3 Auto Buying Tips Every Consumer Should Know
Buying a new or used car is often cited as one of the most stress-inducing consumer experiences because the auto sales industry is notorious for high pressure tactics. Knowledge is power, however, so before you go out to shop for a vehicle make sure that you know the following tips. They will give you added insight into the techniques that auto sales professionals use to beat consumers during those intense and much-dreaded showroom negotiations.
1. Plan Ahead
First you’ll need to come up with the money needed to buy the new car, which typically requires that you take out an auto loan. To prepare for that you should focus on reducing your debt load, because the lower your debt is compared to your income or available credit, the easier it is to qualify for a loan. Lenders refer to this as credit utilization, and learning to manage it is one of the keys to improved credit. The better your credit, the lower the interest rate and down payment on a car will be, so this step can save you lots of money before you even decide what kind of vehicle you want. You may also want to sign up for a card that offers cash back rewards that can be applied towards your new car purchase. General Motors introduced a new kind of plastic in October 2013, for example, that lets cardholders earn up to 5% that can be applied towards buying a GMC, Chevy, Buick, or Cadillac vehicle. You may want to sell your old car yourself, too, because you will almost always get considerably more for it than the dealer will offer if you do a trade-in. Another reason to sell the vehicle on your own is to take that transaction off the table before you get to the dealership, because it’s one of the main ways that car sellers try to squeeze more profit from their customers when they use the classic 4-Square sales scheme outlined below. If you have an old car then there are companies that offer cash for car buyer.
2. Beware the 4-Square
The 4-Square system has been used for decades as a way to manipulate the components of a car sale negotiation and tip the scales in favor of the dealer. As one auto dealer described it, the 4-Square is used to give the buyer the false impression that they are getting a better deal even when they aren’t. Familiarize yourself with it so that you won’t fall victim to that practice. There are many variations to the 4-Square, but basically it involves dividing the price negotiation into four parts. Dealers often draw four squares on a piece of notebook paper to help them keep track of the technique, which is how it got its name. In one square they write the retail sales price, in another they put the trade-in price, the third square is reserved for the down payment, and the fourth square is where they record the amount of your monthly payment. The idea is that the customer will ask for a low sales price. In order to give them what they want, the sales manager can drop the price while adding to the cost of financing, lowering the value of the trade-in, or raising the amount of the down payment. In this way a clever seller can change the figures in one box and then manipulate the math in the other three squares in order to always come out ahead. If you want to buy a car for $20,000, for example, despite a sticker price of $28,000 a dealer might agree, but will then offer you less for your trade-in and also charge higher interest on the financing. Maybe you want a lower monthly payment and the dealer agrees. In exchange, the dealer will add a year or two to your repayment period so that they can profit from many more months of interest payments. In the end the buyer gets what they ask for, but they don’t realize that the dealer walks away with a lot more money because of how they structured the complicated finances for the transaction.
3. Shop for Affordable Bank Financing
Many automotive dealerships actually make more profit from financing than they do from selling cars and trucks. That’s why General Motors Financial Company is, for example, one of the most powerful financial institutions in the world. The $2 billion a year corporation grew big and profitable by earning money on loans made to car buyers. Meanwhile, local banks generally offer much more affordable terms for auto loans, so shop for a bank loan with a competitive interest rate. Once you’ve found the best loan you can then go and visit dealerships without worrying about negotiating the financial terms of the deal. A savvy shopper will know ahead of time, in other words, how much cash they want to put down, how they want to structure the financing, what their trade-in is worth, and what price they can afford to pay for a vehicle. If you already sold the trade-in and secured bank financing before you go car shopping, that alone will virtually eliminate any opportunity for the dealer to use the 4-Square. There is nothing left to discuss or stress over except the bottom line price. Also Worth Noting Be aware that if you borrow money to help you pay for your vehicle, you will be using a secured loan. That means the vehicle itself will be the collateral. If you default and fail to repay the loan, the lender can repossess the vehicle and sell it to cut their losses. Also, since the lender wants to protect that asset as long as you are paying off the loan, you will be required to carry full collision insurance. That’s important to factor into your purchase calculations so you can budget the extra cost of the insurance. Tom Kerr writes for CompareCards.com in addition to others. He has been an avid writer for years, even winning awards for work he’s done.
