Buying a car. Only in America

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As some of our readership already know, we recently had a car accident and as a result our 12 year old, perfectly working Honda Odyssey was a converted into a total loss. Looking for a replacement at the nationally known Carmax was rather a disappointment. so we moved on to the traditional smaller dealerships.

We started looking online for a possible replacement car for two weeks now. Today marked the first time that we started to go and visit car dealerships. Now for those who don’t know how things work in the US it follow usually this script

1. Dealership advertises a used car for a very low price to attract customers
2. You go and visit and a sales person will show you the car and almost force you into a test drive
3. you will sit down and have to provide your information again, like Name and telephone number
4. Then you ask whats the price and the answer is well it depends, let me ask my Manager.
5. Manager comes and looks at you and tells you he is willing to go down a small amount from the list price
6. You counter and say this is what I am looking for
7. Manager either counters again or shakes your hand and is out of there

The infuriating part here is that the ‘Negotiation’ steps #5 and #6 can repeat one or two more times. The more you haggle, the longer they usually let you sit in the room and waste your time.

But the experts say …

I found this article on Motortrend which looks at the process from the sales person point of view. “Most dealerships follow a 10-Step Process that’s as old as the hills.”

1. The “Meet & Greet”
2. Needs Assessment (or Analysis)
3. Product Selection
4. Walkaround / Demo Drive
5. Trial Close
6. Trade Appraisal
7. Presentation of Numbers
8. Introduction to Finance
9. Delivery
10. Follow Up

I know that each business has a process. There is nothing wrong with process if it helps the company AND the customer. However from an outsider point of view I wonder why there has to be a negotiation process at all. It simply signals that the car dealership is not providing the best numbers it is willing to sell the car for. As a direct result they would sell the car to Peter for $10.000 ,- and to Paul for $8.000,-.

I am an entrepreneur and I fully understand that a business must earn money to survive and offer its services. However I completely disagree that you are compelled to stay at a dealership to simply find the lowest common denominator. It costs your time and the time of the dealership, which in turn makes everything more expensive as they require to hire more people to server their audience.

This system does not make any sense

How about this. You advertise the car for what you are willing to sell the car. Then the negotiation comes down to financing if required. Instead of selling a used car for $10.000, you state that the final price tag is $9.000,- and you stick to those numbers. The trick for car dealerships is to sell the point of transparency, trust, faster processing times, and lower prices as your advantage. If a customer comes in and tells you its $8.500,- or he walks out, help him find the door and ask for future considerations. Now this system, if implemented properly would also bring financial benefits as the cash-flow would be much more predictable.

I found another article here, which describes the same process. I may be different than most when shopping for a car as I have done my research and I know what I want and what I need the second I walk into a dealership. For people like me, the process should be cut short to

1. Meet and Greet. Offer tea or coffee and for crying out loud why is there no comfortable couch and big screen TV for the kids ?
2. View the car or cars which you are interested in.
3. Ask what the lowest price is which they are willing to part with it ( I would think that between trade-in price and sales price a range of 10%-15% would absolutely be okay )
4. Let me make my decision and maybe ask if I want for a fee of say $50 put a hold on the car and price for the next day or two.

Done, In and out in under an hour, stress levels down and I can go an shop around more if I feel like it.

This system is mental

I know that of course the high pressure sales pitch will work better. That is unfortunately the reason car dealerships do it. It helps them boost their bottom line which is what businesses do. It’s akin to junk mail, we would have zero junk mail if a lot of people would not actually open and respond to it.

Also most people will require some guidance when they look at cars. They may come in and have a vague idea like I need a minivan, or I want a reliable car and not much more. Additionally, most people come in with not knowing anything about their financial situation like credit score and how much they would qualify for. Your credit score has a huge impact on every deal you close including car deals.

The importance to close the deal today is directly inverted to the value the ‘deal’ truly is. What I mean to say is that if you offer the best deal in the area, it is actually in the buyers best interest to close it as soon as possible. The dealership can simply wait for the next qualifying candidate to walk in.

The reverse is true if the dealership offers a bad deal. In that case they want to close it as soon as possible because it may take a long time for the next sucker to walk in.

Know the cars worth

Before you visit the dealership you should know what you are willing to spend on the car. Don’t just throw around numbers out of thin air. You can E.g. use Edmunds as as a way to find the target range. This includes average trade-in values, which is the value the previous owner received when they brought the car in. The list also includes average dealer prices. The delta between trade-in and dealer should roughly mark the negotiation space. Don’t expect a dealer like Carmax or others to get too close to the trade-in value. Likewise make sure you don’t get too close to the average dealer price.

