Do you know all those car billboards you see on the street?
It doesn’t matter how good the offer looks. Most people look and think: “I will never buy a brand-new car. It’s overpriced, it devalues quickly, and it has high maintenance costs.”
Someone is making a profit from the sale, which apparently means you can’t get a good deal.
Then there are the used cars, which sell for cheaper. The problem is, the shops that sell them are usually not as reliable as a professional business that sells new cars. Oftentimes, owners sell the car for the wrong reasons.
So while you think you’re getting a good car deal, the seller is moving some burden onto you. Repair expenses, hidden damages, manipulated odometers: All the things you take for granted in a new car dealership.
Yes, depreciation is a real problem. But that doesn’t mean you shouldn’t buy the car you like because it’s new. If you don’t plan to resell it, you will enjoy it for many years. A relatively good return on investment.
At the same time, that doesn’t imply you must spend what dealers want you to pay. Believe it or not, even the newest models have room for negotiation. And sellers will often do everything they can to make you buy that expensive vehicle.
This is GOOD because it empowers the buyer. You know what you want to spend. And dealers will find you the right offer IF you’re clear on what you want.
How can you lower the purchase price, or at least, get a fair one? We first need to know the actual money that’s on the table.
- How Much Does It Really Cost to Get a Car?
- How Much Are Dealers Making From Me?
- How Much Can You Negotiate for a New Car?
- Beware Of These Dealership Traps
- How Can You Negotiate A Fair Price?
- The Bottom Line
How Much Does It Really Cost to Get a Car?
It’s no secret consumers pay more than what it costs to produce a vehicle. After all, business owners have to deal with demand spikes, transportation, or maintenance costs.
You never really know what it costs unless you’re the one who produces the car. But you can get an idea by looking at the MSRP value, AKA Manufacturer Suggested Retail Price. This is likely what your dealer paid for it.
Manufacturers also take their profits. These don’t always come from selling cars but from public trading.
These public traded companies want their shareholders to invest more in them. The more cars they sell, the more investors they attract. That’s why they can take lower profits from sales.
They even reward dealers for selling more vehicles, but we’ll get into that later.
When you research a new car, the production cost is about 2% below the MSRP. Don’t consider accessories, since car dealers price them much higher than their cost.
How Much Are Dealers Making From Me?
If you only consider the MSRP, you’re going to miss a lot of discounts. Let’s start with a common scenario:
You arrive at the parking lot, talk to the dealers, and after a few minutes, you find the car you want. But you’re no fool, so you compare the asked price with the MSRP.
It turns out their price is about $300 above. As the salesman tells you, you’re getting the car as cheap as it can get, and $300 are pretty reasonable profit margins. You don’t want to look stupid with a lowball offer, so you take it, thinking it’s non-negotiable.
When you talk to car deals, understand that it’s NOT only the sales where sellers make profits. After you buy:
- The manufacturer gets the dealer a ~$2,000 rebate for selling that model
- Each time they sell a vehicle like that, the brand dealership division rewards them with another 3,000
- If that sale helps the salesman meet the corporate goal, that’s another bonus check worth thousands
AFTER all of that, they might earn an extra $300-$600 for every car they sell.
You can make an idea of how much they make per sale: you think it’s $600, but it’s about $2000-$4000. With that in mind, you can negotiate the best price for you and fair profit margins for them, $1000 or more.
That’s why dealers don’t mind selling you at the MSRP value.
How Much Can You Negotiate for a New Car?
Given the devaluation risk, it’s hard to price a new model. Because of that, there’s room for negotiation, about $2000 to $4000.
This number is for guidance. It all depends on the dealer and the car model.
#1 The Vehicle Value
The most obvious factor is the value percentage. A car worth $30,000 will rarely have price markups beyond $2000. But the dealer can take a 10% commission on a $100,000 car. Expensive models depend mostly on perceived value, which is why they often cost more than they’re worth.
As a rule of thumb, it’s 2-4% for models under $30K. Cars worth $90K or more may have 8-10% commissions. Dealers expect to sell for a minimum profit of $300-$600 for cheap vehicles and $1000+ for the higher tier. Consider those limits when negotiating.
#2 Involve The Manager
When negotiating, make sure you’re dealing with the “decision-maker.” Otherwise, it doesn’t matter how convincing you are. The salesman can’t change the price without the manager’s permission.
But if you’re a serious buyer and plan to drop a lot of cash, you will get their attention. If you think your offer is worth it, tell the salesman to inform the manager, who will then take a look and make a decision. Probably a counteroffer.
Got it? Dealers need to sell cars to stay in business. So if they wanted the sale, they would do it. If the person doesn’t have negotiation power, don’t even bother.
