Financially Boundless Podcast

This is Episode 5 of our Financially Boundless Podcast. You can listen to the full-length episode using the player, or read the transcript below the player.


Full Transcript:

Welcome to Episode Five. I played a song today because it’s relevant to our topic – it reminds me a lot of those car dealers you see on Saturday mornings on television that are like, “come on down and get the best deal you possibly can on a new or used car!”

So, to kind of segue way into that, we’re going to talk about how to negotiate a car purchase. This is something that causes people a lot of stress and for good reason. Inherently, the process is stressful the way that we have the car buying process structured here in this country that you have to go to a new or used car dealer and deal with someone who is very experienced in sales.

It makes you feel sort of uncomfortable and there are some alternatives to it, and I’m going to get into all of that. What I’m going to do is cover this in kind of a step by step process. However, I do want to make some beginning notes to give you a starting point for going to the car dealer.

First off, cars are expensive. I realize everybody knows this, but cars are expensive, especially once you factor in depreciation, taxes, registration, inspection, all the other costs to go along with owning a vehicle.

In addition to that, for new cars: the industry standard is that they lose about 10% of their value when you drive off the lot as the first owner. What this means is that the minute you drive that new car off the lot, it’s lost 10% of its value already due to depreciation. It’s not a great thing.

I recommend used cars. Used scores are better just because you’re not losing as much value, and they if you’re buying a used car that is going to hold its value, you’re going to end up better in the long run.

The second introductory thing that I want to talk about is the 20/4/10 rule. This is an industry standard rule in car purchasing. It means that you should be able to afford 20% down. So the first part of this rule (the 20 of the 20/4/10 rule) is that you’re able to afford 20% down. This isn’t always true, and obviously you can run into situations like no-money-down loans, but they aren’t always a good idea because there are some costs wrapped up in those loans.

The second part of the 20/4/10 rule is to be able to afford a four-year (or less) loan. Don’t stretch your loan out to five, six, seven, even eight years. I know a lot of banks are doing eight-year loans now, which is crazy. Don’t stretch that loan out because you want the car to be worth something when you’re done with your loan. You don’t want to go past those four years because then you’re risking that the car isn’t going to be worth anything in the end.

Third, the “10” part of the 20/4/10 rule [is that] you should expect to spend up to 10% of your income on that vehicle each year between maintenance costs, gas and fuel, and other costs to own.

So, the 20/4/10 rule says that you should be able to afford 20% down, be able to afford a four year (or less) loan, and you should expect to spend 10% of your income on that vehicle each year between maintenance and other costs to own. That’s a good rule of thumb on purchasing a car.

I also want to preface this by saying that this isn’t all BS advice. I myself, before I get into being a tax professional, actually worked in a car dealership for many years, and I’ve seen a lot of these practices in real time. I don’t want you to think all this is just the same advice that everyone else is giving us on the Internet on how to buy a car. I’m giving you insider tips that you might not have heard before, and some insider tricks that you may not have seen before or may not know about, because I’ve actually been in the car industry before. I’ve actually lived it and seen it, and I’m giving you my real advice.

To continue on with some beginning notes, I want to say some things that I’ve seen in real practice in car dealerships, the first one of those being don’t pay in cash.

I know a lot of your parents and grandparents will give you that as their first advice. No, that is completely outdated advice! All that does is frustrate the salesperson, the finance manager and the person in the back office, because those three people all need to count that cash over and over again. It’s a huge waste of time when we have things like checks, credit cards, debit cards and, obviously, bank financing. It’s completely outdated advice. It may have worked at some point, but just don’t do it. It’s not applicable in today’s day and age.

Now, I talked about not paying the car dealer in cash, but here’s something I would want you to do: DO go to the dealer on the last day of the month. Those air the best 12 days of the year to buy a car because all car dealers, especially new car dealers, have quotas to meet and they will make you a much better deal on the very last day of the month because they need to meet that quota. Avoid going at the beginning of the month because these dealers really don’t have any incentive to make you a good sale at the beginning of the month, because they don’t know what the rest of the month is going to look like. They could have a stellar month and your sale in the beginning of the month truthfully, sadly, really doesn’t mean that much to them. If you go on the last day of the month and they need to sell 20 cars that day to make their quota, they’re going to make you a good deal.

