Friday, December 13, 2013

How to Buy a Car: Part 6 - When to Walk

No matter what happens in the finance office, or at anytime during the car buying process, remember this:  You can always walk. 

If for any reason you don't like the deal, or the deal changed for the worse between the time you left the sales person and entered the finance office, you can walk. 

Even if you signed a piece of paper for the salesman, committing to buying a car, you can walk.  Only when you've signed the final contact in the finance office, are you obligated to take possession of the car.     

There are always good reasons to walk away from a deal, and you should always have that option.  But there are two things to be conscious of if you do decide to walk away:

  1. The deal may or may not get better by walking away.  Yes, it's possible to get a better deal by walking and coming back later, but it might not.  

  1. You may not get a better deal someplace else.  Dealers have access to the same information you do and they keep a vigilant eye on their competition, including prices and sales volumes.  They also use the same tools to price their cars and appraise trade ins. 

If you do walk away from a deal, you have to be prepared to start over from square one.  Car buying is a lengthy process that takes several hours or more.  If you've already invested a whole Saturday or evening negotiating a deal, you have to decide if it's worth spending more of your time to try and get a better deal. 

This is where the time value of  money comes in--how much is it worth for you to try and get a better deal?  Are you willing to give up another evening or Saturday?  Take time off from work?  Miss out on an activity you enjoy?  You have to ask yourself:  "Is what I'm giving up, worth what I'm getting in return?"

It's a question only you can answer.  And to help answer it, we've come back full circle to the beginning of this series--the key to knowing when to walk is information.  It's another reason why it's important to do your research up front and gather enough information to make the best decision.    

Friday, December 6, 2013

How to Buy a Car: Part 5 - The Finance Office

Once you've agreed to the deal, you're only half done.  After negotiating with the car salesperson, the next step is the finance office, where the next battle begins.  Hard won concessions on the sales price or trade in value of your car can be easily lost in the finance office.  This is not to say the Finance office is shady, just an acknowledgement that it is a profit center for the dealership.     

When I was in the car business, the dealer I worked for made about $150 on every new car sold.  But if a customer financed a car with the dealer, bought an extended warranty or car care package, the dealer could make ten times that amount.  This is why it's important to do your homework on financing and your credit score. 

Most dealers work with a number of lenders, including local banks.  These lenders will give the dealer a "buy rate" or a base interest rate the dealer can use to finance auto loans for its customers.  The buy rate is based on tiers of credit scores--a good credit score might have a buy rate of 3% while an excellent score might be 2.5%.  The dealer then marks up the rate and makes a profit on that mark up. 

For example, if a dealer's buy rate is 3%, they might offer you a loan for 3.25% and will make money off the .25% markup.  If you are prequalified for a loan at or over the 3.25% rate, it makes sense to use the dealer financing.  If you can get a loan for less than 3.25% then you're better off financing the car from your own source. 

You can also use your prequalified rate to negotiate with the dealer.  If the dealer offers you a 3.25% rate, but you have access to financing with a 3% rate, the dealer might try to match the rate or get close to the rate to earn your finance business.  Most of the time I will go with the dealer's financing because they can either match or beat the rate I'm prequalified for.  But I always go in prequalified so I have options.    

Another place car dealers make money is on extended warranties and care packages.  The finance office will show you how adding an extended warranty or a rust prevention package will only cost you a few dollars a month but add years of peace of mind.  As a rule, I generally avoid every protection package except for the extended warranty, which I might consider based on the following criteria:

  1. If the car I'm buying is out of factory warranty or has less than a year of factory warranty remaining. 
  1. If the warranty cost less than $1,000 but provides at least 3-5 years of comprehensive coverage. 
  2. If the make and model of the car I'm buying has a reputation for costly repairs. 
  1. I plan to keep the car for more than 3-5 years. 

I passed on the extended warranty with the Chevy Traverse my wife and I bought, because it had two years of bumper to bumper coverage left on the factory/certified warranty.  I also passed on an extended warranty when I bought my new Ford Fusion, because it's covered for three years or 36,000 miles.  Had I bought a used high end luxury car, like a Jaguar or Porsche, or something like an Infiniti with over 70,000 I would have strongly considered one.