#3 Take Oldest Cars Of The Lot
If the model you want happens to be the oldest one in the lot, you’re in luck. A car that doesn’t sell is a car that adds up maintenance costs. That’s the last thing a dealer wants.
So once you know a car won’t sell, you no longer care about profit margins. You’d be happy to break even as long as you get rid of it! Use that to your advantage.
There’s no way to know which are the old ones unless you ask the dealer. But chances are, the models they push you to buy are the ones.
By “old”, we refer to new cars that stayed on the lot for so long that they become ROI negative.
If you’re interested in pre-owned models, you can take a look at the guide on how to buy a used car.
#4 Your Trade-In Value
Do you want to offer your old car to lower the price of the new one? As long as you get a fair price, it’s a smart idea. But unless you research what it’s really worth, they’ll almost certainly underpay you.
Mind that you still need to offer wide profit margins. That used car may stay parked on the lot for months. And the seller needs to make a commission too. So no matter how accurately you value your car, you will never get the price you want.
Hey, at least you can get a new model for a discount. But before the trade-in, make sure you know your auto price based on a reliable source: Kelley’s Blue Book for example. If you’re a careful owner, your car will look like new, so you should get a decent amount.
Don’t get taken for a ride, see how you can avoid a used car scam.
#5 The Dealer’s Final Offer
It’s common knowledge that car salesmen will pull dozens of tricks to earn their commission. There’s nothing wrong with that, except that you don’t know what makes a fair price.
When visiting your first dealership, you still haven’t seen enough models to decide the purchase. You should visit competitors to see if they offer better deals.
Dealers know most clients who visit them will likely never come back to the lot. Buyers don’t waste time going back and forth to compare prices. They find the best deal, they buy. So every time you try to leave the building, there’s a chance they make you a better offer. If you consider your offer reasonable, use this to your advantage.
If they let you leave without asking questions, that means two things:
- You gave them a ridiculous number
- They might have given you their best offer
When you have tens of thousands of dollars to spend, dealers will try to make the deal work out. If they don’t, they already did everything they could. It’s your choice to either take it or look somewhere else.
Beware Of These Dealership Traps
While it’s fair to profit from those sales, it’s NOT okay to take advantage of buyers. The good news is, the more aware you become, the less money you waste on mistakes. Dealers can’t overcharge if you point out those traps.
That doesn’t mean they are scammers. They have incentives not to give you the best offer. Nobody is going to do it for you.
#1 Salespeople offering “guidance” to clueless buyers
If you don’t know how to spend your money, someone is going to tell you how to do it. And because you don’t even know what a fair price is, you will never get one, let alone getting a nice deal.
If you’re shopping without a direction, you already lost your money. Maybe the car they sell you isn’t that bad after all, but it’s definitely not your best choice.
Just because you aren’t a car professional, that doesn’t mean you can’t recognize a good deal. Here’s a simple checklist:
- How much money do you want to spend on a car?
- What models do you like?
- What’s the average market price for that car?
- What’s it’s MSRP? Also, check the three Kelley Blue Book values: private party, trade-in, and suggested retail value.
There’s a big difference between shopping around and going for the car you want.
And when researching prices, print and bring those sources with you. When the dealer asks too much for the car, you show him this proof so they see you know about fair pricing.
#2 Limited offers that end today
Come back any other day of the year. Those “limited offers” will still be there.
I don’t think there is a scarcity of good deals. More like a scarcity of clients.
Based on experience, sellers know that potential buyers never come back after leaving the lot. So instead of “thinking about it,” these offers force them to make a purchase decision on the spot.
Some limited offers may make sense. For example, a dealer discounts a car because they are only two or three sales away from receiving a bonus. But most of the time, it means nothing.
Plus, discounts mean nothing if the final price is still unfair, or average at most.
#3 They bait you with an unavailable offer
Classic bait and switch. And this is why so many people distrust car billboards.
Let’s get things straight. The ONLY reason you’re driving to the lot is to get that promotion they advertised. The next thing you know is, the offer doesn’t apply to your purchase:
“Sorry, we sold out already”
“This discount only applies to the oldest models”
“We only offer rebates to full-price purchases”
It’s not even been five seconds, and the dealer suggests you another offer you can use instead. So if you buy, what you get has nothing to do with what they advertised. And if you don’t, you wasted your time.
In this trap, they get your attention with what looks too good to be true. And once you’re in the lot, they sell you their standard offer.
#4 Overpricing add-ons
When buying new cars, it’s common that most of them sell with an “accessory pack” by default. So unless you know this beforehand, you’ll be buying these add-ons and nobody will tell you a word about it.
If you want to spend just enough for what you need, don’t do this. Those items price twice more than what you’d find in the average local store.
