March 18, 2009 at 10:00 AM ET
Here's one way to get a slice of all that bailout money that's being thrown around by the government: buy a car. U.S. automakers are desperately trying to stimulate demand, and there are remarkable rebates on some models. To list a few: Chevy Trailblazer and Dodge Magnum,$3,000; Ford F-350, $3,500 ; Hyundai Veracruz and Nissan Titan $4,000. GM is right now offering the mother of all rebates, at $5,000 off a Hummer.
But that's nothing, says Edmunds.com Consumer Advice Editor Philip Reed. A friend of his recently bought a Chrysler Town & Country minivan for $12,000 off MSRP, after all rebates, dealer incentives, and downright price slashing occurred.
"You can get outstanding deals," Reed says. "If you need a car, and you are secure in your job and have the money, then yes, this is a great time to buy a car."
Of course, you might notice something in common about all those cars I've just mentioned: none of them would be mistaken for a Toyota Prius at the gas pump. In other words, huge rebates are available on cars few people want.
But don't let that deter you. The automobile industry is under intense economic pressure now, and that means consumers have serious bargaining power. Dealerships are facing their own cash crunch and need to get rid of inventory even more than usual. That means they are willing to share their secret "dealer cash" – incentives they get from automakers - with buyers just to get cars off the lot. Meanwhile, even some smaller, foreign car models have usually high rebates. Nissan is offering $2,250 off Sentra, for example.
"At this time you might as well ask for the stars and the moon," says Jonathan Linkov, managing editor for automobiles at Consumer Reports. "You will at least get a star or two."
It all adds up to this: If you have the money, it's a fantastic time to buy a new car. It's so good that if you've never been the type to buy a brand new car, now might be the time to start.
There are reasons to be anxious about buying a new car. What if the manufacturer disappears? Both Reed and Linkov think that it's very unlikely for an automaker to go under so completely that it wouldn't be able to honor warranties. It's more likely that individual brands – like Saturn - will be shut down, with warrantee coverage sliding to other brands. Parts supplies shouldn't be a problem either, given the similarity of engineering among cars, and the availability of aftermarket parts. But consumers who cherish the convenience of having repair work done by a nearby dealer should think twice before pulling the trigger. There are no guarantees that dealership will be in business three years from now.
Still, the deals are so aggressive, anyone who's considering a car purchase should really test the new-car market. Before we get to the down-and-dirty details you need to protect yourself from the shark-infested waters of showroom, here's a few basics on how to save money.
Don't buy a new car!
Of course, the easiest way to save money is not to buy a car. The economic downturn has reversed a lot of financial equations for consumers, like the old "time is money" axiom. Perhaps two years ago, $35 for an oil change might sound like a bargain. Today, it might sound like a waste when you can do it yourself for $10 and an hour's time. If your economic situation has changed for the worse, you'll likely be joining the ranks of do-it-yourselfers who baby their cars and hold onto them longer. You won't be alone.
J.D. Power & Associates said in January that used cars traded in to dealerships were on average 6.3 years old - a half-year older than just two years ago. That means consumers are becoming a little more familiar with auto parts supply chains Pep Boys, and Schuck's, and that's probably a good thing. Many community colleges offer inexpensive classes on basic and intermediate auto repair. If you have found yourself with some unwanted free time thanks to a change in employment, learning how to perform tune-ups and other vehicle maintenance could be a great investment. The engine you save may be your own.
The second best way to save money buying a car is to buy someone else's car. Everyone knows the second you drive a new car off the lot, 20 percent of the value disappears in an instant, by some measures. This vicious depreciation leads some to believe that there is no way to get a good deal on a new car. U.S. consumers who aren't holding on to their old cars are more frequently opting to buy someone else's old car instead. Dealer sales of one-year-old cars have jumped from 11 percent of total sales to 16 percent in the past year, according to Edmunds.com. The auto research site also says 500,000 would-be new car buyers from December to February switched to used cars instead.
Now's a good time for new
This might be a penny-wise and pound-foolish decision, however. Every car deal is different. Because different models depreciate in different ways, it's impossible to give one-size-fits-all advice about the new vs. used car debate. Naturally, if your budget limits you to a $3,000 point-A-to-point-B car, then used cars are your answer. But if you were thinking of paying $10,000 or more, let me try to convince you to at least consider that new car smell.
We'll start with the obvious. Perhaps your new Ford will lose $3,500 when you drive it off the showroom floor, but if you're getting a $2,500 rebate, that gap has closed considerably.
