The Seven Deadly Sins Of Car Buying That Could Cost You Dearly, And How To Avoid Them The Car Business 101... 2 Sin #1: Shopping Based On Monthly Payment Instead Of Price... 3 Sin #2: Putting Money Down On A Lease... 3 Sin #3: Not Reading The Fine Print... 4 Sin #4: Buying From A Friend In The Business... 4 Sin #5: Falling For A High Trade in Value... 5 Sin #6: Taking 0% Or Low Interest Financing Over High Rebates... 5 Sin #7: Thinking Dealer Invoice Price Gives You Leverage... 6 About Automall Network... 7 For feedback or questions about this document, please contact Automall Network Inc. at (866) 310 8701
The Car Business 101 Lee Iacocca once said that car buyers would rather have a root canal than have to go through the process of buying a new car. Here are some of the reasons why: a. The car buying process is unnecessarily complicated and you almost have to be an accountant to figure it out, especially when it comes to financing and leasing. People are afraid to make a mistake on such a big ticket item b. The car buying process is cut throat because of the way salespeople are compensated at dealerships. Commission only compensation plans reinforce the high pressure sales tactics that push people to buy NOW c. The car buying process has inconsistent pricing. You could come home thinking you got a great deal and your friend can drive away that same afternoon with a much lower price from the same dealership. True, this happens in retail all the time, but the car business has a much greater negative stereotype and a bigger buyer beware stigma. The car business is like many other types of retail businesses. A new car dealership is a franchise that buys its products from the manufacturer and resells them. The manufacturer sets out a Manufacturer s Suggested Retail Price (MSRP) but each dealership is an independent business and is able to sell a vehicle for whatever price it wants. Used car dealerships buy their vehicles primarily at wholesale auction or from leasing companies at lease termination, but also take them in as trade ins when selling other vehicles. New car dealerships also sell used cars. Unlike most retail businesses where the price is consistent for everyone that walks in, you have to negotiate the price of a car. And some people are better negotiators than others. Most buyers would prefer if the salesperson would just give me your best price and let s get this deal done. Dealerships typically have two departments with different levels of pricing. The retail sales department services walk in traffic the consumer customers that buy a vehicle once every so many years. Vehicle prices in the retail department are based on whatever the market will bear. The fleet department services volume buyers like government offices, major corporations, leasing companies and vehicle buying services like Automall Network who buy frequently. Fleet prices tend to be much lower than retail due to volume purchasing. It is no different than an individual shopper buying one small can of soup from a grocery store at 99 or a restaurant buying several cases at 59 per can. When a consumer negotiates a price, they are dealing with a retail salesperson whose job it is to work with the sales manager to make as much money for the dealership as possible. They are most often compensated based on the profit margin on the sale. The more they can sell a car for, the more they make. Salespeople know that if a prospect leaves the dealership to think it over or comparison shop, there is a good chance they may not return. Hence, the high pressure sales tactics to buy NOW. As a retail consumer, you are dealing with the retail sales department. From the time you walk in, you are lead to believe that you are negotiating with the salesperson, however you are really negotiating with the sales manager. The salesperson is simply a buffer who has little authority to negotiate the dealership s best price. This structure has been carefully designed to work to the dealer s advantage during a negotiation and results in the I have to go talk to my manager script which is one of the most The Seven Deadly Sins of Car Buying That Could Cost You Dearly, And How To Avoid Them Automall Network Inc., 2014 Page 2 of 7
annoying parts of the car buying process. This structure is akin to a casino where everything is carefully designed so the odds work for the casino and not the gambler. When buying a car, everyone says it is important to do your homework. However, most people don't really know what that homework is or how to conduct it. For decades, our society has been conditioned to buy vehicles a certain way by the auto industry. However, that method has been designed to their advantage. As people s lives have gotten busier, the car buying process more complicated, and the amount of information and misinformation from the internet more abundant, consumers have sought out faster, easier and less expensive ways to find the car they want at a better price. Based on our experience dealing with thousands of consumers over the years, here are seven big mistakes (sins) that people have made that has cost them dearly. Of course, there are more but for now, recognizing these mistakes and preparing accordingly will help keep more money in your pocket. Sin #1: Shopping Based On Monthly Payment Instead Of Price One of the first things dealers learn in basic sales training is to get buyers thinking in terms of monthly payment instead of price. This is especially true for leases. This distracts your thinking away from whether you are getting a good price or not and toward how to make this car fit into your monthly budget. Extra costs can then easily be buried into the monthly payment without raising an alarm. When leasing, people tend not to think about price at all. Dealers can now play around with the term and down payment to fit your budget but maximize their profit. Most people find it