BUYING YOUR FIRST AUTOMOBILE



BUYING YOUR FIRST AUTOMOBILE

PROJECT PURPOSE:

To present high school students with the information needed to successfully negotiate the purchase of a new automobile.

BACKGROUND INFORMATION:

For this example, the vehicle under consideration is a 2018 Subaru Crosstrek.

Using (See information contained within), the vehicle has a Manufactured Suggested Retail Price (MSRP) of $23,691 and an invoice price of $22,187. These numbers are representative of both the base model and one selected option. You may notice that there is a 6.78% markup (See Spreadsheet) over invoice. The options/packages that are added at the dealership are where the dealers really make their money; the package that is added in this example is marked-up 55.02% above invoice cost. For the buyer, knowledge of this markup is critical because the dealer will try to receive as much of the 6.78% total markup as he can. In most purchases, the dealer will wish to work from the MSRP down through the negotiations in order to maximize their per unit profit margin; an intelligent buyer will only wish to work from the invoice up. The 6.78% markup represents the range in which the negotiations will take place.

MAKING AN OFFER:

Depending on the vehicle, the buyer should take into consideration the profit that the dealer will be making on the sale of the vehicle. Areas to focus on include: % above invoice profit (as previously noted); dealer document handling fees; dealer preparation fees; the market value of a trade-in; and dealer holdbacks (which are hidden within the quoted invoice price, thereby inflating the invoice number that you receive). Many dealers today will lump all of their junk fees into just the dealer fee and not itemize them out for the customer. As you can see, there are many hidden areas in which the dealer will be making money. Even if the dealer sells the vehicle at cost (invoice), they still have the opportunity to profit from the sale in that they will most likely be receiving: the holdback and any dealer or document prep fees. Additionally, the dealer may also receive special manufacturer incentives that the consumer public is not aware of. Such incentives are communicated only between the dealerships and the manufacturer and thus, prevent the consumer public from knowing the true profit that the dealer will receive.

For the example presented, I have decided to offer 1% above invoice for the vehicle. The Crosstrek is an older product for Subaru; if the model, on the other hand, was relatively new (i.e. – it had been recently introduced or redesigned), dealers would be able to receive higher profit margins.

For reference purposes, generally recommends an appropriate offer in the range from 2% to 4% on most vehicles. For this particular model, Edmunds recommends that you should pay $23,314.00 which is their True Market Value. From a personal standpoint, however, I disagree with this range. My reasoning is this – when you analyze the profits (See Spreadsheet) that the dealer will be making on the sale, you will see that offers in the Edmund’s range yield incredible profit levels to the dealer. Personal experience leads me to believe that most dealerships will jump at the chance to receive 2-4% above invoice. If this is true, then the consumer has some negotiating room from which they can work. Once again, it will all come down to you – “how diligent will you be in the negotiating process?” Please remember, the higher your credit score, the more leverage you will have in the negotiation process.

In addition to the 1% above invoice offer, I have assumed that I will not pay a dealer fee or document handling; I will also not pay for any dealer preparation fee. The only fee that I have included in the model is the national advertising fee of $699.00. As was discussed previously, many dealers today lump the dealer fee, document prep fee and dealer prep fee into one fee called an administrative fee. No matter what these fees are called, they are simply pure profit for the dealership. If the dealer insists on these fees as part of the deal, then I would indicate that my offer of 1% above invoice would have to be lowered. You are now starting to see that the entire process resembles that of a game of “Cat and Mouse.” Please, never fall into the trap of believing that you do not have any bargaining leverage; you are the buyer, if they wish to sell you a car, you should expect them to work with you. Do not be afraid to walk away from a deal. The ability to leave if you are unsatisfied will allow you to receive a better deal in the long run. I realize that it takes a high level of intestinal fortitude to remain patient and levelheaded during a situation like this, but your battle cry should be to never give in.

Additionally, never fall blindly into believing that they are not going to make any money on the sale; you have the numbers, you have a pretty good idea of what they will be making. They will tell you a million stories of how you are handcuffing the dealership in the negotiation. Once again, be diligent throughout the process. Even if they tell you that you are only $500 off of what they need, or $4.75 off of your desired monthly payment (which you shouldn’t provide to them), never cave in if you feel that you can get a better deal. One simple question will support these comments: “Who is better prepared to handle that $500 difference? You, with your salary, or a multi-million dollar operation?” I think you know the answer. But they will try anyway.

During the negotiating process, the issue of a trade-in value will arise; assuming that you have a trade-in. If there is no trade-in, it is generally easier to do a deal. Once again, the more information that you have pertaining to your trade-in, the better equipped you will be to bargain. To research trade-in values, is an excellent site. It will effectively allow you to analyze a reasonable trade-in offer depending on the mileage, condition and the options available on your vehicle. is also a valuable resource that you can use when deciding how much your trade-in is worth.

