(NOTE: I had to break this into two parts because I am so long winded )

I’ve wanted to write this article for some time now. As some background, I was laid off from my job as an Imagery Analyst (I’ll tell you about it sometime) in May of 1998. After about a month of searching for a new job, I took a job selling cars. Selling cars, IMHO, is not a very good job for anyone, at least the way I was forced to sell cars. This was neither profitable nor fun for me, so here I am writing this article, hoping I might be able to help some of you in the future. After a year and a half of selling cars, being a new car sales manager, and second chance finance, I pretty much saw the gambit of life at a dealership. About the only part I didn’t see was ownership, which takes a lot of money to make happen. So, without further ado, here we go!

When you go to purchase a car, there are several ways a dealer can make money from you. If you have the knowledge of how they are going try to take advantage of you, you can better serve yourself and your pocket book.

When you go to purchase a car, whether new or used (and I lump the “certified used” as a used), there are four basic ways a dealership can make money from you: markup, trade in, aftermarket, and finance.

Markup:

• Invoice: This is the difference between the MSRP and the invoice price the dealership owes on the car. !! The dealership owes on the car?? What is that suppose to mean?? Unless a dealership is a factory dealership, which most aren’t, the dealership doesn’t own the cars. They have a revolving bank account (like a credit card) that is usually (depending on the dealership) like $2-3 million. The dealership then pays the interest on the portion of the money that they have borrowed. If the dealership has more inventory on their lot than they have bank account, the bank will come and start selling cars for the dealership until they get down under their credit limit. The vehicle manufacturer usually pays a certain amount to the dealership to cover this expense, but it only covers about 2-3 months worth of interest on the vehicle. Dealers try to get their inventory rotated prior to running out of this money. Sometimes the factory will offer incentives to the dealerships if they sell so many vehicles over a period of time, usually a month or two. As the dealership sells more cars during this time period, the incentive goes up, usually in thresholds; say at 10 cars, then at 20, then 30 and so on. Sometimes if the dealership is really hurting, they will offer you some of this money as a discount to the vehicle. This is a way they can offer you “below invoice pricing”.

The markup of a vehicle over invoice will be dependent on the manufacturer and how much the car sticker shows. The more a car is worth, the more markup you will see on the car, and the more room you will have to haggle. A car showing only $9000 on the sticker price will only have a couple of hundred dollars of markup over invoice. While a car showing $60k on there might have several thousand dollars. When I sold Lincolns, the Navigator had about $6k worth of markup. The markup over invoice (sticker price) is controlled by the manufacturer, but the dealership is free to sell the car at what ever price they think they can get out of it (thus the addendum talked about later). I say all of this so you will have a reasonable expectation of what to expect when you start negotiating on the price of the vehicle.​

• Employee Pricing: Employee pricing is usually below invoice price, but don't ever fool yourself into thinking you'll get this, or even know what the magical number might be. This is a price which is offered by the manufacturer to employees as an incentive for the employee to stay true to the brand (obviously). When an employee gets this special pricing, they also get any rebates or incentives on top of the price, so it can be substantially less than what you as a normal consumer would see on the sticker price. This is a no haggle price given to employees. It comes directly from the manufacturer and the dealership has no control over it. They can choose whether they want to sell the car under this program in the first place, though. I'm just mentioning all of this so you will have an idea what it's about.​

• Maroni: This is the window sticker. It is required by law it be on the window when you purchase the vehicle. It will tell you what options are on the vehicle. The dealership can get in big trouble if it is not on the window. When you buy a vehicle, make sure the VIN listed on the Maroni matches the one on the VIN plate. This will assure you what is listed on the window sticker is actually what is on the vehicle.​

• Addendum: This is the “value added” sticker, which will usually include mark ups for things like “adjusted market value” and undercoating or paint sealant. I’ll cover undercoating and stuff in the aftermarket section. The AMV is a crock of manure. In this area there are probably any of 30 different dealerships of any one type of vehicle. If the dealership I am dealing with won’t take this off from the vehicle, I’ll go find another dealership. Some of you out there don’t have this luxury, as you may live in a remote area. I still would not accept this as a way for them to make money. Tell them to take it off and use the MSRP as a start point of the negotiations. If they don’t, get up and walk out the door. You’d be surprised how many of them will stop you before you leave, or will call you back within 24 hours to get you back down to the dealership. Remember they want to sell you a car. ​

Trade-in:

