Car Buying Tips

 

Purchasing a vehicle can be one of the most taxing times in your life. Why? The automotive purchasing experience is one where information is limited and the consumer is often presented with many confusing products in rapid succession. The automotive industry has come a long way in improving transparency but as with most things in life a little home work and preparation can go a long way. www.creditunionautorates.com was created to assist consumers with understanding the automotive buying process. We will cover the following:

1. How does a dealer make money?

2. Determine what type of vehicle you would like.

3. Arrange Financing!

4. Warranty or not?

5. Choose your dealership.

6. Go Time!

1. How Does a Dealer Make Money? Dealers make money in several ways they are as follows:

Trade -in: The dealer will low ball your vehicle value during your negotiation. Expect this. They have software that looks at their inventory needs based on market needs. Simply put, this software looks at all the vehicles that the dealership has sold and the profit margins and tells them what types of vehicles they need to acquire. The dealer acquires used vehicles through two sources; trade-ins and auctions. The dealer will compare your car to their needs and compare the vehicle against one of the value guides (NADA, Black Book, and Blue Book) to establish a value for your vehicle. The books values can vary greatly from book, by region, and vehicle condition.

Once the dealer establishes what they think the market price is for your vehicle they will try to establish an offer that is well below this value so that they can make a profit. How do you protect yourself? You should first lookup the value of your vehicle in EACH book according to its condition. After you read this section we have a worksheet that you can use to record the necessary data points before you go to the dealership. This way you can stay on point when purchasing a car and get the best deal!

After you establish the value of your vehicle, visit a couple of auto dealership websites and search for your vehicle. Carmax is a good national chain and their site can help you assess what the market price is for your vehicle. Once you understand, what the book value (NADA, KBB, Black Book) and the market value is for your vehicle, then you should have a relative range in which you can accurately assess the value. Remember, when you value your car either through the books or on a dealer website, be fair in your assessment of its condition and always look for a vehicle selling in the same geographic region. This is how the dealer is going to approach it when making you an offer.

Two last points on this matter, you may want to look at the potential dealer’s website where you are looking at purchasing. See if they have similar models on the lot. General rule of Thumb, if your vehicle is a Honda you will typically get a higher trade in value at a Honda dealership. Finally, when you are negotiating your trade in, the dealer will ask what you owe on it. If you owe less than what the car is worth (based on above research), do not tell the dealer what that number is until after you have agreed on a purchase price. If you tell them before they evaluate your trade, the number always magically comes back at what you owe on the loan, funny how that happens!

Purchase price of the Vehicle: Dealers make money on the transaction price or sales price of the vehicle. In the case of New Cars, this price is any price above invoice minus the dealer holdback or factory to dealer incentives. On used cars the dealer makes money on any price over what they paid for the vehicle, either at auction or through trade-in.

In order to understand new vehicle purchases, one must understand how the terminology which is used. The first price that you will always here the dealer discuss is MSRP. This is the suggested retail price for a vehicle. Typically, if you pay this price you are over paying for the vehicle. However, there are times that MSRP is going to be the price you pay. Some examples of this scenario are: If you purchase a vehicle that is in demand. Think about how in demand a Toyota Prius is when gas prices are high. Another example could be when a new model is introduced and demand is great for it, think about the Chrysler PT Cruiser when it was first manufactured. Customers lined up to pre-order this vehicle.

The second price to understand is the invoice price. This is the wholesale price the dealer pays to manufacturer. This is typically the bottom floor price that a dealer can accept on a vehicle. How does a dealer make money, if you purchase the price at invoice? The dealer has special incentives from the manufacturer that add to his profit. If he sells at Invoice, he will make a small amount above his expenses for marketing and disposing of the vehicle.

On used cars, the dealer typically makes wide margins on the vehicle. As previously discussed, the dealer sources vehicles from either dealer auctions or customer trade-ins. It’s difficult if not impossible for a consumer to determine what the transaction or purchase price was for the dealer. A smart shopper will look at comparable vehicles for sale on the Internet and record those prices (Record this in the worksheet). After determining what the market price is, you can get a sense as to what the dealer acquired the vehicle for by reviewing the book value (NADA, Blackbook, KBB). You should look at the Trade-in value to get a sense as to acquisition price for the vehicle. Now you have the market price and the acquisition or trade-in price. This sets the range in which you should negotiate the purchase price for the vehicle.

Financing: Dealer’s make most of their money on the financing of the vehicle. Once you agree to a price for your trade-in and a purchase price on your vehicle, you will meet with the F&I manager to discuss financing of the vehicle and closing on your vehicle purchase. The F&I office is the single largest profit center in the dealership! How do they make money? The F&I office exists so that the dealer can arrange financing on behalf of the customer. Each dealership has relationships with several financial institutions. These include Credit Unions, Banks, Finance Companies, and Captive Finance Sources. Captives are the financing arms of the manufacturers. The dealer will send your application to each financing source and wait for what is called a call back. The call back is either an approval, decline or counter offer. Inside each of these decisions there is various information and stipulations on the term of the deal. The important thing to know is that the lender will let the dealer know at what rate they will buy the loan. This is called the buy rate. The dealer will then raise or markup this rate and offer this to the consumer. An example would be that the lender will buy the rate at 11% and you were approved at 9% the lender will make 2% on the value of this loan. This is extremely important to understand! Why pay more than you have to? This type of transaction is called indirect financing; meaning that the dealership is acting on behalf of the lender to originate the loan.

