August 26, 2007

Breath of a Salesman (Car Buying Lesson Number Two)

The second lesson of car buying is: many car salesmen treat their customers like idiots, and many customers are. Salesmen try, and often succeed, to get the customer to focus on the monthly payment, rather than the price of the car. That's backwards. A monthly payment (when financing or leasing) is simply a mathematical result caused by the price of the car (plus sales tax and finance charges) divided into monthly pieces. The only way truly to lower one's monthly payments is to lower one or more of the components that make up the overall price. Of these, the largest component is obviously the price paid for the car itself.

But car salesmen often reverse this process and create a series of deceptions for the customer. The most common deception is getting the customer to focus on a seemingly low monthly payment, while simultaneously charging a large down payment. That is simply robbing Peter to pay Paul. If you look at a car ad in a newspaper or magazine, the large print is the monthly payment. Often this payment looks attractive (and it invariably ends in a 9). But if you look at the fine print, it almost always indicates a substantial down payment or "capital cost reduction." What's more, the fine print in these ads usually indicates that the advertised price is based on MSRP (Manufacturer's Suggested Retail Price). That's sticker price. Zero discount. Not much of a deal there.

When you're in discussions with car salesmen and they present you with a (rather high) monthly payment and you react negatively to it, many salesmen will then ask, "what do you want your monthly payment to be?" They may even ask you this when you first walk into the dealership. Again, that begs the question, since whatever number you answer, they will typically pull the money out of the monthly payment to lower it to that level, and add the amount to the down payment. Or they might lengthen the term of the loan, or shorten the term of the lease, either of which almost always results in lower monthly payments but not a lower price overall being paid. It's all a psychological ruse. You could buy or lease a Bentley for $299 per month if you wanted to. All you have to do is put down $158,000. So when a car salesman asks me, "what do you want your monthly payment to be?" I answer, "the lowest price for the car, chopped up into 36 (or 48 or 60) pieces."

Some people feel more comfortable negotiating over their monthly payment only. When the salesman presents an offer of, for example, $579 per month, these people like to just get that number reduced, and to let the dealership worry about what components need to be lowered to get there. This is a simple method, and there's nothing wrong with it, as long as one knows what a good monthly payment and a bad monthly payment should be, based on the price of the car and the other factors involved. Otherwise, you could feel great that you got your monthly payment lowered from the salesman's initial offer of $579 per month to $539, only to find out later that, based on even a modest discount off the car's sticker price, the payment should have been only $439.

That is why I find it best to negotiate the price of the car before discussing the monthly payment, not vice versa. And when the salesman or his manager starts poormouthing about how they're not making money on the car, you can remind them that other components that make up the monthly payment, especially the finance rate (or "money factor" in a lease), are being marked up for additional profit by the dealer. And, dealers often receive "holdbacks," "marketing support" or other financial incentives from the parent car company. Don't worry, the car dealers are doing fine.


At 6:08 PM, Blogger Aileen said...

I think sometimes people don't care what the overall cost is. They just want to be sure the monthly payment fits into their budget. This may not be the wisest way to go, but it's a reality. We are a short-term society.

At 6:57 PM, Blogger media concepts said...

I agree. I was going to write about that too, but wanted to keep the post from getting too long. Some people feel that, if they like something and feel they can afford it, they don't need to get into distasteful and possibly confrontational negotiations over price. They'll pay the MSRP or the first price offered (often $500 under MSRP), and be perfectly happy to make a deal in minutes. Other folks are extremely wealthy and don't really care about the price of their cars. Good on them.

At 9:03 PM, Blogger Barbara said...

Once again I am an oddball. We have never bought a car on credit, so we really don't have a lot to discuss once we agree on a price. And that has become quite a bit easier since it's now so easy to know exactly what the dealer cost is. I still hate buying cars and prefer instead to drive the ones we own until they drop. Currently, with the exception of the Prius (which I rarely get to drive), we have a motley assortment of 4 cars each with over 100K miles, the newest of which is a 1997 Volvo. I'm not sure that selling even 3 of them would buy me a decent piano.

At 10:13 PM, Blogger media concepts said...

Paying cash for your car is another subject I omitted due to brevity considerations, and because I think it is something only a small percentage of people do. Obviously, it avoids all of the monthly payment issues. If you have the cash on hand, terrific.

At 8:52 AM, Blogger HomeImprovementNinja said...

Yeah, I prefer to buy a decent used car for cash. I know the finance charges are outrageous and I hate dealing with car dealers, so I make the rational compromise.

At 11:01 AM, Blogger media concepts said...

Yes but who do you buy your used cars for cash from? If you buy them from a dealer, you're dealing with car dealers. If you buy them from an individual, you get no warranty and are practically guaranteed to have problems with the car. The only place I know of where it's actually easy and pleasant to buy a used car is CarMax, although they give you a take-it-or-leave-it offer, and I don't know if it's a good price or not.

At 7:35 PM, Blogger TC The Terrible said...

A couple of lifetimes ago I sold cars for a living. I used to live for the customer that was only concerned about the monthly payment. I could play with that all day and get them to pay well above the MSRP.

With all of the information available today no one should get taken to the cleaners when buying a car. My last car, 2007 Dodge Caliber, took less than an hour to buy including the test drive. I walked onto the lot armed with a print out of the car's sticker from the dealer website and a dealer invoice from my bank. With that information and my own financing there wasn't much for us to haggle over.

Always, ALWAYS, get your own financing approved before you go on the lot shopping. There are tons of hidden charges and fees in the financing package and trying to negotiate them is like starting over at square one in the buying process.

For the record, most dealerships don't take advantage of single women when selling them a car. We always used to try to wait on young black males when we needed to turn a bigger profit. It was easy to get the better of their pride and they couldn't back off of the deal at that point. Some day I'll have to post on my own about the stunts I've seen pulled in the closing room.

At 8:04 PM, Blogger media concepts said...

Thanks TC, I agree. Nowadays, many dealerships have Internet managers who will make a quick deal with you online. If there are folks who have Internet access and who do not use it to find the relevant info., I guess they get what they deserve.


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