Then there's the issue of market forces. Buying a new car and buying a used car are fundamentally different. Buying new is akin to shopping for a new television -- they're everywhere, they're easy to compare, and if someone buys the set you were about to pull off the rack, there's always another. And most important, price comparisons are part of the game. You can tell a salesman, "Hey, the guy across the street is charging $100 less on the exact same model," and you will likely get a discount.
Buying a used car, on the other hand, is more like shopping at an antique store. When you find that old Tiffany lamp, there's only one. If you don't buy it, it might be gone tomorrow. "Buying panic" is very likely to take hold of most consumers in this situation. Without question, the buyer has less leverage. It's normally impossible to play one antique dealer off another to get a better price.
That's how things work in the used car market. Sure, you can find similar models with similar odometer readings. But two used cars are always different -- one is more of a cream puff, one has obviously worn brake pedals that hint at aggressive use, one has a cigarette stain in the back seat, and so on. It's very hard to play dealers off each other, because by the time you travel to a competitor, the car you want really could be gone.
So when you shop for a used car, you are surrendering the most powering bargaining tool you have: competition. And nowadays, the Internet has really tipped the scales of comparison shopping towards consumers.
More than 10 years ago, I took a new car off the lot for a solo test drive, drove onto another dealer's lot, and parked next to another car I was considering to show how serious I was about comparison shopping. But driving around like that to multiple dealers would get exhausting very quickly, something economists call "search costs." High search costs prevent consumers from getting the best market price. The idea of haggling with seven different auto salesmen in seven different showrooms probably makes your stomach churn.
Nowadays, thanks to the Internet, you can do the same thing over e-mail, for virtually no search costs. The last time I purchased a car I got price quotes from dealers and e-mailed them to each other.
Experts agree that while Web sites and magazine research can give you a good idea of the price you should pay, a host of local factors mean there's really only one way to make sure you pay a fair price for your car, and that's to get price quotes from multiple dealers. Reed recommends asking for seven price quotes before visiting a dealership. Try doing that when shopping for a used car.
If ever there were a time to put the principles of market forces to work buying a car, it's now. The used car market simply doesn't offer the kinds of downward price pressure that the new car market does, thanks to competition, and our time offers unique leverage to car buyers.
How to buy new
Sadly, getting a price quote is only the beginning of the car buying process. You might not find that much variance in price, once you show the dealer you are a savvy buyer who's done Internet research. Dealers will recognize you and lure with a low price, then hope to cash in on your purchase by larding up your deal with extras and hidden fees.
"If you get seven quotes, you'll likely have five that cluster in the middle, one that's very high, and one that's very low," Reed said. Now you will have a good idea of the real market value of the car you seek.
The low price might seem tempting, but it should raise alarm bells. If you try to purchase from the outlier, you can bet that dealer will try to make up the difference somehow. Dealers often make more money in the meat grinder of the buying process -- at the financing desk, for example -- than they do on the actual purchase. So that's when your antenna should perk up. But even if you go with an average-priced dealer, there are many traps on the way from e-mail quote to your driveway. Here's how to survive the experience and get a good deal:
1.) Purify the negotiation
The most universal tip for saving money buying a car is to show up at the dealership with your own money -- buy the car with cash, or with a pre-arranged loan from your bank. The dealer will hate you, because they make money on those loans, but you don't care. A car purchase is already an incredibly complex transaction, and something you do only every five years or so; don't muck it up with another complex transaction like a loan. Paying "cash" will make your negotiations simple. You only haggle over the price of the car. From the moment you arrive until the moment you sign the contract, make sure all your focus is on the price of the car and not on any side deals, like loan interest rates or extended warranty discounts.
When you settle on a price, make sure it's the "out-the-door" price. Dealers know smart buyers are arriving with Internet printouts that claim to reveal "invoice" prices, and force them to offer rock-bottom sales prices. To counter, they tack on fees for marketing and other intangibles, or they over-charge for license and tags. Some of these fees are legitimate; just make sure you know what they are when you are negotiating and keep the conversation about your out-the-door price.
If you plan on trading in your vehicle, don't bring that up until you've established the price. Remember, you want to keep the conversation simple. If you combine trade-in value, financing, and price all in one conversation, you will give the dealer too many weapons for baiting and switching -- what the dealer giveth in trade-in they'll taketh in interest rate, for example. If you can, sell your trade-in privately. You'll always get a higher price, and Craigslist makes it easy.
