I’ve always wondered what it would be like to be car salesman.  What goes through their minds as soon as a potential customer enters the lot?  Do they see the new comer as fresh meat while anticipating the kill (sale).  Do they profile the customer based on the car that they drive and clothes that they wear?  I came across an article on edmunds.com that answers all these questions (and more).

The article is called “Confessions of a Car Salesman” and it’s a report of how an edmunds.com reporter went undercover and found a job as a car salesman.   The article is quite long, so I took the helpful tidbits that may be useful the next time you decide to purchase a car.

… process begins by asking the customer how much they want for a monthly payment. Usually, they say, about $300. “Then, you just say, ‘$300… up to?’ And they’ll say, ‘Well, $350.’ Now they’ve just bumped themselves $50 a month. That’s huge.” You then fill in $350 under the monthly payment box.

… you could use the “up to” trick with the down payment too. “If Mr. Customer says he wants to put down $2000, you say, “Up to?” And he’ll probably bump himself up to $2500.” Michael then wrote $2,500 in the down payment box of the 4-square worksheet.

This is called the “up to” technique/trick.  A small $50 raise in the monthly payment may not seem like a lot, but it ends up being $3,000 extra at the end of a 5 year term.

Lesson:  Negotiate the final selling price (even for a lease) instead of monthly payments.

The final box on the 4-square was for the trade-in. This was where the most profit could be made. Buyers are so eager to get out of their old car and into a new one, they overlook the true value of the trade-in. The dealership is well aware of this weakness and exploits it.

Car dealerships can make a killing on trade in’s and usually look to low ball the offer since it’s your “old car”.

Lesson: Look up the value of your trade-in before you go car shopping.  Also, don’t mention a trade-in until after you have negotiated your purchasing price.

“But here’s the beauty of this system,” Michael said, “these numbers aren’t coming from you — you’re still the good guy. They’re coming from someone on the other end of the phone. The enemy.”

This reminded Michael of something and he laughed. “Here’s another thing. Never give the customer even numbers. Then it looks like you just made them up. So don’t say their monthly payment is going to be $400. Say it will be $427. Or, if you want to have some fun, say it will be $427.33.”

So what you do is this,” Michael pretended to pick up the phone again, “you ask the desk, ‘What did we get for the last three Tauruses at auction?’ Then they’ll give you some figures — they’ll say, $1,923, $2,197 and $1,309. You don’t have to say anything to the customer. But he sees you writing this down! And he’s going, ‘Holy crap! I thought my trade was worth $6,000.’ Now it’s easy to get it for $3,000. That’s a grand extra in profit. And it’s front-end money too!” (I later learned that front-end money was what our commissions were based on. Back-end money was made on interest, holdbacks and other elements of the deal.)

These are some examples of sales tactics that car dealerships use.  The good cop, bad cop routine (using the phone), and pricing strategies.

Lesson:  Be aware of the number games that car sales people can pull.

  ..whenever someone failed to accept the “first pencil” (the high numbers they begin with) Michael would always have “an idea” or “remember” a rebate or special interest rate program. This avoided the head-to-head confrontation. It also promoted the sense that we were working in the customer’s best interest.

The dealership can always go lower than the sticker price.

Lesson:  Always ask for a better price!

If the minivan was selling for a sticker price of about $24,000 with options and tax, a 60-month loan at 9 percent interest would be $475 a month. However, I later checked Edmunds.com True Market Value prices and saw that this van should have been discounted about $1,700 from the sticker price. Then, monthly payments at 9 percent would have been $430 a month. Over the life of the loan this was a $2,520 difference.

This goes to show that a little pricing research can go a long way when purchasing a new vehicle.  In the states, edmunds.com is popular.  Here in Canada, I’ve read that CarCostCanada is popular.

Lesson: Buying a car is just like buying any other big ticket item, research and due diligence is required!

From my commission check it was clear that the minivan couple could have made a better deal and saved several thousand dollars. So where did they go wrong? Well, first of all, they negotiated as monthly payment buyers, rather than bargaining on the purchase price of the vehicle. When you agree to be a “monthly payment buyer” several variables are introduced that are harder to keep track of: the term of the loan can be extended up to 72 months (six years!) without your awareness and the interest rate can be raised. When you bargain on purchase price, it is a cleaner, simpler way of negotiating.

 As I mentioned above, it’s always best to negotiate final purchase price rather than monthly payments.  Negotiating monthly payments may end up costing you more in the long run.