Also, when you go to the car dealer, don’t think you’re just going to skate in and out. I know a lot of people think this, and it plays on today’s world of impatience. But be prepared to be at the car dealer for about three hours, all said and done, between when you meet with your sales person and you go to the finance office and you negotiate your deal and you finally leave with the car.

Also, on that same note, be prepared to not get the car the same day. The dealer, especially with used cars, may have inspections or detailing to do on that car, and you don’t want to rush it by saying “I need to have this car today” because those services are included in the cost of that car. If they still have to wash it and vacuum it or they have inspections that they have to do, or even if they’re going to add on some things for you, come back and pick it up [another day]. Don’t be prepared to get [the car] the same day if the dealer’s not prepared to give it to you the same day.

That’s all my introductory advice. Now I want to get into this step by step process of how to negotiate a car deal and what to look out for.

Step #1: Research

This happens before you even set foot in a car dealership. Research your new or used car purchase before you ever go to the car dealer. The two best websites to do this are Kelley Blue Book (kbb.com) NADA Guides (nadaguides.com). NADA is the one that the most car dealers actually use. Kelley Blue Book isn’t actually used by most car dealers, but is used by consumers to figure out what your car is worth if you’re selling it outright or what a new car might be worth if you’re going to purchase it.

If you’re buying a new car, it might be harder to use Kelley Blue Book or NADA. But if you’re buying a used car, certainly make use of these two tools that are out there for totally free online. All you do is plug in the make, model, and year and you’ll get a dollar range of what that car should retail for if it’s a used car.

Along those same lines, after you research that new or used car purchase, call or go online to your auto insurance company and get a quote for the new or used vehicle you’re looking at purchasing. This is to ensure that the insurance rates are similar to what you’re already paying, or they’re at least affordable to you. You’re going to barely have time to do this when you get to the car dealer, so it makes sense to make the five-minute phone call (or even go online to do this). You really can’t leave the car dealer without having some insurance on that vehicle.

Now, as part of this first research step, I also want to talk about trade-ins, if you have one. First of all, don’t tell the car dealer right off the bat that you have one, we’ll get to that and why It’s not a good idea in a later step. But, if you have a trade in, also see what the value of this trading is using those two tools that I talked about (Kelley Blue Book or NADA Guides).

I also recommend using a different tool for this, and this is Carvana (carvana.com). Carvana is revolutionizing the way that car dealers work. It’s a totally online car dealer where you can buy vehicles online and you can trade vehicles completely online. This is a great negotiating tool for you, even if you don’t decide to actually trade in your vehicle with Carvana (which you can).

You can go online to carvana.com, and they’ll give you a quote on your trade-in in about two minutes. It doesn’t take long at all. It’s just as easy as going on Kelley Blue Book or NADA Guides. And they’ll give you an actual down to the dollar quote that they’d be willing to pay you for that car. You can print this out and take this to a physical car dealer with you and say, “I actually have a real offer on the table for this trade and for this price”.

What Carvana will do, if you do decide to go with them: they’ll send a rollback (tow truck) to your home or your office and they’ll just load up your car. They’ll spend 15 minutes with you signing some paperwork and cut you a check. It’s very simple. I’ve personally done trade ins with Carvana before, and I’ve loved it. The tow truck has showed up in front of my house. The driver is very friendly, he looks over the car, takes a few pictures, has me sign my name to some things and gives me a check. The car rolls away on the roll back, and it’s very simple. Use this as a negotiating tool as well, because this is what an actual dealer is willing to pay.

Another point I want to make about trade-ins while we’re on that topic is if you still have a loan on your trade in, call your bank and get a payoff quote. The dealer will need to pay off your loan. If you decide to trade in the car, this saves you plenty of time at the dealership when you’re really not going to have a whole lot of time to be doing this, and it only takes a five-minute phone call. Some banks even let you do this online, and the dealer will be happy that you already did this from the get-go.

