Car Buying Tips
These car buying tips will help
you save money by avoiding common overcharges and outright
rip-offs that occur at many car dealers across the country. (These dirty
tricks are not used by ALL car dealers, but they are used by too many.)
When you are done reading about these
common dealer rip-offs, be sure to visit our How
To Buy A New Car page, where you will learn the best new car
buying strategies for getting huge discounts on new cars and trucks. And
see our Car Buying
FAQ page for answers to the most common questions asked by new car
buyers.
NEW!
Be sure to read How
I Bought A Popular New SUV for $3,611 Below Dealer Invoice.
Money Saving Tip: Free
Price Quotes
To get the best possible deal on a
new car or truck, do all of your homework before signing any
contracts or putting any money down. Dealer tricks (like secret APR
increases, packed payments and other common rip-offs) can quickly erase
any discounts or other savings that you think you're getting, so learn how
to calculate your own monthly payments. Use the Internet to get at least
5-6 quotes before you start negotiating with dealers. For free (no
obligation) quotes on new cars and trucks, use Edmunds,
Autos.com, and
CarsDirect.
To make sure you're not missing out on a better deal, get quotes from all
three services!
Be sure to see our
Money Saving Tips page for
more information and resources.
Quoting Packed or Loaded
Payments
Quoting "packed" or
"loaded" payments is a deceptive practice that is commonly used
by car dealers. (It's even taught to their salespeople in training
seminars.) Here's how it works: When the customer asks how much the
monthly payment would be on a particular vehicle, the salesperson gives
them an inflated figure that represents a higher loan amount or APR. For
example, if the correct monthly payment was $400, the customer might be
quoted a payment of $450 instead. On a 6-year loan, this would end up costing the
customer an additional $3,600.
If the customer (unknowingly) agrees to the
inflated monthly payment, the dealer then has a number of ways to get his
hands on the additional money. For example, the customer might be talked
into getting one or more high-priced (and high-profit) items like an
extended warranty or car alarm, "at little-or-no extra cost."
(At least that's what the customer is told.) Or the customer might be
charged an APR of 11% on a loan when the going rate is only 8%, so the
dealer can pocket the additional finance charges. And if inflated payments
were used on a lease, the extra money could represent a secret price or
APR increase.
This little scheme is frequently used to
trick people into leases: Dealers simply quote inflated loan payments to
make a conventional purchase look a lot more expensive than a lease. You
can avoid this scam by using the Internet to find competitive rates on car
loans (look for "Online Auto Loans" in our
Money Saving Tips page), then calculating your
own payments.
Kickbacks for Secret APR
Increases
One of the car industry's dirty
little secrets is the practice of lenders giving kickbacks to dealers for
charging their customers higher interest rates. For example, if a lender's
current rate on a particular loan is 8%, but the dealer charges the
customer 10%, the dealer usually gets to keep most (if not all) of the
additional finance charges. (On a typical 5-year loan for $30,000 that
extra 2% adds about $30 to the monthly payment.) This is done on both
loans and leases, and because it's done without any disclosure to the
customer, it's a deceptive practice.
The "Doc Prep" Scam
This is one of the most common scams at car
dealers - charging outrageous amounts for document preparation ("doc
prep"). What exactly is doc prep? It's preparing the documents that
are required to sell you the car: the sales contract, loan agreement,
trade-in docs, rebate docs, and your identity for reporting to state DMV
and sales tax authorities. They're not registering your new car (you still
have to do that), they're just reporting the sale.
Some states have passed laws limiting doc
prep charges, but most have not, so watch out for outrageous charges. In a
state with limited doc prep charges, you might only pay $75. Cross the
border to a state without a limit, and dealers might be charging $300 to
$400 for the same thing.
Since $75 (or less) would easily cover
the actual cost of a dealership employee entering the purchase details
into a computer and hitting the "print" button, dealer prep
charges of $300 to $400 are outrageous rip-offs. To help dealers get away
with this scam, doc prep charges are almost always preprinted on their
sales contracts so they can say, "Sorry, but I can't remove that
charge, it's automatically included in the sales contract."
So what can you do if they're trying to
overcharge you for this? If they disclose a $300 or $400 doc prep charge
while you are still negotiating the price of the vehicle, assume that you
will have to pay it and lower your offer to compensate for their extra
profit.
If you've already negotiated the price of
the car and they didn't disclose a $400 (or $300) doc prep charge until
the contract signing, tell them the deal is off unless they reduce the
price of the car by $300 (or $200). If they refuse, walk out. In almost
all cases, they will try to stop you from leaving or call you later to
come back "to work something out." Most dealers will cave on
this (eventually), so stand your ground.
The "Dealer Prep" Scam
Charging customers for "dealer
prep" is an old trick that's been used to pick up an easy $150 to
$200 (or more) in extra profits. Since dealers are already being paid by
the factory for new-car preparation, any amount that you pay for this
service is pure profit. Don't fall for this, just refuse to pay it.
Extended Warranty
Rip-offs
Selling service contracts (extended
warranties) has always been a big moneymaker for
car dealers. Since their
customers have no idea how much markup there may be on a particular
warranty, many dealers have been able to make as much profit on that item
as they made on the whole car. Worse yet, instead of selling good
factory-backed policies, some dealers have sold practically worthless
"brand X" warranties at outrageous prices, just to make more
money.
