How To Negotiate A Used Car
Buying a car can be stressful and that’s actually exactly how car dealerships want it. The more frustrated and stressful it is, the more likely you are to settle on whatever deal they offer. Learning how to negotiate a used car will pay dividends over your lifetime so take a seat and pay attention.
Once you know the ways dealerships scheme and where they make money it’s much easier to know where you can shave some money off the price during negotiations and where you can’t.
Since I know like no-one is going to read the link above I will go ahead and drop in this very important piece on understanding trade-ins, as they play a big role in your negotiations.
What Is A Trade-In Allowance?
A trade-in allowance is the amount of money a car dealership will offer you for your used car. The value of
Dealerships offer trade-in allowances that are already predetermined and have a low and high end. In this way, the dealerships set a standard for what they are willing to offer on a trade-in in a sort of collusive way.
How Do Trade-Ins Work?
In a nutshell, trade-in allowances act as a down payment with a small caveat. When you trade in a car you only pay taxes on how much you finance.
This is different from buying a car without a trade-in where you pay taxes on the sales price of the vehicle. See the example below, using Texas sales tax rates:
|Taxes Paid With Trade:||(10,000 x 6.25%) = 625.00|
|Taxes Paid With No Trade:||(20,000 x 6.25%) = 1,250.00|
When you trade-in a car you will always get less money than you would if you sold it outright, but be sure to calculate any tax benefits in the trade-in value to get the full picture.
Below are two other common trade-in scenarios that are important to
Negative Equity Trade-Ins
This occurs when the value of your trade-in is less than the amount you owe on the vehicle. This is the most common situation buyers find themselves in. Getting out of a car with negative equity is its own topic entirely that we will cover at a later date.
For now, the important thing to know is that the difference between what the car is worth and what you owe in financing will get added to the amount financed on the new vehicle and not the price of the new vehicle.
Owing Money On A Trade
When you trade-in your vehicle and you still owe money the financing behind it can be a bit tricky. To help understand how the loan is calculated I’ve created a simple example for you below using the below facts:
|Amount Owed on Trade-In:||$20,000|
|Price of New Car:||$35,000|
The amount of the financing would be determined in this way:
|Price of New Car:||$35,000|
|Less: Trade-In Value:||($15,000)|
|Amount to be financed:||$20,000|
|Plus: Amount to be financed||$20,000|
|Total financing for new car:||$40,000|
This might seem intuitive, but it can get a little confusing if you’ve never done it before. Rather than using the value of the trade in to reduce what is owed on it and simply adding that to the new loan, the financier pays off the old loan entirely and adds that amount to your new transaction.
It’s something you need to be aware of before starting negotiations as it will help you get a better idea of of your monthly payment.
How To Negotiate A Used Car
Let’s assume that you didn’t read that and that you don’t have a relationship with a salesman before arriving to negotiate on a car. These are all of the steps you should take to negotiate the best deal on a used car.
Step 1 – Identify The Exact Car You Want Beforehand
This one should be obvious but sometimes people surprise me, so I want to be clear – identifying the car you want is a process that involves actually driving all of your top choices till you find the right one.
Therefore, it’s very important to identify a few different makes and models you are interested in and then testing them all BEFORE making a decision. There are a number of benefits to taking this approach:
- Test driving several helps reduce buyers remorse.
- Walking away from the dealership without buying lets the dealership, and salesman, know that you will walk away.
- It allows you time to sell yourself rather than be sold.
Taking the time to do real-world comparisons will help you get really comfortable with whatever car you are looking to buy. It’s so important to be happy with your choice after the fact and it will help you feel like whatever price you paid was worth it,
Another benefit is that once you have done this you now have a contact at a dealership and a particular car in mind that you are really set on. This sets you up for step 2.
Step 2 – Take Time To Shop Around For Similar Cars To Avoid Emotional Attachment
It’s super easy to find a car while test driving and start saying silly shit like “this is the one”. We aren’t shopping for spouses, we are shopping for cars and there is likely a similar, or maybe even a better one out there.