Like I said before, don’t let the dealer know right off the bat that you have a trade in. We’ll talk about that in a couple more steps.

In my last point, under the research topic here in step one is to make the decision on looking into any aftermarket products before you go.

If you’d like to look into warranties on your purchase vehicle, that’s fine. Decide this ahead of time, though, so you don’t get caught looking into everything that the dealer has to offer. Most dealers have a variety of extended warranties, along with maybe some GAP coverage, tire and wheel coverage, paint protection, and sometimes they even offer more obscure things like collision deductible payment coverage. We’ll talk about all these aftermarket products in the last step, but make the decision ahead of time if you actually want to look into these [or not].

Step #2: Financing

So the second step in this car buying process is financing. You want to walk into the car dealer with financing already lined up, so you want to do some research ahead of time on this. This ties into step one really well.

This financing could be through a local credit union or local bank that you know has good auto loan rates. To figure this out, you can go on their website. Look up some websites of some local banks and credit unions, even some of them bigger national banks, and look into their auto loan rates. They have to publish these rates online for full disclosure by law.

Just get preapproved and take your preapproval letter or email to the dealer with you. Sometimes they won’t even actually ask to see it. They just want to know the interest rate. If you can get a decent interest rate on a new or used car loan from a local bank or credit union, know what your interest rate is and tell the car dealer to beat it.

Large dealers usually work with 30 to 40 banks at once, so make them compete for your best rate. They’ll want to beat it because dealers actually make a sweet commission off of financing contracts. The dealers sometimes actually get to markup your rate. What I mean by this is, say you got preapproved at 2.5%. The dealer might get to mark that up to 3.5% and keep that extra 1% for themselves. I know it sounds crazy, but it happens all the time.

In addition to that, the dealer also makes a sweet percentage commission off [financing in-house], and banks even run contest for dealers to get [a certain] number of people financed through them in a month. So, the dealer has a really incentive to get you financed directly through them with a bank that they work with themselves.

The sales person or finance person also makes a little commission off this. This is called a spiff. In dealer terms, a spiff is a commission. If you hear the word spiff being thrown around while you’re in the dealership, know that it means commission.

Step #3: Going to the Dealer

So far, we’ve only talked about what you do before you go to the dealer. You’re probably sitting there saying, “when do I actually go to the car dealership?” Well, step three is actually going into the dealer.

(Now I’m going to step back a second and do another thing before you go to the dealer, which is contact a salesperson online. You’ll usually go through the Internet sales department, which will “qualify” you as a lead and get you set up with a sales person and an appointment. This way, when you get to the dealer, you already have some information and the dealership already has some information on you. This is especially true if you go in the last days of the month like I advised to do, because the dealer [will likely be] very busy.)

Once you get into the dealer, you’re going to sit down with the sales person and they’ll take you on a test drive the car you’re interested in, show you all the features and everything, and then you’ll likely get what we call the four square.

The four square is a dealer tactic – they will talk about four items:

  1. The supposed “real price” of the vehicle, which you never know.
  2. The down payment
  3. The monthly payment
  4. The trade in value (which we can cancel out right away because we’ve already said not to tell them you have a trade-in until the very end.)

They’ll do anything not to talk about the actual purchase price they’re willing to offer until you have said it. So don’t say it. Don’t answer the age-old question of “what are you willing to pay for the car?” or “what’s your monthly payment look like?”

They’re going to dance around the actual price of the car and talk about monthly payments. Tell them to come up with the best monthly payment that they can, not what you can afford, because what you can afford is a tactic they’re using to come up with a number that meets your expectations but still makes them some profit.

If you allow them to come up with a number first, you can go back to the drawing board and say, “you know what? That number is not even close to what I was thinking. So why don’t you try harder?” (or something like that!)

While this salesperson is taking down all your information, they’re building what the industry calls a deal jacket. This deal jacket is essentially a folder with all your information in it and all the information on the car that you’re interested in. The important part of talking about this deal jacket is in there is the car’s invoice from the manufacturer. Ask to see this invoice. Some salespeople have no problem with this, others will give tons of pushback. Don’t let them feed you a line about not having it, because by law every car that they have on that lot must have an invoice.

