May the salesman curse your name II

Casio sells this for $9. It'll pay for itself in the first millisecond.

 

Negotiate a price first. Not a price and a financing percentage. Not a price and a cash back amount, available only to friends of the dealership, like you. A price. A fixed, solitary number of dollars that the dealer is willing to accept in exchange for its vehicle. That’s all you need, and all you want, before negotiating. Why? Because you can’t negotiate multiple quantities at once. It’s too complicated.

You can have the car for $20,000 cash. Or we’ll discount it 10%, with 4.9% financing for 5 years. Does that sound fair?

It doesn’t take a mathemagician to know that subtracting 10% from the price of a car and adding finance fees of 4.9% means a net savings of 5.1%, right? In fact, while the dealer would probably never go for it, you might even want to ask for a 20% discount with 9.9% financing.

Let’s look at the three scenarios:

a) $20,000 cash. Cost to you, $20,000.
b) $18,000, with 4.9% financing. Cost to you, $20,331.
c) $16,000, with 9.9% financing. Cost to you, $20,350.

Price first, terms later. Welcome to another illustration of compounding interest and how it can screw the unprepared. Always start any negotiation with a raw dollar figure and no financing terms. If you don’t, it’s too easy to just accept an interest rate on faith without bothering to do the math. Besides, interest rate numbers often seem so innocuously small that you’d think they couldn’t possibly damage your checking account balance that much. But they can.

Want to know how much a particular nominal price coupled with a certain interest rate will cost you? Well, you could guess. And you’d probably be as wrong as you were when you guessed that a 20% discount with a 9.9% interest rate was a good deal. Write this formula down. You haven’t even seen it yet, so stop bitching about how complicated it looks.

abc (1+(c/12))b
______________________

12 ((1+(c/12))b-1)

Where

a = nominal price
b = number of monthly payments
c = interest rate

Waah, it’s got parentheses and double parentheses and triple parentheses and those little numbers that go up top.

First, they’re called exponents. Second, this is not hard. Let’s demonstrate:

Say the dealer offers you yet another scenario: $18,500 (thanks to $1500 bonus cash, direct from Dearborn!) with a 4% interest rate. Plug the numbers in.

18,500 x 60 is 1,110,000.
4% of that is 44,400. That’s your term, from the numerator. That monstrosity to the right of it isn’t much harder.

4%/12 is .0033333.
Add 1.
Take that to the 60th power, that’s 1.22099659.

Save that term, you’ll need it later.

44,400 x 1.22099659 is 54,212.25.
That term you saved? It appears in the denominator (with 1 subtracted from it) giving you .22099659. Which, when multiplied by 12, gives 2.651959.

Divide that into 54,212.25, and you get $20,442. Among all our examples, that’s the worst deal yet.

The car salesman hasn’t put this much thought into it, of course. He simply gets a list of approved price/interest rate combinations from corporate and tries to sell you on the worst possible ones. But if you insist on having him quote you a cash price, and don’t even listen to the financing options, he’s forced to negotiate on that and that alone.

Once you’ve got your cash price (in this example, $20,000) you’re in the figurative driver’s seat. Most car buyers don’t even think about this, but,

If you want to borrow money, you don’t have to borrow it from the dealer. Even though you’re physically in his building, that doesn’t make him the only lender in existence.

Call your bank. Talk to the friendly teller- the one you flirt with every time you go in and would ask out if it wasn’t for the unflattering androgynous khaki uniform pants- and ask for a loan officer. Tell the loan officer that you want to know what rate they’ll let you borrow $20,000 at. If you’re really smart, you’ll have done this before you started car shopping. (So pretend this paragraph appeared at the top of this post.)

At the very least, talking to your bank gives you options. If your bank offers to lend you $20,000 at 3% and the dealer is offering 3.5%, tell the dealer to beat the bank’s price. The dealer will be infuriated by this, because

a) you didn’t accept his financing offer blindly;
b) you’re asking him to come down a little, which he could interpret as a blow to his pride;
c) you went behind his back and dealt with another party. The nerve.

The dealership floor is not the place for decorum and etiquette. You’re there to spend as little money as possible, so you can buy assets with what you have left. You’re not there to make friends, especially not with a salesman who doesn’t care if you live or die once you’ve signed the paperwork. Stand your ground. Even if the dealer brings his sales manager in to play good cop/bad cop and berate you for insulting and making a mockery of the car-buying process, you can just sit back and smile. Remember from last week: there are 17,999,999 other cars out there. If you feel slighted, you can get up and leave.

(That is, if you didn’t hand your keys to the valet or your driver’s license to the salesman when you entered the dealership. Oh, you didn’t, did you? Good Lord, do we have to do everything for you? Next time, park on the street and bring a photocopy of your license.)

