How do you get a good price when buying a new car?

A general outline for buying a new car.

I’m writing this because after recently purchasing a car, I’ve realized that there is a lot of misinformation, incomplete information, and plain silly information about how to get a good price on a car. I am not an expert at car buying, but I do have a fair understanding of economics and negotiation. My outline here is not meant to become a standard doctrine, but hopefully it will consolidate some existing information and improve on the dealer-weary’s understanding of negotiating car prices and how car sales works.

Here are a few things to keep in mind. As long as you’re not in a pressure situation (your car is dead and you need a new one NOW), any price you offer is a good deal for you. Any price the dealer accepts is a good deal for the dealer. You want to minimize the price you pay. The dealer wants to maximize the price he or she charges. This seems basic, but it is the utter foundation of negotiation. That being said, however, you should be completely happy UP FRONT about any offer you make to the dealer. Then, when you hear that your neighbor down the street got the exact same car for $500 less than you paid, you’ll still feel good about your purchase. You’ll rest knowing that you offered a fair and reasoned price and the dealer accepted a fair and reasoned offer. There seem to be a lot of people out there that feel that they’re getting “ripped off” by the dealer because they paid more than the next guy. Guess what . . . you should NEVER pay more than what YOU THINK the car is worth. Of course, your understanding of the car’s value will improve your offering price. That is where we should start. (This analysis assumes that you have one particular car in mind and that you’re not comparing two different models).

The following will be discussed in greater detail below, but this is what every informed buyer should be doing:

1. Conduct research so that you know what your ideal price should be
2. Always think in terms of the total price of the car (and not monthly payments, trade-in value, etc).
3. Know how much (or how little) leverage the dealer has so that you can discount your offer accordingly.
4. Ignore sticker prices and invoice prices. The only price you should be concerned with is the price YOU want to pay for the car.
5. Negotiate WITHOUT pressure on yourself, negotiate first (be the first to offer a price), and negotiate WITH pressure on the dealer (let them know you have somewhere else to be in a few minutes, so you don’t have much time to talk today).
6. Once you have a firm offer, shop around with other dealers to try for a better offer.
7. Save trade-in and financing discussion until after you’ve agreed on a price.
8. Don’t attempt to second-guess the deal after the deal is done. Be happy with your new car the deal you worked out for yourself.

1. Do your homework! Know how much other people are spending on the same car. Know what manufacturer incentives are being offered. (Manufacturer incentives are great for you and for the dealer because you can get that money discounted off the price, and the dealer doesn’t get hit for the discount . . . keep in mind, however, that the dealer understands that you’re getting a better deal and will be reluctant to pass all this savings on to you). Know the current market values. Conduct research on Edmunds and Kelly Blue Book. Conduct research on enthusiast websites. This way you will know what dealers have been “letting the car go” for.

2. ALWAYS think in terms of the price of the car, and NEVER in terms of monthly payments. Your offer should be for a total price “out the door” (OTD) minus taxes and tags. The only thing that a dealer charges in addition to this OTD price is the taxes and tags. Any additional fees (document fees, dealership fees, etc) are simply a way to tack more money on to the price. When negotiating, do so in terms of the OTD cost. This leaves the dealer fewer variables to manipulate you into thinking you’re getting a discount (when in reality, the money is just getting tacked on somewhere else). In short, don’t discuss the deal in terms of monthly payments, or in terms of a trade-in. If you have a car you’re willing to trade-in, consider this two separate negotiations: one for the price of the new car and one for the price of the trade-in.

3. Know the factors influencing the dealer. Try to get as much information out of the dealer as possible. Try to find out how many of your desired car the dealer has in stock (the more cars in stock, the more flexible the dealer will be). Understand that if your desired car is in high demand, the dealer has an advantage in terms of price. Try not to want cars where the demand is greater than the supply (easier said than done). They will always go for a premium. If the next year’s model is on its way in, you’re likely to get a bit more flexibility from the dealer. This is not universally true, and there is a bit of a catch to this. Once the manufacturer starts advertising for “end of model year sales,” the car’s demand gets a bump with renewed interest based on this free-to-the-dealer advertising. If you can find the “sweet-spot” a couple of months prior to the new model’s arrival, but before the manufacturer advertising, you’re likely to get increased flexibility from the dealer.

4. Ignore sticker prices COMPLETELY (MSRP, Invoice, destination charge, etc). The dealer can charge whatever they want for a car, and you can offer whatever price you want to buy the car. A dealer’s sales figures are typically based on a yearly number including all makes and models (or at least models). A dealer knows that if she is making a killing on one type of car, she can sell another type of car for a lot less to make room for more of the “money-maker” on the lot. They might use an invoice price as a theoretical base, but this is only done to fool you. They can go below invoice (and often do). Also, in negotiation, extensive studies have shown that when you have two people, each with a target price in mind, the person who offers their price first is the person who will set the pace for the negotiations. Take this example: You have two people negotiating over a car price, and one person wants to sell it for 22K while the other person wants to buy it for 20K. If the buyer says, “I’ll buy it for 20K,” studies have shown that the final price will usually be less than 21K (the mid-point). A good rule of thumb is to figure out a price you’d be completely happy with (based on your prior research), and discount that price by 3-5% (depending on market demand, dealer pressure, etc). Also, set a price that you’re unwilling to go above and be willing to walk out if the dealer refuses to sell for less.