For this example, I ran three sets of queries (Excellent, Good & Fair condition) to determine a reasonable asking price for the trade. The range of these three assessments was $4,500 to $5,000. As a result, if I were actually buying the car, I would have built different trade-in amounts into each spreadsheet model. *For this project, everyone will be required to use the same trade-in value obtained from Kelly Blue Book. As a result, I have used $4,500 for the trade-in value in each purchase scenario. Once again, if the dealer is not willing to budge in one area (i.e. – document handling fees), you will have to negotiate harder in another area. The trade-in is one particular area that you can negotiate. A good point here is that you can visit several dealers to determine an appropriate trade value range. For instance, CarMax will give you a free estimate if you take your vehicle to one of their dealerships and will actually buy your vehicle even if you are not purchasing a vehicle from them. Just remember, the initial number that the dealer gives you will be a “low balled” number. The dealers will do this in order to create some negotiating room for themselves later on.

After crunching all of the numbers, including the $3,500 down payment, you can see that (Please refer to Scenario 1 – Offer #1) the monthly payment will come to $314.16 at a 3.25% interest rate for five years on a $17,376.13 loan. Understanding the effects on compounded interest, you should be aware that you can enter into a loan of a shorter term (i.e. – 3 or 4 years), however, your monthly payment would then be higher. From here, you have to ask yourself “Is this an acceptable deal?” “Can I afford this monthly payment without having to make reductions in my current standard of living?”

If I were personally negotiating on this vehicle, I would not do the deal at this point. Why? When you analyze the fact that the dealer will be making a minimum of $1,394.69 on the sale, I believe that there is still some negotiating room that they would be willing to come down to. I may be incorrect in my assertion, but I would try to work these numbers lower.

My first concern would be to address what they are going to make on the deal. Here again, the game starts all over and they will bombard you with comments about “how they don’t see the holdback until the end of the year, etc., etc., etc.” To begin, I would analyze my monthly payment by using an amortization schedule or financial calculator. These tools will allow me to see what various monthly payments will do to the final walkout price. When I feel that I have reached an acceptable monthly payment, I will communicate that to the dealer and see if they can do the deal. *One point that bears mentioning here is that the dealer may be able to help you with financing either internally or externally by getting you a lower rate. Just because this may be true, it is always in your best interest to go ahead and shop a rate at different banks and credit unions prior to going to a dealer to purchase a vehicle. By pre-qualifying in advance, you will already know what your rate will be. Then, should the finance manager be able to get you a lower rate, then you win. Just make sure that any loan that the dealer arranges for you is one that is from a bank/credit union that you are familiar with.

How would I do this? I simply would start plugging and chugging numbers until I arrived at a reasonable offer (please refer to Scenarios 2 & 3). In Scenario 2 (Offer #2), I have calculated the cost of the vehicle at invoice, holding everything else constant. This deal would result in a loan of $17,140.95 (see Unpaid Balance on Cash Price). Here, the monthly payment would be lowered $4.25 to $309.91. This would represent a savings of $255 over five years. Analyzing the expected dealer profit level, the dealership would net $1,172.82. I believe that most dealerships would accept this deal during the current market climate.

Next, in Scenario 3 (Offer #3), I have offered $100 above invoice. The monthly payment on the $17,246.95 loan is now $311.82 which is $2.34 lower than in Scenario 1 for a savings of $145.08 over five years. I also feel that this is a good offer in the sense that the dealership will be making close to $1,272.82 on the sale of the vehicle.

Which offer would I pursue? Answer: If I didn’t wish to haggle, offer #1 is what I would go with. If I did want to try for a better price, I would offer to buy the vehicle at invoice (offer #2). When it’s all said and done with, will my offer be accepted? I do not know; this is why it is called “negotiation.”

Here we go again, part III – The salesperson will, at this point, counter with “if you put more down, then your monthly payment will be lowered to the desired amount.” At this moment, you have to stand tall in the face of adversity and remember that since 99% of all new auto shoppers are monthly payment shoppers, they will want to play the “reduction to the ridiculous” game to squeeze out as much profit as they can from you. I would tell them at this point that $310 is my max monthly payment (offer #2 - $309.91) and that I am not putting anything more than $3,500 down. I would stand firmly behind offer #2 if I wanted to haggle for the best price. Never let them work you over for additional revenue in the areas of monthly payment and down payment! Simply understand that this process will continue on and on until you receive the deal that you are looking for, or you reach the stage where you cannot do a deal and you walk away; taking your business elsewhere.

FINAL THOUGHTS:

During the analysis, I have included a number of subjective statements (beliefs) about the process of buying a car. These statements have been formed through the years and include both personal experience and knowledge received from friends who work “in the business.” The statements are not meant to draw a pessimistic picture of the car buying process; they are merely included to illustrate the games and realities involved. There is no one best way to buy a car. However, by performing this unit, it is hoped that you have been exposed to a number of areas that you will take into consideration as you move through your life. Additionally, the final outcome will boil down to you; you are the one who will have to complete the deal. To do so, you must develop a sound negotiation strategy based on patience, information, and financial knowledge. Remember, this is one of the major purchase areas of your life: Proceed Intelligently and With Extreme Caution!

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