With the convenience of online automotive reviews and pricing tools like Edmunds.com and Kelley Blue Book at their fingertips, consumers may feel more empowered entering into an automotive showroom than ever before. Haggling for the best price is almost a thing of the past, as car buyers can easily pit dealerships against each other to get a good deal. However, there still many unforeseen perils when buying a new car, and if you don’t know how to spot them, you can end up paying thousands of dollars more than you should. Here are the top five tricks dealers use to rip you off when you're buying a car.
1. Mixing negotiations. Most car shoppers are fixated on the amount they can spend each month for a car, and salespeople know this. It’s their hope that you’ll tip your hand as to what you think an affordable monthly payment will be. Oftentimes, they’ll even ask you what that figure is. Don’t fall into that trap, as a slick salesperson will use that number to pad in as much profit as he can for himself.
Salespeople like to start with the monthly payment because it allows them to combine the trade-in value of your old vehicle, the price of the new car, and financing terms to fit that figure. In other words, they’ll get you to that monthly payment, but they’ll do whatever they can to hide how they got you there. Mixing these negotiations allows them to show the buyer one favorable figure, like the new-car price, while obscuring a less favorable figure, like the trade-in price or financing terms. You’ll typically end up getting to your monthly payment when the dealership plays with the term of the loan. So if they give you a bad deal on your trade-in, they’ll just extend the term by 12 months, and like magic, you’re at your target payment.
You can avoid this by negotiating every aspect of the sale separately. Start by knowing the trade-in value of your car. Check with sites such as Yahoo Autos and AutoTrader.com to find out what similar cars in your area are selling for. You may even want to take your old car to a used-car dealer and ask what you can get in a straight-up sale. Your trade-in price should be close to the price that the used-car dealer offered or what similar cars fetched in private sales.
Then go to the new car dealership and negotiate the price of the new car. To find the best price, find the dealer invoice price — the price they paid for the car — at Internet sites such as Edmunds.com and negotiate up from there. Sometimes, a motivated salesperson will sell you the car at a price just a few hundred dollars higher than the invoice price, which should be a bit below sticker price.
Only after you’ve negotiated this price should you discuss your trade-in. If the dealership won’t come close to matching the price you can get in a private sale or from a used-car dealer, take the trade-in off the table and sell your old car elsewhere. But if you’ve agreed with the dealership on a trade-in price for your old car with the intention of applying it to your down payment, only then should you discuss financing.
Now knowing the amount you need to finance, have your loan pre-approved by a banking institution, instead of the dealership. Only if the dealership comes back with financing terms that beat those of your bank — which often happens in the 11th hour — should you go with their loan.
2. Marked-Up Financing. Car dealerships might make very little profit on the actual sales price of a new car, so they have to find other streams of revenue like selling used cars and repair and maintenance charges. But one common profit center is to offer in-house financing. What typically happens when you apply for financing through a dealership is that they take your loan application to several lenders to see what interest rates you qualify for. So, if the best interest rate they can find for you is 5%, they’ll come back to you with a rate that's between 2-4 points higher, skimming that extra interest right off the top and sometimes splitting it with the finance company.
The sad part is you might not even see much of a difference in your monthly payment, but the money adds up. Let’s say you were to finance $20,000 for a car and you qualified for 5% interest on a 60-month loan. If you were to get that rate, your payments would be $377.42 a month. But if the dealership comes back with their pre-packaged loan and the rate they’ll give you is 7.5%, you’ll be paying $400.76 a month. While $23.34 a month might not seem a lot more, you'll be paying more than $1,400 over the life of the loan.
3. The Spot Delivery Scam. Don’t ever take that new car home unless all the financing has been finalized. Some unscrupulous car dealerships use a “ spot delivery scam,” where they allow potential buyers to leave with the car they’ve chosen before financing has been finalized, only to call them up several days later to tell them the loan has fallen through. They then ask for the car to be returned, sometimes threatening repossession.
When the car buyer returns to the dealership with the car, the dealership’s finance officer is typically waiting with an alternative loan at a higher interest rate or a larger down payment, sometimes both. And when the price is marked up, a dealership can make thousands of dollars in unearned fraudulent gain.
This scam is most commonly used against buyers with bad credit scores, since dealerships perceive such people as vulnerable and easier to take advantage of. The best way to prevent a spot delivery scam is not to take delivery of a vehicle until you have been fully approved for a loan by the dealer or a separate financial institution. Again, it might be to your advantage to come to the dealership with your financing already arranged.
4. Unneeded Extras. Car dealerships like to add “dealer-installed options” to pad the price of the car, often doing so after a sales price has already been negotiated. This allows them to boost profits by adding things such as rustproofing, paint sealers, fabric protection, and VIN etching (where they scratch the car’s vehicle identification number into the windshield). Together, these add-ons can add hundreds, even thousands, to your bill.
Beware, these dealer-installed options are nothing but big wastes of money. The paint protector is nothing more than a $300 layer of car polish. All new cars come with adequate rust protection applied at the factory, and the $200 to $1,200 a dealership would charge you for rustproofing or undercoating is not only a waste of money, it can void the automaker’s corrosion-perforation warranty.
If you really need a fabric protector for your upholstery, you can do it yourself for much less than the $200 a dealership charges. And VIN etching, which can cost $300, is supposed to stop theft, but is a dubious crime deterrent. Some states require that dealers offer customers VIN etching, but you’re under no obligation to buy it.
Oftentimes, dealer options aren’t even discussed during the sale, but are added to your sales invoice at the closing. So, it’s very important to go over all documents line by line. If you see any of these items or other extra options you didn’t ask for, take a pen and draw a line through them and refuse to sign any documents until the items are removed from all copies.
5. Extended Warranties. New car buyers should always say no to extended warranties, which can add between $1,200 and $1,500 to the invoice, as they’re notoriously bad deals. They're nothing more than a bet you're making with a third-party on how reliable your car will be, and the odds are not in your favor. Car salesmen push extended warranties because they get a large commission for selling them, up to 50 percent or more.
Keep in mind that these warranties are not factory warranties you automatically get on any new car you buy. Extended warranties are policies that kick in after your basic warranty has expired and they're backed by a third-party underwriter like auto clubs or insurance companies. Chances are you’ll never need the coverage, and even if you do, the money you save on the repairs won’t likely come close to what you paid for the warranty, according to a recent survey by Consumer Reports.
The magazine’s survey found that the median savings on repairs covered by these warranties was $837, far less than what extended warranties typically cost. So, in the end, you’re likely to lose $400 or more by choosing an extended warranty in the long run.
Instead of wasting your money on an extended warranty, consider putting that money into an interest-bearing account dedicated to emergency car maintenance. This way, you’ll have a rainy day fund if anything catastrophic happens to your car. Also, if you end up not needing any repairs, you can always apply the savings to the down payment on your next vehicle.