5. Put yourself in the best possible position to negotiate. If you can avoid it, NEVER walk into a dealership under pressure to buy. If you desperately need a car, your demeanor will reek of said desperation. Any good salesperson will pick up on this. If you find yourself without a working vehicle, try to work out something from friends and family so that you have use of a car for at least a couple of weeks without worries. Also, never buy a car the same day you walk into a dealer. If the dealer asks you if you could purchase today, say, “I plan to purchase very soon.” This will let the dealer know you’re not wasting his time, and it will give you time to shop around for a price. Another tactic is to let the dealer know that you’re pressed for time. After you’ve done the test drive and once you’re sitting at the desk, tell the salesperson that you don’t have too much more time, but you wanted to make an offer. Suddenly, YOU will be the one pressuring the salesperson (and not vice-versa). Make an offer. The salesperson will likely check with his or her manager and come back with an acceptance or a counteroffer. If they accept, great! Ask for it SIGNED, in writing with the specified vehicle (VIN number if possible), and on company letterhead. If they don’t at least give you this, be prepared to walk. Tell them that you’ll be able to stop by in two days to finalize the deal. Make an appointment, if necessary. If they come back with a counteroffer that is acceptable, either take it, or counter with something lower than they offered, but higher than you originally offered (counter with your ideal price). They’ll either accept this or reject it. If they reject it, get the price they’re willing to offer in writing as stated above and then shop around for a better price.

6. SHOP AROUND!!! This is potentially the most complicated step of the entire process. Say you made an offer for 20K and the dealer accepted it. You’ve got it in writing (preferably). You get a list of local dealers and start calling down the list. You get a salesperson on the phone and say, “Can you beat $20K for this specific car (including all options, etc)?” The will either say yes or no. If they say no, move on to the next dealer. If they say yes, stop there. You might have offered too much originally. Go in person to the next dealer as if it were your first stop. Test drive the car, develop a rapport with the salesperson, figure out how many of your desired vehicle they have in stock, and then make an offer that’s substantially below the firm offer you have at your first dealer. If you have an accepted offer of $20K, and the dealer you called said that he could beat that price by $500, offer $18K. The dealer will either accept the offer or counteroffer. If they counter with more than the $20K, you’re not likely going to be able to get them to beat your best possible price. See how far you can get them to go, though. This could confirm that your $19.5K over the phone offer is near the dealer’s threshold. Ask them for their best offer. If it’s above $19.5K, tell them that you have an offer for $19.5K and ask them to beat it. If they can’t, you’re in pretty good shape. Call back your original dealer and ask them to beat it. The will likely beat it nominally (offer $50 less) to get you to come back in. At this point in time, you know that you have a decent price, so simply go down the list of phone numbers and ask if anyone can beat it. Repeat until you get the lowest possible price. Dealers don’t like it when customers do this, but so few actually do, it isn’t much of a problem. If you did your homework properly, this exercise will likely be futile (save for confirming your good price), as other dealers won’t be able to beat your offer. Pat yourself on the back for a job well done.

7. Save trade-in and financing for after you make your deal. You can always go to a bank to shop for car financing. Manufacturers tend to offer good deals on financing prior to the release of the new car models through their associated lending company (GM uses GMAC, etc). If you’ve saved this discussion for after you already have a negotiated price, the dealer will likely just give you their best deal (they have no reason not to . . . dealers only have incentive to get a higher price on the car. Financing deals are transparent to the dealer’s bottom line). Know the value of your trade in (kbb.com), and be firm with your asking price. Go to Carmax and get a quote from them. If the dealer can’t beat it, you can always go back to Carmax to unload the used car with them for the price they’ve quoted to you (it’s usually good for 1 week or a certain number of miles). If you think you can get more from a private sale (you usually can), and you’re willing to put up with the hassle, feel free to use that as an option. Selling a car privately can be time-consuming, however. Know how much your time is worth prior to committing to a private sale.

8. Be happy with your deal no matter what your neighbor pays later. If you followed this guide, feel confident that you obtained the best possible price for when you bought your car. If your neighbor bought the same car a month later for $500 less, good for her. As long as you were happy with your price at the time, you will never feel “ripped off.” Keep in mind that, as long as you’re not under pressure, you will never pay more than you are willing to pay. If market conditions make it so that your neighbor get a lower price a month later, or your friend across the country gets a lower price than you, know that you got the best deal that you could at the time and in the place that you were shopping. Congratulate yourself on a job well done.

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