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.  

2. 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.    

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. 

2. If the warranty cost less than $1,000 but provides at least 3-5 years of comprehensive coverage. 
3. If the make and model of the car I'm buying has a reputation for costly repairs. 

4. 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.  

How to Buy a Car: Part 4 - Doing the Deal

William H. Macy played a sleazy car dealer in "Fargo"

The single biggest challenge of negotiating a car is information.  Without it, you won't know what a fair price is--either for the car you're buying, or the one you're trading in. 

It seems complicated, but buying a car comes down to four things: 

1. The price of the car you're buying

2. The value of your trade in

3. The finance terms you can get

4. Your payment terms

Years ago, when my grandfather bought cars, he didn't have access to the internet or other sources of information about car prices.  Instead just he'd go in and haggle with the salesperson.  This could take all day or several days as he started with an unreasonable offer, picked apart the car he was looking at, and generally annoyed anyone who wanted his business.  It would go on and on until the salesperson or the sales manager practically threw him out of the dealership.  That's when he knew he was close to the dealer's best price.   

Today there are books and internet sites like Kelly Blue Book, NADA,  and Edmund's that provide pricing information for cars.  You can get information on the new car's invoice price, and what the dealer actually paid for the car, as well as any incentives or rebates.  You can also get wholesale and retail values for used cars as well as the car you're trading in.  And there are even calculators to create a custom appraisal for your trade in or the car you're looking at, based on mileage, condition and options. 

Financing is another key piece of information.  Even if you finance with the dealership, which typically works with a number of lenders, you need to know your credit score and what terms you an qualify for.  The difference between a 3% or 6% interest rate can add $20 or more to your payment.

Smartphones are a great equalizer when you get to the dealership because this information is readily available at your fingertips.  Having this information was invaluable for me recently, when I went to a Ford dealer in Raytown several weeks ago. 

I made the trip planning to buy a 2012 Ford Fusion, a gray SEL V6 with leather.  When I got there, the car was in the service department and we had to walk through the new car showroom to get to it.  Sitting on the showroom floor was a brand new 2013 Fusion, SE Sport Package with the Ecoboost engine, in white platinum metallic paint. 

My one criticism of the 2012 was its Plain Jane looks.  Then again nothing in the midsize segment is eye candy, with the exception of the Kia Optima.  But the 2013 model is stunning.  Ford cribbed off Aston Martin and Jaguar and threw in a bit of Audi S7 for good measure.  The result is one of the best looking sedans in recent memory.  The car in the showroom was exactly everything I wanted but didn't think I could afford. 

Doing the math on my phone, I realized I could afford it, if I cut some other things out of my budget like running to Starbucks or eating out at lunch 2-3 times a week.  Given the choice between driving leftovers or eating leftovers, I decided I could live off Hot Pockets or yesterday's dinner. 

The negotiation process was short.  The dealer had advertised their best price on the car and a quick check on my phone to Edmund's and Cars.com confirmed the car was priced a few hundred dollars under dealer invoice, and below what both websites calculated as their target price.  Given the easy access to this kind of information, most dealers are now upfront about their prices.  The days of the car price guessing games are largely over. 

I spent most of my negotiating time on the trade in value of my car.  Dealers want to sell cars at retail prices and buy cars at wholesale prices.  Buyers want to buy cars at wholesale prices and sell their cars at retail prices.  Since I was already under invoice, or the wholesale price for the Fusion, I tried to bump up the price on the Nissan Pathfinder I was trading in, and managed to get a price I thought was acceptable.  Given more time and persistence, I may have been able to get another $100 or so out of my trade in, but I knew the value of the car and knew that overall I was getting a very good deal. 

I agreed to the terms of the deal and sat down to wait on the sales manager to put together the paperwork and my trip to the finance office.  I was halfway done, but still had to get through the finance process, and the myriad of extended warranties, credit protection, and accessory packages offered by the dealer before I could go home.