If you want the add-ons, at least buy them somewhere else. If you’re also getting car insurance, make sure you’re buying genuine accessories. With some policies, only the original add-ons apply for insurance.
#5 Deceptive financing
When you say No to cash, we can guarantee you will pay more on top. Financing isn’t cheap, so the longer you wait to pay back, the more interest it costs you.
This isn’t anything new if you handled loans in the past. But car dealers don’t improve the situation at all. If you finance with them, you will ALWAYS overpay.
Here are a few example scenarios:
- Because you can’t afford the car, the seller asks: “How much do you want to pay per month?” The number you give doesn’t matter, because they’ll take the most convenient loan for them.
- Dealers usually add 2% to whatever interest rate they get from lenders
- You want to finance the new car, but you still haven’t repaid your existing one. The seller says: “We’ll pay for it no matter how much it is.” What happens next? They get you a loan with much higher interest or a longer term. Or they add up your previous debt to the new loan.
#6 They want you to focus on monthly payments only
We get it. Big numbers intimidate. It’s much more attractive to get your dream car now and make a small monthly payment.
Well, dealers take advantage of this. They set sky-high interest rates. Or maybe they sign you for a +70-MONTH loan.
It all starts with that little question:
“How much do you want to pay per month for the car?”
$300! $1000! $100! They talk to their manager, they come back to you with the contract, and there it is. As they point out, you pay your objective price per month. BUT if you want to get this *limited deal, they need a commitment from you right now.
If you don’t take the time to review the document, you won’t know the interest rates you’re paying, nor for how long.
For a buyer who’s too emotional about buying a car, it’s hard to think of what you pay long term. But if you don’t want to pay 2-3x the car price, do NOT extend your loan for too long.
How Can You Negotiate A Fair Price?
Now that you got rid of all those consumer traps, you can be more flexible with pricing. But before we start with the tactics, have this in mind: the perfect car may not exist. And if it does, it may be too time-consuming to find it.
Instead of looking for the ideal one, identify what trade-offs you can tolerate. Things like the paint, the upholstery, or the add-ons shouldn’t stop you from buying. Because those details are easier to fix.
Set your standards
If you don’t make clear what you want, the seller will start promoting what they want instead. So before you talk about money, let them know:
- You have researched carefully the model you want
- You know the exact options you want and have an idea of what the dealer paid for it
- You got proof to back up your calculations. Remind them you’re ready to buy, and your offer considers fair profit margins
- Communicate your intention to buy on the spot if they meet your target price. Otherwise, you’re going to keep looking in other dealerships
Car dealers won’t give you a lower price unless you ask for it. Assuming they have enough profit margins and your offer is reasonable, try doing the following:
- Tell them you already got competitive bids to compare but don’t say how much they are
- If the offer makes sense, you can raise your price a little to show you’re flexible if they give you what you want. Don’t do it too often, or it will look like you respond to pressure
- The moment you tell them what you’re willing to spend, you lose your negotiation power. You will get that question over and over, but instead of responding, it’s better to redirect. “Will you buy if we offer this and this?” If that’s not the final offer, don’t say Yes. Say something like: “That’s closer to what I have in mind.”
- Some will invite you to come back in case you don’t find a better competitor. Tell them you’re not wasting time going back and forth, because you want to buy immediately.
- Offer to pay cash on the spot. Dealers are already winning if they have the sale secured. So they are more likely to offer what you want
- If you can’t afford to pay the lump sum, financing is the only way. But instead of letting them do it, finance it yourself. If you present at the dealership with a pre-approved loan, that’s much more convincing than a guy who hasn’t borrowed yet
- Dealers may argue that rebates only apply to their standard offers. But manufacturers don’t set such rules. Rebates always apply, even after you negotiate the dealership price. It’s as fake as those one-day limited offers.
- After a few counteroffers, you may finally get close to what you want. At this point, the salesman expects some sort of commitment from you. You still have one last chance to reduce the price: “I like what we have here. But I still need to check for other dealerships. Ask your manager what’s the best you can offer.”
Sellers know what other dealerships are charging you. If the dealer doesn’t want to lose the sale — and you commit to buy immediately — you might get an even better deal. If they don’t have anything better, maybe it’s because they have the best offer on the market.
The Bottom Line
And that’s how you negotiate a new car. We’re not talking of just cutting thousands of dollars, but setting a fair price first, and then negotiating.
If you got a lower price, congratulations. You’re going to need that money for other costs: insurance, gas, maintenance costs, taxes, and all the long-term costs related to owning a car.After you buy a new car, it devalues 20-30% within the first year. Then, it’s another 15-20% ~five years later. The moment you drive away from the parking lot, it will instantly be worth much less. Negotiating helps, but to get the best ROI, buy a car you like, not just whatever is cheaper.