Taking a couple of days to shop around will do a few things that will assist you at the negotiating table:
- It will help you get a sense of the price that most dealerships are asking for a particular car.
- Shopping around provides insight into how abundant a particular model is, the more available the more leverage you will have.
- While continuing to shop you might realize that their options you could live without making it easier for you to find a car for less.
Step 3 – Value Your Trade Before You Arrive
Most people go wrong here and this is the biggest place a dealership can squeeze you for money. Imagine for a moment that you trade-in your car at the first offer the dealership makes. They likely made about $4,000 off you and then sold you another car.
If you have a solid idea of what you can get for your trade before arriving it will make it much easier for you to estimate the amount you will be financing and/or paying.
Aside from the financial benefits of knowing your worth, it saves time and lets you know if a dealership is really working you over. It’s critical to have a good idea of the value of your trade-in before you show up.
Step 4 – Shop For Financing Before You Arrive
The number one place people get completely screwed at a dealership is in the financing office. A number of shady tactics are deployed here at buyers expense and it should be illegal.
Avoid this like the plague. Shop for financing in the comfort of your own home and know what you can get for rates before you even talk to the dealership.
Withhold this information till you know if the dealership is going to screw you or not. Once they lay their cards on the table then you can lay yours down too. This tactic is one of the best ways to save money in the long run as your interest rate expense will go with you for years.
Step 5 – Negotiate Your Trade-In Separately
Never allow the trade-in to get bundled into the negotiation for the new car. They are two seperate transactions and should be treated that way.
Referencing our example above, remember that the old loan will be added to the new loan regardless of the trade-in allowance you receive. Keeping that in mind it’s easy to just accept what they offer or get so focused on the negotiation of the new car that you sweep this under the rug.
Understanding the new loan gets added to the old loan should motivate you to only accept the maximum trade-in you can get. In most cases you will be low-balled by at least a couple of thousand dollars, possibly more on newer vehicles.
If you have negative equity and they bring that up tell them to shut their mouth. Your equity and the value of your trade aren’t related at all in any way. In fact, if they even mention this at all during a negotiation take it as a sign to walk away because they are just trying to scare you into taking their deal.
That’s called extortion my dudes.
Step 6 – Be Realistic About What You Can Get
A lot of times there is this attitude that car salesman are lousy and that’s unfair. Sure, some of them are terrible, but there are terrible people everywhere.
All that being said, it’s important to be realistic about how much a dealership can generally take off of the price of a car. On average it’s a couple of thousand for used cars, but on a new car it can vary widely depending on incentives.
Step 7 – Negotiate Price Not Payments
Never, and I mean NEVER, negotiate on payments. In fact, if you have a salesman that starts out with “how much do you want your payment to be” tell him to have a good day and leave.
Negotiating the price of the car is far more important than the payment. If you have done your homework and you have shopped around then you should know approximately what the payment will be. If you can’t afford a car you would have known well before you arrived at the dealership.
When you negotiate a payment you find yourself in predatory financing land where people will underwrite outrageous loans just to sell you a car that meets your monthly payment demand. In the long run it will hurt you far worse than having a higher monthly payment.
Final Tips and Tricks
A few things to keep in mind before arriving at the dealership:
- Know the best times to shop and buy for new and used cars
- Set an appointment to do the purchase, allowing yourself plenty of time to both prepare and negotiate
- EAT BEFORE YOU GO and even arrive with snacks and a drink. Dealerships intentionally stall the sales process. If you show up full and with your day blocked off it won’t bother you and it will just keep them from making another sale.
- If you show up in a car then bring two keys. The dealership will take your trade where you can’t see it to make you feel like you need to buy a car. By bringing an extra key it will remind you this isn’t so and keep you calm.
- Be sure you’re excited to be buying – if you aren’t then don’t buy. Buying a car should be exciting and fun not a chore.
Now that you are prepared to hit the negotiations like a pro go be sure to read up on the benefits of having a salesman working for you. Good Luck!