very difficult to calculate backwards from monthly payment to price but as long as they have the car they want within their monthly budget, they are satisfied. What they don t realize is their monthly payments could be much lower if they knew what to look for. How To Avoid: Start by negotiating the price of a vehicle. Once you have an agreeable price, then calculate the monthly payments yourself along with dealership salesperson. The lower the negotiated price, the lower the monthly payment will be. Use professional lease and finance calculators to ensure that there are no extra hidden fees buried into the calculation. Dealer computer systems are notorious for automatically building in hundreds of dollars in administration fees without you realizing it. Sin #2: Putting Money Down On A Lease When you finance a vehicle and put money down, you are contributing towards your own equity, much like a mortgage. However, when you lease, you are only renting the vehicle; the leasing company actually owns it. Any down payment is only a pre payment of rent spread out over the term. This provides the perception of lowering your monthly payment. You may save a little bit of interest on the amount that is prepaid but, over the term of the lease, you are still paying virtually the same amount The Seven Deadly Sins of Car Buying That Could Cost You Dearly, And How To Avoid Them Automall Network Inc., 2014 Page 3 of 7
out of pocket. However, if the vehicle is stolen and not recovered or involved in an accident and deemed a total loss by your insurance company, then you could lose all the money that you put down. To better explain, let s compare it to an apartment lease. Imagine you wanted to lease an apartment where the monthly rent was $1500. Assume you can t afford $1,500 per month, however $1,200 is manageable. The landlord kindly offers to accept $1,200 per month if you are able to come up with $3,600 ($1500 1200=$300 x 12) upfront as a non refundable deposit. It works out to the same thing in the end, however it appears that the landlord is helping make the apartment more affordable. Using the example above, if the building burns down 3 months later, then your deposit goes up in smoke with it. The same is true for leasing a vehicle. We suggest that people take the amount of money they want to put down and deposit it into a bank account in their own name. Draw the difference from that account to make up for the difference in monthly payment. How To Avoid: Using the example above, tuck away the $3,600 into a bank account you control. Every month pull out $300 and add it to the rent payment of $1,200 you can afford. You are achieving the same outcome, however the down payment is in your control. Sin #3: Not Reading The Fine Print In The Ads When reading car ads, it is very easy to get caught up in the excitement of seeing a very low advertised price or payment. You call the dealership to ask if this is a misprint and they confirm that this special price is correct but you have to come down right away as it is a time limited offer. When you get to the dealership, the salesperson points out a little asterisk next to the price in the ad. At the bottom of the ad is the fine print that says this price or payment does not include certain items and requires a large down payment. Now that you are face to face with the salesperson and in the excitement of the car buying mood, it is easier to sell you a vehicle. How To Avoid: Always read and understand the fine print to avoid negative surprises when you get to the dealership. An asterisk next to a price always indicates that there are conditions attached and typically additional costs involved. Sin #4: Buying From A Friend In The Business Many people have strict rules about mixing friends or family with business. If you have a friend or family member working in a dealership, it can be very tempting to go to them for a deal. However, it can put a strain on the relationship if the deal isn t as good as you could get elsewhere. Although supporting your friend is a good thing, you also have an obligation to yourself to do your homework and ensure that their pricing is competitive. The Seven Deadly Sins of Car Buying That Could Cost You Dearly, And How To Avoid Them Automall Network Inc., 2014 Page 4 of 7
To illustrate this, we refer to a total loss insurance claim that we handled. The insurance company used our service to negotiate a much lower replacement cost than what the policyholder originally paid. Upon settlement, the policyholder contacted us to replace the car at the price quoted. We forwarded the authorization to our contact at the dealership. When they saw the policyholder s name, they raised a red flag. Apparently, it was the policyholder s brother who worked at the dealership and had sold him the totaled car originally at a very inflated price. How To Avoid: Obtain an acceptable price first from an independent source. Then present that figure to your friend or family member and give them the opportunity to match it or beat it. By setting the benchmark, it leaves you in the driver s seat. In most cases, they will match it. You ll get a price you are happy with and they will get the deal. However, if they won t match it, that is their decision. At least you gave them every opportunity to earn your business. Sin #5: Falling For A High Trade in Value Many people feel their car is worth a lot more than it actually is on the open market. Smart salespeople are able to recognize this type of buyer and understand how to play up to their emotions. By inflating the trade in value while at the same time not discounting the new vehicle as much, it creates the perception of getting a high value for the trade. In fact, the end result is the same or even worse for the buyer. For example, let s assume the new car s asking price is $20,000 and the discount that could have been achievable is $2,000. During