Must Know these Car Dealership HIDDEN SECRETS Before you buy

Must Know these Car Dealership HIDDEN SECRETS Before you buy

Must Know these Car Dealership HIDDEN SECRETS Before you buy

If you’ve saved up money to buy a car in cash, congrats! That is a GOOD thing! But, there is one thing you should NOT do with that cash. What is it? Do NOT go to the dealership and pay for your car in cash. And I know what you’re saying: “Kim, if I pay in cash isn’t that a great bargaining chip when I negotiate the price with the dealer?” Nope. It isn’t. In fact, if you do that, you’re losing any chance you have to get the best deal on your car.

Paying with cash is NOT a negotiating chip! Dealers are not incentivized in any way for you to pay cash. In fact, not only will you not get the best deal, you might end up paying MORE for your car! Why? Well, to explain, let’s first take a look at how a modern car dealership works as a business.

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On average, 58 percent of all sales at a dealership come from selling new cars. Most people think that car dealerships make most of their money from selling cars, which couldn’t be further from the truth. Even though 58 percent of sales are new cars, only 26 percent is gross profit.

The prices are all pretty straightforward and since everyone with a cell phone has access to every bit of data about every car in the world, you already know exactly what the price of the car should be. So car dealers have to find other ways to make money. What do they do? Most of their money comes from F and I parts, service fees, and accessories.

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These are where a dealership makes most of its money. The car is just a way to get you to buy high-margin finance and insurance products. In fact, that is what the letters F and I stand for: finance and insurance. F and I is just where they try to sell you something.

Gap insurance, undercarriage warranties, wheel insurance, protection plans, extended warranties, and so on. The funny thing is that 55 percent of these are never used. So you end up paying for something you never use.

What is the best process to actually buy a car with cash?

So, now you know why the price of the car isn’t a negotiating point, let’s look at how the business works and how you to best use your cash to buy a car. What is the best process to actually buy a car with cash? Well, there are only four things to think about when buying a car. First, know how much the car should cost through your research.

Second, if you have a trade-in, then know the value you should get from that exchange. Third, If you have money for a down payment you’ll have to factor that into the equation too. And finally, if you end up getting financing for any part of your car purchase, be aware of the terms of your loan and how much you’ll have to pay.

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These four things are pretty much what every car sale comes down to. When you go to a dealer and finish your test drive and are about to start talking price with the dealer, whatever happens do NOT say you will pay with cash. You will loose all your leverage and bargaining power. Why? Well, dealerships have incentives.

Car dealership incentives

Remember when I said that they get 74 percent of their income from F and I and other upsells? Dealerships make money by either acting as the bank through their financing division and giving you a loan, or sending your information to a lender in their network where they can get you a loan deal.

This is where they make money, and where you have leverage to get a good deal. What is important to be aware of is that the dealership makes money when you finance your car with a loan. It is in their best interest for you to take out a loan because that is one of the ways they make money! How? Well, the lender provides the dealer with what is called a “BUY rate” – this is the rate that the dealer can offer the loan at.

However, dealers will then tack on a couple more points on top of that loan and then offer the new terms to you as the “SELL rate”. For example, if you took out a loan for $20,000 over 6 months at 4%, and they give you the loan at 6%, that 2% difference wil cost you $1,033 spread over the life of the loan.

This is why the dealership is more willing to negotiate on price if you tell them you want to take out a loan. They make money on the payments! Of course, I can hear what you’re saying: “But Kim, I don’t want a loan! I already have the money!”. Exactly! And this is the really interesting part so pay close attention.

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When they take you to the back office and set up all their F and I and other add-ons, take a look at the total break down of all the costs. Typically you’ll see the “sticker price” followed by their “special price” that they’re offering you.

Then they’ll put on the taxes and after that a bunch of other fees that are part of all of those F and I’s that mentioned before. Doc fees. Government fees. Gap fees. Things like that. This will all be totaled, and the final price, minus your down payment, is going to be your final price for the car that you’re going to be financing.

And this is where you undercut them on the price. The first thing you need to do is see if there is a penalty for paying off the loan early. If there is then this process won’t work. Don’t be afraid to walk away because honestly it won’t be worth the trouble.

Most loans don’t penalize you for early payment so double check this to make sure. So, this is the point where you go through each line item, identify the erroneous fees and charges and cross them off. Be strong here and don’t give into pressure. Of course, if you really need the extended warranty that is fine. But if you don’t need fees that are made up, like Gap fees or Doc fees, then be confident to tell them you won’t pay for those.

These are really just negotiation tactics. If they tell you a fee HAS to be included, then ask for it to be removed from the base price of the car. Remember, they’re thinking about how they’ll make money on the loan payments so they’re more willing to cut out some of these fees if they know you’re financing a good chunk of the price of the car.

After you’re got your finances amount recalculated and your total price is lower, you drive off with your new car and new loan. Then what? Well, a month or so later you call up the lender and ask them for your payoff amount.

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It should basically be the total price of the car minus what you already put down. Then you write them a check and pay off the rest of the car. In the end, you still essentially bought the car with cash with just a slight time delay.

But because you took out the loan you were able to negotiate on the total price of the car and reduce ancillary fees and add-on expenses. You bought a car with cash, without any of the negative effects of losing the negotiating power you get when you take out a loan. Is it a bit more work than just plopping down cash for a car? Sure.

But being frugal and careful with your money is about taking some of the steps necessary to save wherever you can – especially on a large ticket item like a car. But that is just one part of keeping your wealth and being careful with your expenses. 

Must Know these Car Dealership HIDDEN SECRETS Before you buy

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