How do you prevent the dealer from making money on you in this manner? The answer is simple; before you visit the dealership, arrange financing with your credit union. The credit union will lend you money based on your credit history. Arranging financing ahead of time accomplishes two things. It saves you money in that the dealer is not marking up your rate, and it also allows you to more effectively negotiate the price of the vehicle. How? Buyers who are preapproved for financing understand how much car they can buy. Consumers who walk into the dealership without financing being pre-arranged are at the mercy of the dealership and ultimately will not leave with less vehicle for their money because the dealership always works to optimize profit. This means, they will sell the vehicle at a higher price, mark up the rate and sell a bunch of unnecessary add-on products. All of this cumulatively results in the consumer having a higher payment and if you compared that payment to the same payment and having been pre-approved for financing through your credit union, you will see that the result is typically a more luxurious vehicle. An example could be that now the consumer could have a vehicle with leather seats or navigation.

Once you arrange financing through your credit union, do your research, visit the dealership, negotiate your trade-in and vehicle purchase, you will visit the F&I office to close on your vehicle. At this time you will let the F&I manager that you have already arranged financing. He will try and persuade you to accept his offer for financing. Politely decline and follow the Credit Unions instructions that they gave you when they approved you. This could be as simple as writing a check from your checking account.

Warranties and Aftermarket Products: Dealerships will at the time of closing in the F&I office present to you a number of products. Among these include Extended Warranties and Gap Insurance. Extended warranties are designed to provide the consumer with coverage for their vehicle in the event that the vehicle breaks down. This coverage is in addition to the manufacturer’s warranty. There are two types of warranties. There are warranties that are underwritten by the manufacturers and then there are third party products that are underwritten by insurance companies.

GAP insurance is a product that is designed to protect a consumer in the event that there is a catastrophic loss of the vehicle and the recoverable amount of the vehicle by the insurance company is less than the amount that you owe on the loan. This difference is then covered by the underwriter and consumer or policyholder does not have to pay out of pocket for this difference.

Both products are valuable and do provide a good service for the consumer. However, like anything else you have to read the policies carefully and stay with a well known brand. Dealerships make loads of money on these products. They typically make anywhere from $500.00 to $1000.00 on these products. When you arrange financing, I would ask the credit union if they carry these products. Many of the credit unions today offer these products and certainly do not mark them up like the dealership. In general, it is advisable to stay away from the aftermarket products being offered at the dealership as they are typically way overpriced.

2. What type of vehicle would you like? This is such a silly question, right? The last thing you want to do is to go to the dealer and not know. The dealer’s job is to get you to drive off in the most expensive car that they can get you approved for so they can make the MOST money! Review reviews of vehicles you are interested in, look at the reliability and owner satisfaction information on these vehicles. The internet has an amazing amount of information on it. As discussed earlier, look at dealer and manufacturer websites and get a general feel for the sales price of the vehicle you’re interested in. All this information will serve you well when you start negotiating.

3. Arrange Financing! As previously discussed arranging financing prior to your visit at the dealership will save you money and help you negotiate a better price. We have information on over 7000 credit unions. Click Here for our Credit Union Locator. Additionally, we provide you with information on the prevailing auto rates in your area. Click Here for Auto Rates.

4. Warranty or not? This actually depends on how what type of vehicle you are buying. If you are buying a new vehicle they typically come with bumper to bumper coverage for 36,000 miles or 36 months whichever comes first. Bumper to bumper simply means that everything is covered on the vehicle with the exception of named items. This type of policy in the Insurance Industry is called Exclusionary coverage because it’s easier to tell you want it doesn’t cover than what it does.

So if you are planning on keeping the vehicle after the 36000 miles or longer than 5 years and want comprehensive coverage on your vehicle, then a warranty is probably a good idea.

If you are buying a used car, contact your credit union and see what a warranty costs. If your budget is tight and an expensive car repair would hurt your finances, a warranty is a pretty good idea. There are several companies that sell these warranties online and they are just as good as what you would get from a dealer. However, be leery of any warranty company that offers warranties for just a few hundred dollars. Remember what your Mom and Dad taught you, if it appears too good to be true it probably is.

5. Choose your dealership. There are over 20,000 dealerships in the United States Today. These dealers range from small independent dealerships to large corporate owned and operated dealerships. Most all of them are advertising their cars on the internet. Check with your friends, your lenders, and even your better business bureau about the dealerships reputation. When you are making a purchase this large, you should know who you are doing business with.

6. Go Time! Now that you have researched your options, found your car, arranged financing and decided on a warranty; you are now ready for visiting the dealership. When you arrive at the dealership, stay focused on the task at hand. Use our Worksheet click Here. When you arrive you will be greeted by a sales person. They will ask lots of probing questions trying to find out if you are trading a vehicle in or ask you what type of payment you want, or if you are financing. Do not answer these questions. Answering any of these questions will provide them with information in which they will structure the deal so they can optimize their profit. When they introduce themselves, you should indicate that you would like to see the vehicle you have researched. When they ask if you are financing a vehicle, you simply tell them that you haven’t decided yet. This way it allows you to negotiate the best price on the vehicle first. Same applies for when they ask if you are trading in your vehicle yet, you tell the dealer that you haven’t decided, but that you would like to agree on a price on the vehicle in question. Once you agree on the price on your vehicle, then you can begin to negotiate on the value of your vehicle.

Remember, if you do your research then you will know what your vehicle is worth by using the same methodologies and sources the dealer uses. Finally when you agree to a price for your vehicle and the one you are purchasing, you will be brought back to finance to close. When they ask how you would like to pay for the vehicle, tell them you have already arranged financing. The dealer will then tell you that they can get you a better rate. Politely decline and tell them that you are financing through your credit union. If you take your time, do your research, and arrange financing through your credit union, you will be able to negotiate a good deal on your next purchase. Remember, be firm, be polite, and be direct. Best of luck!