comparison shopping, let s assume the buyer has been able to achieve an offer of $5,000 which is a very reasonable wholesale price for their vehicle. The salesperson senses that the buyer is sensitive to the value of their vehicle. So, istead of offering $5,000, the salesperson offers $6,000, making the buyer very happy. However, instead of discounting the new vehicle by $2,000, they are only able to discount it $1,000. The end result is the same but the buyer feels they received a much better offer for their original vehicle and does the deal accordingly. How To Avoid: It doesn t matter what the value of the trade or the price of the new vehicle will be independently. What matters is the amount of cash that one has to pay or finance, in addition to their old vehicle, to drive away with the new vehicle. When comparison shopping, focus on the difference. Sin #6: Taking 0% Or Low Interest Financing Over High Rebates There is no such thing as free money in the car business. Over the last several years, manufacturers have offered several promotions to stimulate sales where buyers can either get free interest if you are financing or a sizable rebate if you pay cash. However, they cannot take advantage of both. The Seven Deadly Sins of Car Buying That Could Cost You Dearly, And How To Avoid Them Automall Network Inc., 2014 Page 5 of 7
Paying cash does not mean that you have to have the cash available in your bank account. Few people have enough money to actually pay cash for a vehicle. It simply means that you are obtaining the money from your own sources and not from manufacturer. You can borrow it from a relative or from your own bank. In either case, it will be treated as cash on your vehicle purchase. For example, one manufacturer offered 0% financing or $7,500 rebate if paying cash. Many buyers took the 0% financing option because they thought that they were getting free money for the next 48 months. After all, the banks were charging 8% interest. What they did not understand was that if they went to their own bank and borrowed the money and paid 8% interest, they would actually save $3,425 over the term of the finance. This is because the interest amounted to much less than $7,500. Do not expect the salesperson to educate you with this sort of information. If it is easier to sell you a vehicle because you believe you are getting free money, then that is exactly what they will do. Their job is to sell the vehicle. How To Avoid: Run the figures through a professional loan calculator using both scenarios. Choose the option that results in the lowest TOTAL cost of vehicle. Note: There may be some extenuating circumstances where you need to take financing regardless of which option is better. However, in most cases, choose the one with the lowest TOTAL cost. Sin #7: Thinking Dealer Invoice Price Gives You Leverage Many people are led to believe that if they know the dealer s invoice price, this will give them a tremendous advantage when negotiating the price. What they don t realize is that Dealer Invoice Price is the slickest, sneakiest marketing gimmick in the auto industry. First, there are really two levels of dealer invoice price, 1) the information that the manufacturers allow to be shared with the public and is available through third party websites and even through dealer s themselves when they want the buyer to believe they are getting an unbelievable deal, and 2) the true dealer invoice price which is lower but the public will never see. Second, many companies that offer confidential dealer invoice prices to consumers are actually lead generators for dealerships and are compensated, maybe even funded, by dealers. Paying small amounts for an invoice price report or a similar service demonstrates that a buyer is at least a little more serious than your average tire kicker. Their contact information is extremely valuable to dealers in this very competitive and cut throat industry. The lead generators sell the contact information to the dealers who are able to proactively follow up with an offer and get first dibs on that client. Third, clever dealers provide offers that seem extremely aggressive, focusing on the profit margin over invoice that they are willing to sell the car for which seem like a great deal. Once that price is agreed upon, then extra products and fees are added, like administration, vin etching, extended warranties, rust proofing, etc. which are all high margin profit opportunities for dealers. The Seven Deadly Sins of Car Buying That Could Cost You Dearly, And How To Avoid Them Automall Network Inc., 2014 Page 6 of 7
How To Avoid: Don t worry about dealer invoice price. Focus on total cost and the maximum level of discount that can be achieved in your market with an on the road price. About Automall Network Automall Network is an auto buying consultant. We conduct independent market research on vehicle pricing to determine what the best prices are in your market. We sell this market price data, which we call our "Best Price Reports", to car buyers to eliminate the need for comparison shopping and negotiate their best deal. For the convenience of those that don't want to do any negotiation, we offer our "Full Concierge Service" to conduct the negotiations and make the necessary arrangements. There are many more car buying Sins that could cost you money and can be avoided. Automall Network teaches courses called "Car Buying Saving You Money" through various local colleges to teach car buyers how to plan for their next purchase or lease, make financially sound decisions and prepare them to effectively negotiate their best deal. For a course schedule, please visit our website at http://www.automallnetwork.com/courses.php. For a full list of services and costs, visit www.automallnetwork.com. The Seven Deadly Sins of Car Buying That Could Cost You Dearly, And How To Avoid Them Automall Network Inc., 2014 Page 7 of 7