Getting a new car is awesome. But buying a new car is stressful, expensive and filled with traps set by skilled salespeople who — even the most honest among them — are trying to get as much of your money as you’re willing to part with. The average person only buys a car a few times in their life, while salespeople do their jobs every day. You need to watch out for these common and costly traps so you don’t get burned the next time you’re shopping for a car.
1. Marked Up Loan Rates
Dealers partner with many lenders, often as many as 20, with some specializing in certain types of loans, such as prime or subprime. In exchange for getting a customer — a car buyer in need of financing — the lender often lets the dealership mark up the interest rate to turn an extra profit. For example, if a lender approves a buyer at 6% interest, the dealer can present an offer of 8% interest without the buyer knowing any better. On a $15,000 loan that extends over 60 months, that’s more than $1,000 out of your pocket and into the dealer’s bank account.
Get Your Financing Preapproved
Dealers make much of their money through their financing departments, often presenting only the offers that earn them the most commission or highest markup rate, not the offer that’s best for you as a buyer. The remedy is to get preapproved for financing before you walk into the dealership. Local credit unions often offer better rates than traditional lenders, such as banks, so you can bargain from a position of strength and know that you got the best deal possible. You can ask to see the actual lender approvals on paper, but the dealer might not comply.
2. Inflated Sticker Prices or MSRPs
The sticker price sometimes, but not always, is the same as the manufacturer suggested retail price and represents what the dealer hopes to get from the buyer. It includes the price the dealership paid for the vehicle, add-on costs and the profit the dealer hopes to earn on the sale. The sticker price often represents the starting point of negotiations — but it shouldn’t.
Instead, Negotiate From the Invoice Price
Negotiations should start with what the dealer paid for the vehicle, which is sometimes the same as the invoice price, but not usually. Just as the buyer tries to negotiate down the sticker price, the dealer often negotiates down the invoice price and pays less than what the manufacturer hopes to get. Although dealers have been known to show customers something that resembles an invoice to show how little they’re making off the sale, you can find the true invoice price by searching sites such as Edmunds, CarsDirect and Consumer Reports.
3. Higher Interest Rates When Car Price and Financing Negotiations Are Combined
If dealers know that you’ll be financing the car through their dealership, they can factor that into their negotiation strategy. That strategy often involves convincing you that you’re getting a great deal on the car by slashing the MSRP from $22,000 to $19,000, for example, and then making up for the price decrease by raising the interest rate on the loan.
Don’t Tip Your Hand
To avoid this trap, keep financing negotiations and car price negotiations separate. In fact, don’t reveal how you plan to pay at all. When the dealer asks if you’ve been preapproved, if you’re paying cash or if you’re looking for dealer financing, respond that you’re not sure, haven’t decided or that you’d just like to square away the price of the vehicle first. Once you settle on what you’ll pay, then discuss financing.