(Now, the one caveat to this is I’m only talking about new cars here. New cars come with an invoice from the manufacturer. Used cars won’t have this.)

Most of these invoices will only have two prices on them: MSRP (manufacturer’s suggested retail price) and an invoice price. Right now, you’re probably sitting there going “well, if I can see this, I can negotiate right down to the invoice price, and then I know they’re not going to make awesome profit. And I’m going to get the deal of a lifetime!”

No, that’s not really what I’m saying. Don’t try to negotiate right down to the invoice price because the dealer does have added costs on top of this, such as delivery fees, pre- delivery inspection fees (or PDI as they call it in the industry) and more. So, you’re going to want to add $500 to $1,000 to the invoice cost and use this as your [starting] negotiating point if the dealer. Hopefully, this is near the price that your research told you.

Step #4: Negotiation

This is going to be the actual negotiation. Once you start negotiating the cost of vehicle, know something if you have a trade-in: like I said before, don’t make up your mind quite yet. If they want to give you a value on it or send someone out to look at it, that’s fine, but tell them you’re not even sure that you want to trade it. And don’t let them build the deal off the fact that you have a trade-in.

So, at this point the salesperson will get up quite a few times to go talk their sales manager or general manager about your deal. Now we give you kind of an inside tip here that most people realize, but I’ll say this is completely proven: when your salesperson goes to talk to their manager, this usually consists of about five minutes of talking about your deal and getting a yes or no answer. Then, they waste about 15 or 20 more minutes BS-ing and making you sweat it out at the salesperson’s desk in the showroom. Because what are you doing when you’re sitting of the salesperson’s desk in the showroom? You’re bored and you’re staring at all the beautiful new cars in the showroom. This is a great sales tactic, and just trust me when I’m saying this that it’s just a sales tactic. They’re only talking about your deal for a couple of minutes, and then you’re like they’re letting you sweat it, so don’t let this get to you.

[Salespeople] do actually have to go to their sales managers or their general managers to get approval to make a deal, so this is a necessary thing for them to do – it’s just not necessary for them to drag it out sometimes as long as they do.

They’ll come back with their offer and you can counteroffer on it if it’s not acceptable. This this process can go back and forth for as long as you want it to or as long as the car dealer tries to drag it out.

The only thing that I recommend is bring your phone with you. Have the calculator on it out and use it at the salesperson’s desk to double-check all the calculations that they give to you. Say you mean no offense by it. But I’m telling you, I’ve worked in a car dealer before and I’ve seen the calculations be wrong hundreds of times.

Step #5: Trade-Ins

In step five, we’re finally going to get to the trade-in after you negotiate everything else to do with your car purchase. Now let’s decide about your trade. And if they’ve beat or come close to your Kelley Blue book or NADA or Carvana offer, any other private offers that you have, then take the offer. It’s less hassle for you to just have them take it if they can come close on the price.

The only thing that I say to watch: don’t let your deal get adjusted after you make up your mind on your trade; make sure the paperwork all stays the same reserve for that one more little line that says “trade-in”.

Step #6: The Finance Office

At this point, you’re going to be getting up probably from the salesperson’s desk and you’re going to go into the finance office (or a finance manager might come to the salesperson’s desk for you). This will happen whether you’re getting a loan through the dealer or not.

This process is where a finance manager is going to try to sell you all those extra products that go along with your new or used car purchase like we talked about in step one: warranties, GAP coverage, tire and wheel coverage, paint protection, collision deductible payment protection, etc.

These are referred to as aftermarket products, or in dealership lingo: back-end. Like I said in step one, know which ones of these aftermarket products that you actually want to look into before you go. The finance manager is going to try to put these on hard because this is where the salesperson, the finance manager, and the dealership all make a good little commission.

