According to the valuation analysts at Kelly Blue Book, the January 2021 average transaction price for a new light vehicle in the United States was $40,857. The same price-increase paradigm also holds for used cars, though they’re always less expensive than a comparable new vehicle. All that said, to get a good deal on the car, truck, or SUV of your dreams, first shop online and be prepared to negotiate. Also, understand the below points when it comes to the auto buying process:
Dealers Maximize Profits
New and used vehicle dealers are in business to maximize their profit on each “unit” (a car, truck, or SUV which is sitting on their lot or in their showroom) they own. It doesn’t matter whether the vehicle you have your eye on is new or used, either, because the dealer owns it and wants to profit on it if possible. In the auto sales world, maximizing profit on a new or used vehicle sale is known as “holding gross (profit).”Read More »
How They Profit
Before entering negotiations with any auto salesperson, whether new or used, you should understand they make money. Most auto salespersons earn their compensation via commissions paid on the gross profit of each unit they sell. Suppose they sell a vehicle for too little gross profit. In that case, they make very little money, so their incentive to “hold gross” is typically pretty strong.
When it comes to dealers maximizing their gross profits and salespeople earning a decent commission, keep the following in mind:
- New cars are usually sold through an automaker’s dealer franchisees, and those dealers purchase their product from “the factory.”
- Loan interest on a dealer’s vehicles begins adding up not long after purchasing them.
- The longer autos sit unsold on dealer lots and showrooms, the greater the interest that accrues on them.
- These unsold vehicles, or “aged units,” frequently become a financial burden on dealers, and they’ll often do what they can to sell them.
The Bottom Line
Here’s the bottom line on this aspect of the auto sales business and why you can improve your chances of getting a good deal on any new or used vehicle:
- The longer a vehicle has been sitting unsold on an auto dealer’s lot, the greater the chance you’ll be able to get a good deal on it.
To get that deal:
- Ask the dealer’s salesperson or the sales manager just how long the vehicle has been “on the lot,” and if it’s been there a while, offer a lower price.
Plenty of Fish
Good auto salespersons are skilled at making their shoppers fall in love with any new or used vehicle they may be considering. Except for the hottest-selling cars, though, there are likely plenty of models just like them sitting on other dealers’ lots.
The Sales Process
The above is why it’s essential not to fall in love with any new or used vehicle you’re considering or just test-drove (especially if you test-drove it). Auto salespeople typically employ a four-step process — often known as the “Four Quarters” — when it comes to closing the sale on a vehicle:
1st Quarter: “Meet and greet” the prospective buyer, either out on the sales lot or when that buyer first enters the showroom. The salesperson is trying to bond with you.
2nd Quarter: “Proper model selection.” Experienced auto sales personnel will help you determine just what sort of vehicle you need.
3rd Quarter: “Demonstration and test drive.” Your salesperson will try to get you to take any new or used vehicle you’re interested in out on a test drive, preferably with them riding along.
Remember this auto sales adage: The feel of the wheel seals the deal. Here’s why:
- The odds of you buying a particular new or used vehicle increase once you take it out on a test drive, especially when it comes to new cars, trucks, or SUVs.
- Before you go on a test drive, though, the salesperson may do a “walk-around” or demonstrate all of the features of the vehicle you’re considering. Good salespeople will do this automatically.
Remember, as well, this point if you take a test drive:
- Never express to the salesperson that you’re in love with, or even really like, the vehicle you test drove. If you do, you’ve likely helped strengthen the salesperson’s bargaining position and weakened yours.
4th Quarter: “Financing and trade-ins.” Everything your auto salesperson has done to this point is to make you excited to buy a new or used vehicle. Don’t let them do it.
- During the entire process, the salesperson will try to get you to discuss your trade-in if you have one and subtly talk its value down while talking up the value of the vehicle they want to sell you.
- Negotiate your trade-in separately from the vehicle you want to purchase.
- The dealer will try to get your trade vehicle for as little money as possible to maximize their gross profit. Take time to research used vehicle wholesale and trade prices at sites like NADA Guides or Kelly Blue Book.
- Don’t be afraid to walk away from your vehicle purchase if you’re not getting fair value for your trade-in, even if it’s not in the best condition. Remember what we said about there being plenty of vehicle fish in the sea? Also: NADA Guides and similar sites usually provide a range of used vehicle trade-in values. Learn them for your trade-in vehicle.
Price and Payments
The purchase price or monthly payment your salesperson presents is usually the opening offer. It is frequently for as much as they think they can get. Be prepared, and don’t become angry or excited over the price. If it’s too high, give the form back to the salesperson and tell them it’s too high and needs to go much lower.
- If you’re getting ready to walk out of the dealership without making a deal, your salesperson likely will have their sales manager talk with you. This “sales manager meeting” is to your advantage because you can press for the purchase price and monthly payment you think is fair.
- Expect plenty of back-and-forth between you and your auto salesperson and their sales manager when you negotiate the purchase of your new or used vehicle.
- Unless you’re purchasing your vehicle from a small used car lot, once you’ve agreed to a price and monthly payment, the salesperson will hand you off to the finance manager.
Auto dealers also make money when arranging to finance a new or used vehicle purchase or lease, usually called “backend.” Smart dealers always try to determine whether a low price or low monthly payment is more important to you, which affects your financing.
- Once you’re with the finance manager, you’re “in the box.” The finance manager’s job is to deliver financing and upsell you on extended warranties and other loan add-ons, like tire-and-wheel packages. Purchase such add-ons only if you want and need them, though, because they’ll increase your loan or lease payment amount.
Beating the Auto Dealer
Auto dealers have many methods for convincing shoppers that they’re getting the best of the deal, and sometimes they really can. To beat the dealer:
1. Thoroughly research the new or used cars, trucks, or SUVs that interest you.
2. Never walk into an auto dealership on the spur-of-the-moment and start shopping for a new or used vehicle either. You’ll put yourself into a vulnerable bargaining position if you do.
3. Don’t make an emotional decision when buying any new or used vehicle. Also, don’t let the salesperson know you want the car.
Lastly, negotiate vigorously for the vehicle you want, and don’t be afraid to walk away from the bargaining table if you must.