Buying a car: How to avoid the traps
Published on GoldenGirlFinance.com, January 22, 2013
Spotting the way to a better deal is all about knowing where to look - and overlooking the details designed to distract buyers from what really matters.
The stereotype of a car salesman (or, to be fair, woman) isn't pretty: Pushy, aggressive and willing to tell us whatever it takes to send us rolling out of the dealership in a new set of wheels. But, of course, that isn't the whole story. Maybe no salesperson worth his or her salt is likely to be too liberal with particulars about pricing, but in many cases the truth - and the way to a better deal - is right in front of a buyer's eyes. The key then to getting a fair price on a car is all about knowing where to look.
We asked Viraf Baliwalla, owner of Automall Network, for some insider tips on the traps car buyers often fall into - and how to avoid them.
8 tips for avoiding car-buying traps
- Set a budget
Before making any purchase this big, you need a budget. So what's a reasonable amount to spend on a new car? According to Ayton MacEachern, a Certified Financial Planner at MacEachern & Associates, you shouldn't plan on spending more than 20 percent of your monthly take-home pay.
"But you can't devote all of this figure to your monthly payments," MacEachern said. "You'll have to include other expenses, such as maintenance costs and insurance payments, in your budget too."
- Do your research
Once you know what you can afford, it's time to put some thought into what you need and what you like.
"Do a bit of research up front," Balliwalla said. "Pick the vehicles that you are interested in and test drive them to make sure they fit your body, your lifestyle and your interests. Once you've done that, you'll be in a better position to know what you want and value. Then it's a matter of talking price."
When you're thinking about a new car, one of the worst things you can do is to start talking pricing (and purchasing) the first time you head into a dealership. Indeed, "new car smell" has developed quite a reputation for helping people get caught up in the moment - and get carried away.
- Keep your eye on the prize
Now it's time to start negotiating. But where to start? According to Baliwalla, buyers tend to focus on either the manufacturer's suggested retail price (MSRP) for the car or the dealer invoice price, which represents some approximation of what the dealership paid the manufacturer for the car. The problem, according to Baliwalla, is that both these price points only serve to distract consumers from what really matters: what they pay in the end.
"Instead of starting at MSRP and negotiating down, buyers need to get a sense of what price is achievable in their market. Once you know that, you can use that information as a negotiating tool at your favorite dealer."
Visiting a number of dealers and using the quotes you get to negotiate with others can help you to find a ballpark. There are also a number of companies that will provide a report with information about the fair market price for a car in your area.
- Avoid extras
Each and every "option" that can be added to a new car includes a dealer markup (which is why they're offered; this is a business transaction after all). Okay, so maybe most Canadians don't want to drive off without a block heater, but loading on too many options can make negotiating a good deal very difficult.
The best way to keep this cost in check is to investigate which option packages are available for the cars you're interested in and decide what you can't live without. After that, it's just a matter of avoiding getting talked into more bells and whistles. As for things like rust proofing and window etching, Baliwalla says steer clear. Most of these dealer add-ons just cost money without adding much value.
- Forget the warranty
When you're forking out a ton of money for a new car, a warranty can seem very appealing. It's also very expensive, and can increase the cost of your purchase by hundreds or even thousands of dollars. The good news is, this is one expense you can most often opt right out of.
"Most new cars have a three-year warranty," Baliwalla said. "Once the manufacturer's warranty is up, you could add on an extension, but why pay for it up front? After three years, you may not even want the car anymore."
- Forget about monthly payments
When you're planning to finance a new car, it's only natural to think of the cost in terms of monthly payments. Unfortunately, Baliwalla says this is a major trap for buyers, especially if they let the dealer in on what sort of monthly payment they can afford. If you tell a salesperson that you can afford a car payment of $300 per month, he or she can often make that happen just by adjusting the length of the loan. Indeed, this strategy can often lure the buyer to strike a deal without even talking about the total price of the car!
Plus, if your monthly budget's $300, it's pretty easy to be talked into $305 or $310. And while this additional amount may sound like peanuts, add that up every month and it means you're paying hundreds (or thousands) more for the car over time. In the end, it's that overall price that really matters. Make sure any negotiations start and end there.
- Consider paying interest
Zero-percent financing is like a dinner bell; car dealers ring it and customers come running. After all, it sounds like a great deal when you consider that your local bank will probably charge a 5 to 10 percent interest rate for the same loan, depending on your credit. The reality is that you can't get a loan for nothing, no matter how many 0 percent stickers are attached to it.
"The marketing is very cleverly done," Baliwalla said. "The dealer will often offer something like a $3,000 rebate or zero percent financing. Most people jump at the 0 percent because they think it's free money. The trouble is that the $3,000 you're passing up is really not a rebate. It's you prepaying the interest over that period of time."
Baliwalla recommends comparing the two options on a spreadsheet to see which one comes out on top. In many cases, the rebate wins hands down.
- Don't fall for a high trade-in value
It's natural to fall in love with the dealership that offers the best trade-in value for your current vehicle, but Baliwalla says this is yet another instance where consumers are expected to focus on one thing, while overlooking what's more important.
"You really need to be looking at the difference between the trade-in and the price of the new car. If you focus only on the trade-in value, you're forgetting that the dealer can pad the price of your new car by at least that much."
The car bottom line
Getting a fair price on a new car isn't easy, but most of the so-called "tricks" that car salespeople play are little more than sleight of hand. With a little knowledge and research, you can negotiate your way to a much better deal...you just need to know where to look.