I want to make a couple of notes on these:

  • Warranties are great but ask to see what exactly is covered before purchasing. If you’re buying a new car, the warranty should be through the manufacturer. [For example] if you’re buying an Audi or a Subaru, the warranty should be directly from Audi or Subaru. This means you can use this warranty it any dealership nationwide, and it generally has better coverage. Don’t get sold a third-party warranty. These can range from only being valid at the dealer you purchased at to being good anywhere, but they generally don’t cover as much, so stick with a manufacturer warranty.
  • GAP Coverage: GAP stands for Guaranteed Auto Protection. Usually this is a bank-required product, so what I recommend is only get this coverage if you actually need it. Usually, most banks require GAP if you have a loan on your vehicle and your loan-to-value percentage is 80 to 90%. What this means is, if you took out the loan for the vehicle, the value of the vehicle is 80 to 90% of the loan that you took out. Let’s take an example: if the car is worth $20,000 to the bank and the amount that you owe on your loan is $25,000, your loan-to-value ratio is 80%, because $20,000 / $25,000 = 80%. 80% is that beginning threshold that your bank may require you to get GAP at. GAP will pay the difference between what you owe on your loan and what the vehicle is worth if you get into an accident that totals that vehicle. It’s a great coverage to have, but generally you don’t need it unless you’re at that 80-90% loan-to-value ratio. If you don’t have a loan on your vehicle, you never need to get gap coverage because you don’t owe anything on the vehicle. Another point on GAP is that most banks offer this. If you’re going to go with outside financing you already had lined up, see if your bank’s rate for this coverage is cheaper than the dealers.
  • Tire & Wheel Coverage: this is exactly [what is sounds like]; it covers your tires and wheels [only]. If you’re constantly running over nails and screws in parking lots or you’re getting flat tires or you’re bending your rims, this might be something to look into. Otherwise, I recommend just skipping it altogether, because it only covers tires and wheels.
  • Paint Protection: This usually has quite a high mark up on it. Generally, paint protection is absolute nonsense. I’ve even heard salespeople laugh at this product, so I don’t recommend ever getting it. It’s supposedly to protect like your hood from getting paint chips in it if you drive on the highway all the time. Sometimes it works, sometimes it doesn’t. Heck, sometimes I’ve even heard of not-so-savory dealers charging you for paint protection and then not actually applying it to your vehicle! In the end, I recommend just skipping this coverage.

Step #7: Fees & the Bill of Sale

Before you walk out of the car dealership is look at the fees on the bill of sale. Look over the bill of sale. You must be given a copy of this to sign before the deal goes through. You should also be given a copy to take with you after the deal is already through. The only thing that I say about this is make sure it’s correct before you sign it. If it’s not, make them make up a new one before you sign it, because it has to be 100% correct.

Now let’s talk fees. Sales tax, registration, titling, and destination fees: they’re all legit. You might not want to pay them, but you’re going to have to.  You obviously can’t get away from sales tax or registration and titling fees, which are required by your state’s Department of Motor Vehicles. Destination fees are something that the manufacturer charges the dealers that they’re forced to recoup on each sale.

However, there are things like “doc fees” or documentation fees: these are “phantom” charges that the dealer builds in to add a little profit. So if the dealer’s hitting you with the $200-$300 doc fee, question what it is, what it does, and why it’s necessary. You’re likely to get a load of BS, but tell them you’re not paying it. It’s not necessary, and it’s not required to be charged. If the dealer tries to defend it, begin to walk out at this point. Most times can be waived.

A good way to check if a fee is BS or not is did see if you’re paying sales tax on that fee. If you’re not paying sales tax, chances are the fee is legit because it’s not considered a sale for the dealer to charge tax on. But if you’re paying sales tax, it’s counted as a sale for the dealer, and they’re taxing it. Chances are [these fees are] not legit.

I really want to thank you for tuning in again today to the Financially Boundless Podcast. I hope you enjoyed the podcast today, talking about how to negotiate a new or used car purchase. We had some industry expertise that I thought I’d give you on the topic at hand here today, and I really hope you enjoyed it. I’m happy to answer any questions that you might have.

If you have ideas for episode topics or if you’d like to be a guest on an episode, go to boundlesstax.com/podcast and there’s some forms on there for if you have ideas for episode topics or if you’d like to be a guest that you can fill out and we’ll get back to you right away. Drop us a line and we’ll get back to you will answer any questions and I’ll see you next week for a brand-new topic.

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