Recently, I wrote about buying used vehicles. I described all the steps to purchasing an automobile except when it comes to negotiating because that is a topic all in itself. And that brings us to this latest article: five essential tips when negotiating with used car dealers.
Now to begin, here is my confession: I am terrible when it comes to negotiating. I had to learn the hard way, so to speak, when buying a vehicle last year. It was glorious failure not because I didn’t try, I truly wanted to sharpen my chops and walk away with a great deal, but because I didn’t take into account important information concerning how dealers make their money.
So how do dealers make their money?
Used car dealers earn a profit in one of three ways: first, they make money on the front end by selling the vehicle for more than they purchased it for; Second, they make money on the back end through selling you financing, warranties and dealer add-ons like maintenance packages; and third, if the dealer includes trade-in value, they can make up the difference by selling the vehicle for an appropriate price above the cost.
Now that you understand how used car dealers make their money, let’s get ready to negotiate!
Tip 1. Always Buy a Vehicle that is Two Years Old
Why? They’re new enough that they still look modern and most likely don’t have any real problems. But most importantly, the wholesale value on a like-new (or new) car drops between 45% and 55% of its original sticker price after two years. Awesome!
Tip 2. Check Kelley Blue Book’s Value
The KBB is a resource that gives a vehicle’s general value. The website version only supplies retail values, so it’s imperative to obtain a hard copy to see wholesale values. Knowing the wholesale price is important because that is the value used car dealers rely on when determining your vehicle’s value to them. After paying wholesale, they will increase the price to an indeterminate retail value. The KBB website is only useful as a tool to determine private sales of vehicles.
Tip 3. Fine Tune Your Estimate
You can do this by researching the going rates for similar vehicles in your area. This will give you an idea of what people are willing to pay for an automobile like the one you want, which ultimately trumps any price advertised in a manual. This information can be used as leverage during negotiations.
Tip 4. Get The Facts
Ask for a fact sheet or full report on the vehicle you’re interested in purchasing. Finding issues not advertised (e.g., vehicle underwent extensive body work) can either help you determine if you really want the vehicle, or give you more leverage when it comes to negotiating a price.
Tip 5. Research Financing Rates Ahead Of Time
Cash is king, but sometimes you may not have a few grand hiding under your mattress to blow. That’s when financing comes in handy! Remember that dealers actually profit from signing you up for dealership financing. The deal is actually financed by a bank with the dealer as a middleman. Don’t hesitate to shop banks for financing. When the dealer tries to entice you into the dealership’s financing office, you can tell him / her that your bank has already approved a loan and how much it is. Now you have a price to start negotiating with!
Lastly, be ready to walk away from any deal that does not feel right. Be flexible and don’t get too fixated on one car. Remember, there are dozens (if not hundreds or thousands) of other automotive fish in the oil sea.