The prices between different locations and different colors do not seem to be a large factor in most cases. Unsurprisingly, the year, mileage and the condition of the car is however a major factor in the price. For example a 2015 Odyssey with 85.000 miles on its odometer in outstanding condition is about $20.000,-. The same car with 120.000 miles and in only clean condition is around $16.000,-. That car as a 2014 model will cost you only about $14.000,-

Finding the right car boils down to what your wants are more so than what you can afford. Sometimes it may be better to get a slightly older car for the better value. Other times it may be better to invest a little extra to give you more value. It all depends on your definition of value.

If you finance your car, you can use the following calculator to estimate the total cost of the car, including interest paid.

Trade in value

If you have a car you want to trade in you should have a look at the same site  obviously for the year, make and model of the car you want to leave at the dealership. In my case we could skip this step because, the car was a total loss from the accident.

Remember that the offer from the dealership may be higher than the value you can achieve outside. The dealerships incentive is that they want to sell you another car. Not everyone may want to trade their car into the dealership though. You can also consider to donate your old car to a charity and receive a tax write off. Or you may want to sell your old car to one of your kids instead. Remember if you gift the car you will have to think taxes again. It all depends on your circumstances and your financial situation.

Always get at least a trade-in-range from the dealership if they are able or willing to offer one. It is then up to you to accept or decline a possible trade in deal. Do your initial research. This will give you a rough idea of what you could expect from the dealership. Most people will trade their car in when they upgrade.

Know your worth

You are in the stronger position if you can get pre-approved for a loan through your bank or if you are in the position to a cash purchase. I won’t go into the benefits and disadvantages on how either would affect your overall financial health. As always there are reasons for borrowing the required funds and there are reasons for paying it off in one go. It all depends on your personal circumstances and the available loan conditions. If you found the lowest price on the car you want and you get offered a zero percent interest loan, then by all means you should get it.

You should however avoid car loans from the dealership if their interest rates are higher than those of your bank. If they can offer a zero percent interest loan, then instead ask them how much they can reduce the price if you purchase the car outright. With today’s core interest rates close to 1.5%, the difference may not be a lot but it’s worth asking for it. If you have a bad credit score and you can get the money through your bank, you may be able to save a lot over the total financing period.

As of November 2019, you can get loans from your bank in between 3.5% and 4.0%. I believe that these rates may go down a bit further over the coming months. That’s because the federal reserve is on track to further cut interest rates.

Time is money

As long as you are alive you can always get more money. You can never get more time. I think of time as being the most undervalued asset most people have but that’s another story for another time.

Sometimes you need to be blunt and let the dealership know that you are only shopping around. You simply want to look at the car and get the best quote. Tell them that you are able but you are not willing to buy the car on the spot today. There are at least four positive things you will get out of this.

1. Save yourself time and the dealership as well.
2. Get a feel about the dealership and the way they treat prospective customers.
3. Be able to collect a few hard numbers you can take your time to sleep over at home.
4. You will get contacted by the dealership over the next few days and may receive much better deals

Never ever buy if you do not have a good feeling about the dealership or if you feel you are pushed in buying on the spot. The chances of you losing the best deal of your life are limited, trust me. Spending a bunch of money on a new or used car is also something you should be able to sleep over and feel good about the next day.

Your time is worth a lot. As a matter of fact most people undervalue their time tremendously. Have you ever seen how some people stand in line for hours only to get the Black Friday savings ? Unless you are in it for the thrills and you like the adventure of being trampled-on that is crazy.

What did we do ?

We knew that we wanted to replace our minivan with a newer model of the same make. So we visited a few dealerships before we bought our new Honda Odyssey. We made certain that we did not spend too much time in each one of those dealerships and told the sales rep that we are only looking and are not willing to buy on the spot.

It took about one week for the whole process to play out but eventually we got a great price on a 4 year old minivan. We may not have received the absolutely best price but we also did not spend hours and hours in any of the dealerships to haggle about the price.

The whole experience for my wife and I was fairly stress-free because of the above stated reasons. We eventually bought the car we felt that we had gotten a great deal, and I am certain the dealership was glad to sell us the car and also make a small profit.

In my books, that’s a win-win.