to go directly to the fleet manager (see below). There are other ways to buy than going by yourself, which I will explain later.
OK, THIS IS THE WAY TO BUY A CAR!
You should prepare, prepare, prepare before you go to a dealer. Contact the fleet manager if at all possible before you go to the dealer. Your next choice would be to contact the internet manager. Most people have not even heard of the fleet manager, because this is the least profitable department of a dealership, and no dealer wants to "advertise" their least profitable department. Try to get a final price over the phone or internet, if you can get the accurate invoice figure first. This makes it much easier, as the manager can approve the price ahead of time and you won't have to negotiate (as described above) at the dealership. Some dealers are much more amiable and willing to negotiate than others. Contact the dealers selling the vehicle(s) you are looking to buy and you will quickly find the ones that you would like to deal with. Try asking your friends or family if they recommend a dealer or try going to bbb.com in your area to see how they rate the dealer(s) you are talking to.
So you are with the fleet manager and know the cost of the vehicle and have agreed on a price, but that is only half the battle. Before you go into the finance office, find out what interest rate the dealer is figuring your payment on, so if they try to raise the interest rate later, you will know. The best move you can make after you have settled on the price, is to get the numbers in writing and tell the dealer you will get back to them in a couple of days. This way you can shop for financing from your own bank or credit union, and save the hassle of dealing with the finance manager. If your bank or credit union can't finance you, they are a good source to find out what interest rate you should expect from the dealer.
OR
More and more people are using a broker to buy their car. Brokers deal with the fleet manager, trying to go into holdback and make a few hundred dollars profit for themselves. Most brokers sell to lease customers, for excellent credit customers only, so the customer comes back every 2 3 years when the lease is up. Of course, brokers have finance managers too, so the same problems exist in the finance office, but it's tough to avoid the finance person unless you arrange your own financing. Brokers typically do not have inventory, so they don't deal with used cars, but they will if they can make a profit. The benefit of using a broker is that you don't have to set foot in the dealership, and play their games.
IF YOU MUST FINANCE WITH THE DEALER (OR BROKER)
Most dealers will try to get you to finance with them, and most customers do finance with the dealer. This is when the dealer will try to switch you from price to payment. Never, ever negotiate a deal on payment. When the sales negotiations are done, the finance manager will go to the sales office to see the "numbers". This is where the finance manager sees if there is "extra payment" he can work with. Let's say the payment to purchase the car is $300 per month, but you have agreed to $350. The dealer will try to raise the price to get to the payment you have now agreed to. If they can't raise the price, they will add extras, like service contracts, GAP, credit life, lojack or other warranties. Based on your credit score and the interest rate the dealer figures they can get for you, they add in the extras until they get to your agreed payment, the above "extra $50 per month". Now, when you go into the finance office, they have you sign the normal purchase paperwork, and the paperwork for all the extras. You might notice the extras and say you didn't want that, but they say, "it's included in the payment you agreed to". Most people feel like they are getting a good deal, as the payment didn't go up based on what they agreed to, and say "ok". The dealer just made $1,000 to $4,000 additional profit on those extras. If you say no to the extras, they will raise the interest rate so they can still make profit on the interest rate spread.
You should never buy an extended service contract on a new vehicle, unless you plan to keep the vehicle for 5 or more years, and then, negotiate the price as low as you can. Most dealers get extended service contacts for a cost of less than $1,000 but try to sell it to you for $2495 or more. I do not recommend extended service contracts at all, but finance managers lie, lie, and lie to customers to scare them into buying. The last dealer I worked for told all customers that the manufacturer only covered repairs that were a result of "defective" parts. This is untrue, but customers fall for it.
Of the extras mentioned above, only GAP (Guaranteed Asset Protection) is worthwhile, if you don't pay too much. GAP costs a dealer $150 to $250, but is sold for $495 to $895. GAP is insurance that covers the customer if their vehicle is totaled in an accident, and the payoff amount of the loan is higher than the appraised value of the vehicle. If you put a large down payment on your vehicle purchase, you do not need GAP. If you traded in a vehicle, which had "negative equity" (you owed more than the vehicle is worth) you probably need GAP, because in addition to the negative equity, the value of a vehicle drops a few thousand immediately after you drive off the lot. Just don't pay too much for GAP. I recommend paying $300 and no more than $395. You can also get GAP from your car insurance company, so check with them.
Credit unions usually don't allow dealers to raise the interest rate above their base rate to the customer. Interest rates are usually based on the year of the vehicle, and your credit of course, so if you are buying a new car, you will get the best rate.
If you are purchasing a used vehicle, you have much less information to work with. There is no invoice to tell you what the dealer paid. You need to do much more homework before going to the dealer, if you want to get a good deal. If you know what make and model of vehicle you want, go to used car websites like Vehix.com, Cars.com, Craigslist or Autotrader.com to find comparable vehicles that are for sale at other dealers. If you don't know what type of used vehicle you want, you will have a much harder time getting a good deal unless you pick a vehicle, then go do your research before heading to the dealer.
If you know all the comparable vehicle prices at other dealers or on Craigslist, you can negotiate much better. Try to do as much of the negotiation on-line, with the internet manager. You can try to negotiate a used car purchase with the fleet manager, but he/she will most likely hand you off to a salesperson. If that happens, get with the internet manager, as they can usually make decisions, and avoid other managers. Most salespeople will try to negotiate with you on the phone, but their managers will throw them out of the office if you are not there, in the dealership. The internet manager or fleet manager is usually the only salesperson that can negotiate with you before you go to the dealership. Don't be afraid to walk out of the dealership if your gut tells you to. Be sure not to give the dealer anything they can hold, like driver's license or your trade-in keys. If you do give them a license or keys early on, when test driving or get your trade appraised, get them back immediately. Otherwise, the salesperson will leave your license or keys with the sales manager, and sometimes they hold these items hostage. (In the old, old days, dealers would throw the customer's keys up on the roof to keep them from leaving).