May the salesman curse your name

What would I have to do to get you to walk off this guy's lot, TODAY?

 

Walk away.

That’s the primary piece of advice we offer to anyone shopping for a new car.

The Control Your Cash book devotes an entire chapter to how to buy a new car. Here’s an extremely brief summary, starting with a critical point: every year, 18 million new cars are sold in the United States.When you fall in love with one on the dealer’s lot, regardless of whom else looked at that same car this morning and is at this very moment racing home to grab a checkbook, 17,999,999 other cars are available.

You see a car you like, or even one you’re lukewarm about. The dealer wants to get the car off the lot. That is not your problem. Most car buyers get suckered in by the personality of the salesperson. Don’t. Keep it cold. There’s no more blatant example of why it’s important to look at every transaction from the other party’s perspective.

You occupy several roles in your life. In which ones is it important to you that you succeed?

Spouse?
Parent?
Child?
Employee?
Profit center for a car dealer?

Your financial obligation is to yourself, your dependents, and no one else, regardless of how radiant the salesman’s smile is. Some dealerships are so gauche that they actually keep each salesman’s monthly figures on a whiteboard where clients can see them. Think about that.

Occasionally, it makes sense to overpay for something – like a rising stock whose fundamentals make it likely to rise even more, or a house in a great location that can’t help but eventually appreciate. But there is never an excuse to overpay for a vehicle. Ever. Why?

Buy assets, sell liabilities. Unless you own Michael Jackson’s 2006 Bugatti Veyron, your car will never appreciate. Therefore it’s not an asset. You can add the swankest sound system and the snazziest white sidewalls, it won’t make a difference. As far as Control Your Cash is concerned, a car is a liability. A necessity most likely, and something you have to spend money on (which might make you think it’s an asset), but it isn’t.

Think of a car the same way you think of your mobile service plan. Determine what features you want, which ones you can live without, comparison shop, then get your outlay as low as possible. Only a moron would brag about how big and powerful his monthly phone bill is.

You’re only at the mercy of the dealership if you want to be. The dealer should be at yours. Most buyers have no idea how much power they wield in this relationship. Once you agree on price, you can refuse to buy. But the dealer has to sell. Advantage, you. Your livelihood doesn’t rest on the exchange of cars for money; his does. This should be obvious, but you might be naïve: the salesman is not your friend. Stop laughing at his jokes, even if doing so makes you feel more comfortable. Is filling an awkward silence really so important to you that it’s worth thousands of dollars?

Once you’ve decided on a model, take one step back and expand your horizons. Look at that model’s competitors. You have to have a Honda Civic? Fine, but at least see how much the reasonably similar Volkswagen GTI is going for.

Do that at KBB.com. That’s Kelley Blue Book, the standardbearer for pricing cars. KBB gives its information away, for some reason. Sure, the company’s numbers aren’t exact, but they’re somewhat internally consistent. If KBB says a 2010 Tacoma Tacoma double cab 4-door 4WD Pickup costs the dealer $24,344 and a Ford F150 Regular Cab 2-door XL Pickup costs the dealer $24,916, it’s reasonable for you to assume that the latter should cost you ~$600 more than the former.

Car dealers usually make their lots available during non-business hours. If you want, you can look at their cars’ window stickers on a Sunday or late at night and figure out how closely the numbers affixed jive with KBB’s numbers.

Oh, that sounds like too much trouble? Fine, then find something else to do for that hour or two that’ll net you hundreds of dollars. Heck, many dealers even post the stickers online, making your job that much easier. The dealers’ rationale for this is that they’d rather get two sophisticated buyers out the door quickly than spend that same time negotiating a few more dollars out of a single, less-sophisticated buyer.

This is the perfect time of year to buy a new car, too. Think about that prominently displayed sales board and use it to your advantage. Car salesmen have monthly and annual quotas. We know of one dealership owner who would fire his lowest-producing salesman every month. (Which has two benefits: it tells struggling tyro salesmen that they should find a new line of work, and it really motivates them. Not every dealer uses this tool – most bad salesmen rapidly flame out on their own without ownership’s help – but the ethics of it are not your concern. Your concern is to save as much money as possible when buying a liability like a car, then use those savings to buy assets with.)

The most motivated man on Earth is a car salesman at 7 p.m. on the 31st who still hasn’t made his monthly quota. If you threaten to walk, it’s almost funny how much more “wiggle room” a desperate salesman can find. And remember, even then you can still walk. Getting emotionally attached to a car is like getting emotionally attached to a pencil or a carton of milk.

Next week: financing!

**This article is featured at this week’s Carnival of Personal Finance**