This tip leads into another hard-and-fast rule for price negotiating: Never talk about monthly payments. always talk about the total price. Dealers win when you talk about monthly payments – burying hidden costs in those payments is their most common trick. Many consumers who think they're paying $369 a month for four years end up happily leaving the dealership paying $349 for five years, only to have an embarrassing conversation at a cocktail party six months later. This is the chief reason to show up with your own money or loan. When the sales rep says, "What can you afford per month," you say, "What's the total price of the car" and move on.
When price comparing, expand your local area. Reed recommends getting at least one quote from an entirely different metropolitan area -- if you live in DC, get at least one quote from Baltimore, for example. "The price differences can be enormous," he said, and fluctuations have been exaggerated in recent months because of the economic downturn. When a dealer goes bankrupt, for example, a flood of cars can hit the local market and impact prices. Now more than ever, it pays to expand your shopping region.
Finally, if you hear anything you don't like, you can employ the most important bargaining tool you have: walk out. Some people believe that if you haven't walked out of a dealership at least once, you haven't really bargained for your car. Keep in mind that if you're buying a new car, there will always be another one just like it somewhere else. And despite what the salesman says, the price you're getting is never only "good for today."
2. Give yourself time
This seems obvious, but it's not. Dealers brag about how fast they'll get you into a new car. You might be busy running back and forth to soccer practice. But buying a car is the second-biggest financial decision most people make, and it deserves sober reflection. Take at least a full weekend to shop and *not* buy. One helpful trick: Find out if a local dealership is closed on Sundays, or another day of the week, and walk the lot on that day so you can survey cars without being hassled.
3. Avoid extras
This sounds like point No. 1, but it's the most common error car buyers make, so it deserves separate mention. Reed's friend, who saved $12,000 on a Chrysler car, gave part of that savings back by buying a $2,000 extended warranty from the dealer. "The car's power train already had a lifetime warranty," he noted.
It's easy to get sucked into warranties. Sales reps just pack consumer loans with them. You might hear, "Oh, it's only $15 extra a month." Some dealers even hint – or lie – that they are required by banks. They're not, and they can be purchased separately. Extended warranty sales abuse has been so extreme that several states, such as Washington, have passed separate consumer laws that give buyers "regret" rights. Extended warranties bought at time of sale can be voided for seven days after purchase.
Other extras, like undercoating protection, are usually unnecessary and can turn a good deal bad very quickly.
4. Take the cash
Zero-interest loans sound like a deal that's too good to pass up. Often, you should. When offered the choice of rebate or low-interest financing, you should almost always take the cash. For starters, it gets you out of the car dealer's financing office, which helps you avoid the booby traps there. And generally, the math works in favor of applying the rebate to your down payment and using your bank loan instead. Bankrate.com offers a calculator to help you decide.
But generally, take the zero-interest deal only when you are borrowing a lot (more than $20,000) and the rebate is small.
5. It's OK to ask about dealer financing…at the end.
When you get through all the steps of negotiating, and have the final out the door price, it's worth asking the dealer if it can beat the financing deal you already have from your bank. Often, the dealer can offer a better rate. But before you even ask the question, make sure you know exactly what your payments and terms would be with your bank loan. Using that comparison is the best way to make sure you aren't missing some hidden cost that's shoved into your dealer loan
6. Take a friend
When the time comes for doing the deal, another pair of eyes really helps. It's impossible for a mere mortal to follow everything that's going on when you are sitting in those dealership back-rooms surrounded by the sales posse. Generally, at that point, the buyer is worn down and just wants to go home. It's very helpful to bring a dispassionate friend who can ask extra questions on your behalf and act as your own posse.
7.) Price isn't everything.
Finally, you don't always have to go with the absolute lowest price. Many shoppers get hung up on those last few pennies as a point of negotiating pride. That's silly, and can hurt in the long run. I'd happily pay $100 more to buy a car from a dealer I trusted, and who didn't make me miserable during the purchase process. There's a high likelihood that you will end up back at the dealership at some point in the first two years – to get a small repair, or to ask a question. At that point, you'll be glad you purchased from a good dealership.
If you're interested in a deeper look into the shady back-room dealings that happen at auto dealerships, read this spectacular account by Chandler Phillips, a reporter who was hired by Edmunds.com to work at a dealership and write about the experience. The epic take he produced should be required reading for anyone buying their first car.
Meanwhile, for a quick overview of the car buying process, a Youtube video called "How to Buy a Car and Not Get Screwed" is a cult favorite.
How do you save on car buying? Leave your comment below or visit Newsvine and join the Red Tape Raiders.