In Summary:

  • Car sales people commissions are based on the profit that they bring in.  That’s probably the reason why they always push for rust protection, scotch guard, extended warranties.
  • If you’re set on purchasing a car, tell the sales person that you’re going to pay cash.  That way, you can negotiate a final purchase price instead of discussing monthly payments.
  • If you have a trade-in, don’t mention it until you’ve negotiated your final purchase price.
  • The more educated you are about the market value of a vehicle (along with the trade-in), the better the deal you’re going to get.
  • Never feel pressured to buy a vehicle.  The whole meeting with a car sales person is designed to make you feel “rushed” into buying.
  • When negotiating on the price of the vehicle, always be prepared to leave the table.

You can read the whole story Confessions of a Car Salesman.  Make sure you get comfortable though as it’s a pretty long article but a great read none the less.

Do you have any tips when purchasing a new/used car?

Read about how about MDJ reader got a great deal when buying a new car.

 

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Gregg
7 years ago

Hi, Nice post indeed. I wanted to share something I learned and what was previously said. It’s all about “Walking away from the table”.

I recently purchased a Acura TSX which I made on thier website totaling $38,977.
When I went to the dealer I explained that I saw the car on a commercial and wanted to purchase it with cash ( with all the perks I customized with it online ) and do you know what the Salesman said ? He could do all that for me for “Just under $42,500” Which ended up being $41,700

When I explained to him that I had roughly $40k cash and was willing to spend it, He said he could give me a flat rate of $40k(get this) + tax that I could “Easily put on my credit card and pay it off next month”. ( The original $38,977 was INCLUDING tax. ) When I offered to pay $37k flat He grined and said “We need to get real if we’re going to make a deal.” So I bumped it up to the Website’s price and said “Ok $39k.” Again he smiled and said “Ok kid I might be able to bring it down to the $40k flat.” Now I was getting somewhere. I offered a deal to him that I would give him $38k flat and take the car right now (Which was $1000 off the price I was going to pay) and he disagreed. So I got up and said ” Thank you for your time and patients, but I do not think I can afford “his car”. When I stood up, He quickly called me back and said “Will you really sign the papers now if I can give it to you for $38k flat?” I said OK I can do that, signed off on paper, came in 2 days later with the cash and Drove off with a brand new car.

LESSON: Study this post and how I negotiated. It will ALWAYS get you a better deal, and in some cases..If a Salesman sees you are about to walk away from a sale he had in the bag, he will do what he can to sell you the car, for less of a commission. He gets payed either way….Just not as much.

Jay
9 years ago

From my (considerable) experience with dealerships, the commission for extended warranties, 3M, undercoating, Scotchguard etc all goes to the person arranging financing for you, not the salesman.

Nathan Dickson
9 years ago

whitbymazdaNathan

Car sales men, in the province of ontario are regulated by a governing body by the name of OMVIC. “the ontario motor vehicle industry council”.
any misleading information leads to a $50,000k fine on a salesman, with an additional $100,000k fine to the associated dealer.
WE show up for work for free everyday. no pay until we have not only sold a car, but done all of our due-dilegance to ensure the car is handed to the customer in a timely and professional manner. we are certified in auto-motive law and ethics.
so to say that we are the one’s ripping customers off for them having to pay a market up when it comes to a retail item.
im sorry but that is grossly misunderstood by the masses.

we work long hours, with no guarentee of what our pay will or wont be come the end of a pay period.
selling isnt easy to begin with, and withholding any offer from a customer does not benifit any salesman. they are offers made to the purchaser only.

is it too much for a sales man to ask, to make a couple hundred dollars after dealing with a customer who has come in with all of these horror stories embedded in their minds after doing “their research”…

its sad that so many people are so petty these days…

you argue about the 200% mark up on a bag of milk or banana’s, but you will scream about the less than 10% mark up (at best) of a new car imported from japan….

yes to all the customers reading this…. please do your research…
you are being mislead, and its mostly by the non sense you are reading here….

moncherion
10 years ago

The rule about negotiating the final price and NOT monthly payments is incredibly important but also seems pretty basic. Oddly enough though, we don’t think that way when it comes to buying homes. We got to the bank and figure out what monthly payments we can afford and then look for houses at or near that peak based on the interest rate we locked in at during pre-approval.