Interest rates are higher on used vehicles, but only by 1% or so. It is important to know your credit score before you contact the dealer, so when you are checking with your credit union or local bank regarding financing, make sure to ask for your credit score and on which bureau the credit union reviewed your credit.
On a used car, you may consider an extended service contract if there is no coverage left from the manufacturer. The dealer's cost for an extended service contract is less if the vehicle is still covered by the manufacturer at time of sale. If the vehicle is still under the manufacturer's original factory coverage (usually less than 36,000 miles), this will save you money if you purchase an extended service contract. Finance people will try to sell an extended service contract for as much as possible, usually $2,495 and up. Thankfully, most banks or credit unions have limits that they will finance for an extended service contract. To give you a range on the cost of extended service contract, on a vehicle with less than 36,000 miles, is difficult. Toyota, Nissan, Subaru (foreign cars) usually cost the dealer a few hundred dollars less than American made cars. Figure the dealer cost of an extended service contract is $800 $1300. Finance people will always try to get you to pay the highest price they can get for an extended service contract, and if the bank won't finance it, will call you back to reduce the price of the service contract, only because they have to.
Credit problems make your purchase even more difficult. Most sub-prime banks have tightened their guidelines and that makes it much harder to get financed if your credit score is less than 600. Interest rates will be higher, the lower your credit score is. This is a fact, based on the market. Most customers with lower scores are more motivated to buy if any dealer can get them financed, and they are called "get-me-dones". Call the internet or special finance manager at the dealership to get "pre-approved", not pre-qualified, before going into the dealership. Most dealers will need your signature to run your credit, so have them fax the credit application to you, fill it out, sign it, then fax it back. Never sign a blank credit application, or the dealer will fill it out themselves, and that can cause temptation for the dealer to exaggerate your information in order to get you approved. Pre-approved means the dealer has sent you application to its lenders and received an actual approval amount or payment that that bank will give you.
If you can, give the special finance manager a vehicle listed on their website, that you are interested in, so the dealer can send your application to the lender. Ask the special finance manager for the actual interest rate, term (length of loan period) and payment before you go to the dealership. Giving you this information commits the dealer to those numbers, so they don't change when you come in. Maybe you should call a couple or three dealers with the same information so as to compare the numbers. Contacting more dealers will cause more inquiries on your credit bureau, and thus lower your credit score, (approx 5 points). Some special finance managers will send your application to all their lenders, which can really hurt your chances of purchasing. If you get a special finance manager that doesn't have much experience, and they send your application to 5-10 lenders, and all the lenders turn you down, it is very difficult to get another special finance manager that does know what their doing to get you approved later. Quiz the special finance manager as to his experience and ask him/her to proceed cautiously when sending out your application.
With credit issues or lower scores you will need stips when you come into the dealership. Stips are your current pay stub, proof of residence (a current utility bill with your name on it, at the address on your application), your driver's license, proof of full coverage insurance on a current vehicle, or you must be able to get insurance from an agent while you are at the dealership. You should calculate your income before you fill out the credit application, by dividing your year-to-date income by the number of months that have passed for the year. If it is before April 1, you will need your W-2 form from the previous year, plus your current year-to-date pay stub, and average them out. Don't overstate your income, because if it proves lower once you get to the dealership, it could affect your approval, as you may now qualify for a lower payment than the vehicle you wanted would have had. If you have been on the job for less than 90 days, or have an unstable job history (with several short jobs of less than a year each) you may want to wait to make a vehicle purchase when your stability is better. If you have credit issues, you can work on getting your credit score higher during this waiting period. One thing you can do to work on your credit is to go to annualcreditreport.com and get your free copy of all three credit bureaus. Sometimes one of your credit bureaus can have a much higher score than the others. If the dealer has run your credit, ask the dealer what the score is for each bureau. Different lenders run different bureaus, and the dealer can submit your application to lenders that run your most favorable bureau. After you get your free copies from annualcreditreport.com, look for incorrect information and contest it with the creditor. If it is older (more than 3 years), it may come off your credit report because the creditor doesn't contest your claim. (See my report on Credit Tips for more details on disputing your credit history.)
If you are getting turned down because your score is too low, you have to much bad credit in the past, the best thing to do is find a buy-here-pay-here car dealer that will finance you and report your loan to the credit bureau. They will probably report to only one bureau, but that's ok. Make sure they report monthly, not at the end, if you pay on time. This way you can establish your car credit and get bank financing next time. If they don't report, don't buy from them; keep looking for the right dealer.
Remember, always ask the dealer to provide you with a Carfax or AutoCheck history report. This report shows service the vehicle has had done, where the vehicle has been registered, maybe the vehicle came from a moist climate such as the northwest U.S. or Florida, so you would look for rust on a vehicle, and most of all tells you if the vehicle has been in an accident. The dealer will provide the report for free. There is a link on this page to AutoCheck where you can run a free vin # check, showing how many reports (such as service claims, accidents) have been filed, but they charge for details. There is a website that tracks vehicles that have been in a flood, been stolen or reported as a total loss. Go to nicb.org.
You can take the vehicle to your mechanic for inspection. Most dealers will let you, unless they have something to hide. If your mechanic finds items that need repair, make the dealer fix these items before you buy, not after.
The information above is just a small part of what really goes on when someone tries to buy a vehicle, but gives you a good start in preparing for your visit to the dealer. I will be setting up a forum so you can ask questions in real-time that I will answer. Keep an eye out for a link to my forum. Meanwhile, good luck, don't get pressured by the dealer and go slow when purchasing a vehicle.
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