• The dealership can make (extra) money on your trade-in by not telling you the truth about the value of the vehicle. The way to combat this is to look at any of several sites online and see what the worth of your vehicle is, such as Edmunds.com or Kelley Blue Book. Don’t fool yourself, though. Most people believe that their vehicle is in “mint” or “very good” condition, when in fact there are lots of problems with it. I’m not trying to burst people’s bubble, here, just trying to give you some facts so you don’t think your car is one thing, and when you get to the dealership and they tell you its worth a lot less, you aren’t surprised. You can get the most out of your vehicle if you don’t use your old car as a trade-in in the first place. The dealership will rape you, have no doubt about it. Unfortunately the car is worth more to you than it is to them. Other things, such as aftermarket rims and stereo systems really don’t mean anything to the dealership. The car came with rims and tires, so it changes nothing on the value of the vehicle. If you want more out of your car, sell it on your own, prior to going to the dealership, or after you buy your new car.​

 

Buying a car from the Stealership - Pt. 2

Aftermarket:

• What I mean by aftermarket is, as I mentioned before, things like undercoating, paint protectant, and Scotch Guard. The salesman will tell you something like “We normally offer this for $1200 for the total package, but tonight we are running a special, and will offer it to you for only $400.” This sounds like a great deal on the outside. The problem is it only costs the dealership around $60 if they have a separate company do it for them, and less if they have their own people do it. There is a huge markup to make money off of you. You can do all of it yourself for around $30 or so, and in some cases, you don’t need it because the manufacturer already put it on the vehicle for you. Other things they may offer you are going to have a similar mark-up, like video gear, rims, alarm system, or stereo or what ever. Don’t have the dealership do it. They will charge the extra mark-up because they want to make money. Think of “the middle man” and it will all become clear to you. The addendum will tell you if any of these things are installed. Tell the dealership that you are not going to pay for these things because you don’t need them. If the dealership tells you that “well these things are already installed”, tell them to take it off. If they really want to sell you a car, they will let you have it for free. If they won’t, walk out the door. The same rules as above apply.​

Finance:

This is the interesting section most people don’t think about. How can the dealership make money on me from financing?? Doesn’t the bank make money from lending it on the vehicle?? Don’t doubt it; the bank makes money, but so can the dealership.

• First of all, they will try to sell you things like life insurance, gap protection, and extended warranties. In most cases you will need none of these, although, extended warranties are nice to have sometimes if you are buying a used car. Most of them aren’t worth the paper they are written on. The ones that are worth anything are through the manufacturer, like GM or Toyota or whomever. Most of us on this forum are mechanics by nature (or know one!!), so can take care of any major thing that may come along. If you do decide to buy an extended warranty, make sure you read the literature from the company that is offering it and make sure what the finance person is selling it to you isn’t telling you one thing and the brochure says another. Most of these only cover the power train, and not any of the other parts of the vehicle, like A/C or electrical. Getting a fully comprehensive or “bumper-to-bumper” warranty can be expensive. Most can offer you one which is good for so many years and 100k miles, which ever comes first. The “so many years” is usually by when the car was first sold. NOTE: Since the time I originally wrote this, car warranties have come a long way. There are many different types of extended warranties out there. The dealership doesn't have a lock on them. You can get them from the finance companies, your insurance company, or other places. Like you are doing with your car when you go shopping for it, do the same for the extended warranties if you truly want to purchase one. Most manufacturers today offer long warranties to begin with (GM's 5yr/100k, for example). In this case, you probably will never need the extended warranty. ​

• The dealership can also make money by doing what is called “holding points”. This entails telling you they can get you an interest rate of 8% on a car, when in actuality they can get you one for 6%. They are “holding” two points against you, and when the paperwork goes through for it, will get the amount of the 2% of the interest the bank would normally get as a payment from the bank. In essence, they are lying to you about your interest rate. The bank doesn’t care the dealership is doing this, because the dealership is getting the bank more money. When I say “bank”, I am using it as a generic term for finance company. The best way to combat this is by going to your own bank or credit union and getting a rate from them. You can also go online to Lending Tree and they will give you four offers. If you go into the dealership and tell them “I can get 4.5% interest through my credit union, can you beat it?” they usually will. They have to write so much paper per month with a bank or they may not be able to continue using that bank as a source of funding. The more sources of funding, the better chance they have of financing everyone, even those with bad credit. There are a ton of companies willing to finance people with bad credit. The thing about it is those with bad credit will get charged an arm and a leg in percentage rate. We saw upwards of 26% loans for people with bad credit. Different states have different max rates which can be charged, but just know it can be outrageous. (I was going to write a big long thing about credit, but will save it for another book!!)​

Things of Note:

• It used to be dealerships would give you a better deal if you brought them cash money. Today it isn't the same. Their main purpose is making money. They will do it anyway they see fit. If you bring them cash money, it takes away a couple of different ways for them to make more money on the transaction of selling you the car. They want you to put a down payment on the vehicle, because in most cases it will allow them to get you financed easier -- especially if the value they are selling the car at is more than what they can get you financed for, or if you are "upside down" in your trade-in. For those who don't understand, being upside down in a vehicle is owing more on it than what it's worth. Again, knowing what your car is worth will go a long way in helping you with your transaction.​

• When the dealership offers you "X" amount for you car, it will be the "trade-in" value of your car. There are three different values associated with a used car: trade-in (as mentioned), private party, and dealer retail. The dealer buys it from you at trade-in value and tries to sell it at dealer retail. Where I worked (three different dealerships), the norm was to mark up a used vehicle by $3000 from what they bought it for, to when you see the price listed on the window sticker. Although, many used car lots will not put a price on the window sticker of a used vehicle. While this markup differential is not absolute, there is usually plenty of room for you to negotiate the price down. This is the area where the dealership makes a lot of its money, though. ​

• One price shopping: Some dealerships offer you one price on a new or used vehicle (Carmax comes to mind). There isn't any haggling on the price. This can be good or bad. You'll have to know up front when entering a dealership of this type how much any of the cars you are looking at are worth to know whether you are getting a good deal or not. I bought a new Jetta from a local dealership which offered me $800 over invoice (this is a fair amount of markup, in my opinion, and their normal mark-up on all their vehicles), a good trade-in value on my car, and 0% financing for 66 months. To me it was a win-win-win situation and probably the best car buying experience I've ever had. You can find good deals at places like these, but you have to be educated. Another note about Carmax. They offer some decent deals on used cars. Do not try to trade your vehicle into them, though, as they will rob you blind by low balling you on the value. I believe this is the key way they make most of their money. I'm not trashing on them, just suggesting you sell your vehicle to a third party if you deal with them. Other than that, they are a stand-up organization as far as I can tell.​

I hope that this helps some of you out in some little way. I would bet I left some things out I wanted to tell you about, but didn’t remember to include. I’m sure there will be a plethora of questions, so please post up and I will try to answer them. I don’t have all the answers, but I probably have most of them. Like I said, I’m going to write another article on credit and how it can affect you. I’ll see if I can scan in some credit reports so I can show you different things and what to look for on them when you get them. Until then, ask away about buying cars from a dealership, I’d be glad to try and help you.

 

Great post paul...

IMO the key in buying a car is to NOT be in a hurry. If you are in a hurry ( an the dealer know can see this) they will rape you. Cause generally you will settle faster and not think all the decisions thru. They prey on people making spontanious decisions to buy a car. Do your homework first. Price shop at different dealerships. ALot of times it is even worth it to make a drive to one. For example I will be traveling 8hrs for any of my Chevy needs in the future.

Don't think because you purchase from an out of town dealership that you have to go there for service/warranty work. You can go to ANY dealership for of the same brand for this.

 

Squirrel?

See, the real reason I broke it into two parts was not because the forum only allows me to input 15000 keystrokes into one post, but because I was thinking of you, Tony Read the first part and come back when the feeling suits you

 

Excellent article! I've never bought a car from a dealership, though someday i likely will. I've been around them enough to gather these general ideas, but seeing the actual workings behind it is very interesting. Great article paul!

I have a little story about certified used car lot thing; there was a car just like mine for sale, with slightly less miles than mine had, going for $8.5k. Absolutely ridiculous. Mine has the "premium" package and this one had the "basic", but because it was part of a ford dealership with a huge trade in/certified used lot, they were able to mark it up a good 3-5 grand over what it would be worth on the market (aka: me selling to you).


I found mine for 3 grand from a third party person who babied it (aka: zero problems, perfect car!) and needless to say, seeing that car off the lot later on, made me irritated. Because some person went in there blindly and threw away good money for a car that wasn't worth even half of the asking price. Sad.

I try to help friends who are buying a new car and this article is a great point of reference on which to buy a car. Thanks man!

 

I appreciate the kind words. When I'm done taking classes this semester, I'm going to try to write up something on credit statements so everyone who might want to know can have a clue how to read one.

 

alot of good info on here thanks!! now when i go to buy car at the stealership i will be more educated!

 

Great article!

 

Thanks Jack. That means a lot to me coming from you!

 

Quit post whoring, Tony ... you fixed CRAP!

 

Hey Paulster I know this may vary from state to state ( I live in Texas) is it legal for a dealer to sell a used car that will not pass emissions testing in the county the buyer is having the car registered in,even though the county the dealership is in does not require emissions testing?