Before the days of four-wheel drives,
computers, and turbochargers, dealer's cost on these warranties used to be
around $200 to $300. Today, policies for a few well-built, basic models
(like a Toyota Corolla) may still cost the dealer less than $400, but most
have gone up in price. For many four-wheel drives and vehicles with poor
repair histories, the dealer's cost may be as high as $1,400 to $1,800 on
factory-backed policies, and the typical "family sedan" warranty
usually costs about $800 to $900. However, the price to the customer is
often whatever the market will bear, so it's not unusual to see dealers
trying to sell $900 policies for $2,000 or more.
As an alternative to the high prices that
dealers often charge for their policies, reliable extended warranties can
also be purchased from other sources. Before you buy one though, you would
be wise to do some research. Most financial experts say to avoid them
because the odds are that the warranty will cost more than the repairs that you
will need. Some people find that the warranty wasn't even needed because their
new car didn't need any repairs at all. Here is a great article on this subject:
Are Extended Warranties Worth It? If you decide to buy one, don't pay those high
dealership prices just to get some peace of mind. You can usually find a good deal at
CARCHEX, a 20-year-old
company with an A+ rating at the Better Business Bureau.
Overpriced Car Alarms
The increasing popularity of car
alarms has given dealers another opportunity to make huge profits. An
inexpensive ignition/fuel cut-off system (which is not even a real alarm)
typically costs the dealer less than $50 to install, but the customer's
price is often $200 to $250. (This type uses a special key that's inserted
under the dash to start the vehicle, but it has no real "alarm"
features.) Dealers often charge at least $500 to $600 for the installation
of a decent (full-featured) alarm system, even though their cost is closer
to $150. And some dealers have been caught charging $2,000 to $3,000 for
systems that were only worth about $250.
If you're interested in saving money on an
alarm for your new car or truck, check the local Yellow Page listings
under "Automobile Alarm/Security Systems." A good system can
usually be installed by an aftermarket alarm company for $200 to $250 (or
less), and some even offer lifetime warranties.
One-Price, No-Haggle
Dealers
A "revolutionary" concept
is being tested in the sale of new and used cars: fixed, no-haggle prices.
Saturn dealers have always had this (supposedly)
"consumer-friendly" policy, and now a growing number of used-car
dealers are showing up with similar practices. Several automakers are even
attempting to convert some of their new-car dealers to
"one-price" after seeing used-car superstores like CarMax and
AutoNation getting good customer satisfaction ratings.
Is improved customer satisfaction the only
motive behind this trend toward no-haggle prices? Maybe not. A recent
survey of used-car transactions suggests another reason for dealers to
embrace this radical change: On average, no-haggle dealers are getting
more money for cars than dealers that allow price negotiation. How much
more? Usually $500 to $600, sometimes as much as $1,000. (For more details
on this survey, see "And They Call This Consumer Friendly?" on
the CarInfo.com Editorial Page.)
Warning to Car Buyers
Many car buyers who rely on the
Internet as their only source of information end up paying a lot more than
others who do a little more homework. How much more? Typically $500 to
$600 on your average $20,000 vehicle, and sometimes as much as $1,500.
(Even more on higher-priced cars.) Why are these people paying so much
more -- for the same vehicles? And what secrets do the "smart
shoppers" have that enable them to get better deals? INFORMATION!
Car buyers with the best information get the best deals, and smart
shoppers know how -- and where -- to get the best information. (They also
don't mind paying for it.)
Too many people make the mistake of
thinking that all they need is the magic "dealer invoice" number
to get the best deal. Thinking that "dealer invoice" is the same
as "dealer cost" is mistake #1, which is usually followed by
mistake #2: thinking that they can always get accurate dealer cost
information on the Internet, for free. Mistake #3 is not knowing the
actual prices that "smart shoppers" are paying for the same
vehicle. Mistake #4: thinking that a dealer who belongs to an Internet
buying program is going to give them the lowest price in town. Mistake #5:
not researching loan and lease rates before visiting the dealer. Mistake
#6: believing the dealer when he says, "The best rate I can give you
on a loan (or lease) is X%." Mistake #7: not knowing how to calculate
their own loan/lease payments. Mistake #8: buying a service contract from
the dealer at the quoted price. Mistake #9...Are you beginning to get the
picture? There's a lot more to getting a great deal than most
people realize, and you're not going to find all the information
you'll need in a Web site.
Here's a true story of mistakes made by one
Web-surfing car buyer: "Fred" works in the computer industry and
is an experienced Web surfer. When he mentioned to a friend that he was in
the market for a new car, his friend told him about a car buying book he
had read and how much money he had saved by following its advice -- which
included paying for accurate "dealer cost" information.
But Fred thought that was silly because he knew how to find everything on
the Internet, for free. (Or so he thought.)
When Fred was ready to buy, he used a
popular Web site to get his free "dealer cost" numbers. Then he
went to the dealer to make an offer. After a little haggling, the dealer
agreed to sell the car for $800 over invoice, stating that "normally,
we like to make more than $800 on a car, but we'll accept your
offer." Since Fred thought the dealer was only making $800, he
was convinced that he was getting a great deal. What he didn't know was
that the dealer's real cost was a lot lower than invoice due to
secret dealer incentives that were worth about $1,300. (So the dealer made
$2,100 on Fred's car, not $800.) And he also didn't know that other people
(the smart shoppers) were buying the same vehicle for hundreds below
invoice. The bottom line: Fred overpaid by at least $1,000 because
he tried to save a few bucks by using free "dealer cost"
information.
Money Saving Tip:
Don't overpay on a new car or truck, be a
smart shopper! Read our New
Car Buying Tips page to learn how to find the real
dealer cost numbers, how to buy at huge discounts from sticker, and
other useful car buying tips.
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