The key to getting the best deal is to understand where dealerships reap their profits.
(Steve Perez/Detroit News/File 2007)
Car buying is very complicated, and for many people it's unpleasant, and for good reason. New cars are pure purchase and assured depreciation, except in the rarest of circumstances.
On top of it, car loans are weighted so you pay mostly interest initially, so you don't have much equity in the vehicle - whatever it's worth - for a long time.
The secret is understanding where the dealer's profit comes from - and knowing when it's time to forget about all that and shop as you would for a good deal on any product.
Though the process can be difficult, buying a new car shouldn't be thought of as a war between buyer and seller; instead, it's really more like a game. The sooner consumers recognize this, the better off they will be. And if you want to win this game, you have to prepare.
As you begin preparations to buy a new car, realize that getting the best possible deal requires a good amount of research and plenty of time. You may need to do a cost-benefit analysis that weighs your time and effort versus the difference between the invoice price and suggested retail. Without investing any time in research or haggle effort, expect to pay the manufacturer's suggested retail price for the vehicle and possibly more for financing and add-on items.
The key to getting the best deal is to understand where dealerships reap their profits and where they serve as middlemen. A car dealer's main sources of profit, in no particular order, are: the new vehicle's purchase price; trade-ins and resulting used-car sales; financing and insurance; "back-end" products and services, such as rustproofing and service contracts; and vehicle service (repair and maintenance).
Purchase price
The price you pay for a new car hinges on a number of variables. They include but aren't limited to:
+ The invoice price.
+ Dealer holdback.
+ Customer incentives.
+ Factory-to-dealer incentives.
+ Supply and demand.
+ Your car's trade-in value.
For most vehicle makes, the published invoice price is not the true dealer cost because of dealer holdback. Holdback is a portion of a car's sales price (typically 2 to 3 percent of either the invoice price or manufacturer's suggested retail price) that an automaker returns to a dealer, usually on a quarterly basis. It's a way of boosting the dealer's cash flow and helps the dealer keep his business going. Most dealers see holdback as something that they're entitled to. In a general sense, everything is negotiable, but this is one item on which dealers seldom budge. And we mean seldom. If a dealer claims he wouldn't make any money on the deal you propose, you may be able to use your knowledge of dealer holdback to call his bluff.
Most car shoppers are aware of customer incentives - cash-back rebates and, usually, low-interest financing as an alternative. Lesser known are the factory-to-dealer incentives that reduce the dealer's true cost to buy the vehicle from the factory. Dealer incentives aren't as simple as customer incentives. But we list current offers for each type of incentive; additionally, we provide further context about dealer incentives here.
Dealer incentives are a bit of a gray area, but they're not the only one. Supply and demand is another factor that's difficult to predetermine. The latest, hottest model will sell at a higher percentage over dealer cost - and possibly over sticker price - than the model that's been around awhile and is in steady supply. But you must realize this isn't just about models; it's about trim levels, colors, and equipment, too. If you want a color or feature that's in short supply, you'll pay more.
Bear in mind that supply varies from dealer to dealer. A dealer's allocation is based on previous years' sales. If he sold relatively few of a given model last year, then he'll get relatively few this year. If the dealer's supply is short, even if the market's isn't, then he'll probably want more money for it. If he doesn't have the model (or trim level or feature) you want and his allocation is used up, then he may be able to trade for or buy one from another dealer.
Your current car's trade-in value can be used to lower the effective purchase price. Some states tax only the negotiated price minus the trade-in value, which results in a lower taxable amount and considerable savings for the buyer. Others tax the full negotiated price. If you're not sure which applies to you, ask the dealer.
Whatever the variable, it's important to shop around. By shopping multiple dealerships during an incentives period, you're more likely to get a better deal.
Additionally, don't forget:
Destination charge: This is a nonnegotiable fee set by the manufacturer that covers the cost of shipping the vehicle to the dealership. It's a fixed number, whether your dealer is 1 mile or a whole continent away from the factory. It may be called a "delivery charge," but under no circumstances should you pay a destination charge and a separate delivery charge that a dealer tacks on.
License and title fees: The method and cost varies from state to state, but these fees are unavoidable.
Insurance: Another unavoidable expense that adds up. Don't leave it out of your calculations.
Trade-ins
The car you currently own probably represents equity. With few exceptions, you'll get the most money for your used car by selling it privately. That's because dealers pay wholesale prices - not retail prices - for used cars. They sell them at retail, and the difference between the two is the only reason they bother. A used car's profit margin, though based on a lower selling price, is much greater than that of a new car. Don't underestimate your car's value to a dealer.
© Copyright 2008 Globe Newspaper Company.