Gerard
10 years ago

Jeez, sometimes I am so glad that I ride a bike…

Jim Nichols
11 years ago

I haven’t read all the comments, but..
HOW TO BUY A NEW CAR:
If you MUST have a new car, go find the exact car, AT NIGHT, on the dealership lot. Write down ALL the window-info. Then research it on edmunds.com. and determine just how much it COST the dealer. Then, decide how much you want them to “make”, on you. Say $300. Go to your bank, and get a pre-buy OK from your banker, to finance it for that sum. Write a check to the dealer for that amount.
NOTE: If there’s a car you need to trade in, DON’T do it. Look up the True Cash Value of your car in edmunds.com, and run an ad in your local FREE paper (Thrifty Nickel, The Shopper) after you have it “detailed”, and correct any glaring problems, like a missing hubcap, burnt-out headlight, etc. Sell it yourself. It’ll be fun. And you’ll get CASH, not an imaginary, fabricated “trade-in” value.
Go into the dealership, on the LAST DAY of the MONTH (very crucial timing) and drive the car. Allow them to “do the ritual” and put on their show. When it’s over, and you have their numbers in front of you, thank them, and tell them, “I’ve already decided what I’ll pay for the car.” Then, take out your pre-written check, and lay it on the desk.
The salesman will look at it, and laugh. At that point, you STAND UP. He’ll get excited, and say, “Wait! Sit back down. Let me go talk to my sales manager!” You may be there for a while, but, they WILL sell you the car, for your offer. They desperately need one more car “on the board” for the month.
It’s true. You win.

Jim Nichols
11 years ago

I read the column a few years ago. It needs to be on the front page of every Sunday paper in the nation, serialized. People have no idea. The car business is, for the most part, organized crime. And I have for years, laughed at those who’re going to “save money” by buying ANY new car. Last week, I bought the kind of car you only hear about, an ’88 Buick LeSabre Limited, for $500. Son took car from 83 year-old Mom, who’d been driving it for 5 years w/ no license. Like new, 102K. So…I really don’t CARE what gas costs, and I get 26 mpg to boot. For the new Hybrid crowd, with their socks-under-Birkenstocks, it’s more about saving the planet, than saving money. Equally misguided effort.
I tried several times in the past, to get rich by selling cars…But I had a problem…I was ‘too nice”. My most vivid memory of “how the game works”, is when in 2001, an elderly couple came in to buy a new Oldsmobile. He was a local minister, and their trade-in was only three years old. Nice car. When the dust settled from all the juggling of the fabricated numbers and the confusing paper, and the discount-to-anybody number was substituted for the “trade-in value”, the slimy sales mgr. literally STOLE their nice old car. In reality, they got NOTHING for it. Zero. They cleaned it up and soon sold it for a LOT of money. And the used cars is where the heavy profit lies. NOT the new cars. But you know that.
The couple headed for the door, him with his cane, and her holding onto her arm. I was the only person in that snickering, gloating group that rushed to open the door for them.
The door closed behind them, and before they were even off the sidewalk and into their criminally-priced new car, the sales manager was dancing around the show room, and he yelled loudly, “We ripped their phugging THROATS out !! ”
There oughta’ be a law…
Jim Nichols Billings MT

Raskulz
11 years ago

Just a quick tid-bit im not sure if it will work, but bring your own pen to the dealership when you are going to buy. Im just thinking that when the salesman are ready to “pounce” they will hand you there pen and want you to sign without hesitation. Bringing your own pen may help you, so you can read through and make sure the salesman isnt trying to rush something past you, im sure that when you take the paper he wants you to sign and refuse the pen he will be taken back and think you are wiser than we all may be. atleast me =P a first time buyer

Raskulz
11 years ago

Excellent information, Im going to be buying my first car with the next year. I will take this information to help me out as i will be buying my first car brand new.

Brian
11 years ago

Ahhh yes, the evil necessity of buying a car (a depreciating asset)… I know how most ppl buy their cars, I’ll show you how I buy mine…

Suppose you buy a $20,000 car and let’s be flattering to say when you drive it off the lot it is still worth $19,000. In 5 years time, you have a car still worth 10K and you want to buy a new car. I will assume that your new car is going to cost $30,000 (inflation, next model up, etc.)… WHen you apply your 10K trade-in, you are now 5 years later needing to come up with another $20,000… Welcome to the treadmill my friends!

Why don’t you do this:

Take your 20K and buy an investment that will appreciate in value. Then go to the bank, borrow 20K paying 6% interest only. Your payments per year are $1,200 per year (or $6,000 after 5 years). Then, in 5 years, look at your investment you’ve purchased that increased by 10% per year in a tax-deferred non-registered mutual fund – it’s worth $32,210 (for simplicity, we will ignore capital gains taxation). Now sell your investment, pay the loan, and you have $12,210 cash.

Let’s summarize:

Most Canadians look like this when on the treadmill – $0 cash + car +20K out of pocket…

Here’s the option I gave you – $12,210 cash + car + out of pocket $26K (interest payments plus your 20K to pay the bank back after 5 years)…

But really, what we do is take the 20K initially and buy the car. Take the banks 20K and purchase the investment paying interest only … When you borrow to invest, the interest is tax deductible. Assuming a 40% marginal tax bracket, your net cost is only $3,600.

It’s your call…