Are you afraid of getting ripped off and embarrassed at your local car dealer on a new or used car? If so, don’t worry. You’re not alone. Many others feel the exact same way, and I get it because I’ve felt that way too.
Walking into a dealership can be a very intimidating experience. After all, it’s not uncommon to pay an extra $10,000 in unregulated charges, non-essential add-ons, and document fees when buying your next car.
But with knowledge comes power, and in this video, I’m going to share with you some of my 25 years of accountant wisdom, so you can save thousands on your next trip to the car dealer.
So, no more overpaying. It’s time to get a great deal!
Now, let’s get ready to dive into my 5 money-saving tips.
#1 – Do Your Research
Before you ever step foot in the dealership, research the true value of the car online. Websites like Kelley Blue Book or Edmunds can give you an accurate estimate on the make and model of the car you are interested in.
In my experience, it’s always a good idea to see what a vehicle is actually selling for before starting any negotiations.
#2 – Request the Invoice
I have thought at times, will they really do this for me, but they do. Ask the dealer for the vehicle’s invoice.
The invoice is the price the dealer paid to get the car on their lot, and it’s a great starting point for negotiations.
You might be tempted to think that the price of a vehicle is where the dealership makes most of its profit but that’s simply not true.
Dealerships make their money on the back end of the deal from trade-ins, service contracts, extended warranties, gap insurance, car accessories, and the financing of the vehicle itself.
#3 – Focus on the Actual Cost
Tip number 3 is a biggie – it’s focusing on the actual cost of the vehicle. Many car buyers get this completely wrong by focusing on the monthly payment amount rather than prioroizing the out-the-door price.
When the sales rep asks how much you can afford monthly, flip the script. Tell them you are more concerned about the actual cost of the car, and are not fixated on a monthly payment amount.
So, why should you take this approach?
In order to get the most profit, dealerships often extend the loan period, and increase interest rates to fit the car into your budget, which means you’ll end up paying much more for the car in the long run.
Here’s a practical example of how this works:
We’ll use the following assumptions for our calculations:
• Let’s assume the car’s final price with fees, taxes, and registration is $40,000
• For the monthly payment, you are looking to stay under $700/month
• And for the interest rate, we’ll use a typical current rate of 5% APR
• So, from the dealership’s perspective, all they are concerned about is getting your payment under $700, and if they can do that, they know they have a sale.
So the dealership gets to work, but quickly realizes your monthly payment would be $921.00 on a 4-year loan at 5% interest. Now, it’s worth noting that this 4-year loan would only cost you $2,116 in interest.
But they have a problem now, the $921/month payment exceeds your monthly requirement of $700, and they know you won’t agree to that, so they shift gears and ask you for a $10,000 down payment, so you can stay within your $700/month car budget.
You tell them, you don’t have $10,000 for a down payment, and they say, “no problem let me see what else we can do.”
They get busy crunching numbers and then say something like this, ”I have great news. We found you an amazing deal. We got your monthly payment down to $644/month. That’s quite a bit lower than the $700/month you had in mind. And you won’t believe this, it requires no money down. Are you ready to drive your new car home today?”
So what just happened here? How did they pull off this miracle and find this amazing deal?
It’s very simple. They extended the length of the loan. The $644/month loan they just quoted you is for 72 months rather than 48 months.
Now, what they failed to tell you is that this amazing 6-year loan will cost you $6,382 in interest payments as opposed to the $2,216 interest payments on the 4 year loan.
While the car’s monthly cost is more manageable, you just lost an additional $4,166 on interest payments and you are paying nearly 3 times as much interest for the exact same car.
#4 – Beware of Vehicle Depreciation
Many people do not realize this, but most cars lose considerable value when they leave the car lot. Some even loss up to 69% of their value in the first 2 years. And that lost value is what’s known as depreciation, and it continues throughout the life of the vehicle.
So be sure to keep depreciation in mind, when you’re buying your next car and you’re being tempted by all of the fancy, unnecessary extras at the dealership. I understand this is not so easy to do when you fall in love at first sight with your dream car. But remember, as pretty as it is now, it won’t retain its value, and it won’t stay as pretty.
Here’s a conservative example of how this works on a car purchased for $40,000.
Let’s begin with Year 1.
For starters, the minute you drive the car off the lot, most cars lose about 10% in value. So with our $40,000 car example, you just lost $4,000 by pulling the car out of lot. Now on average, a car normally depreciates about 20% in the first year. So, after one year, our $40,000 car will be worth about $32,000.
That’s a loss of $8,000 in the vehicle’s first year.
Depreciation in Year 2.
With year 2, thankfully, depreciation slows down, but it’s still significant.
In year 2, we can assume another 15% loss in value. So if we take $32,000, which is the value of car after the first year, and we multiply that by 15%, that gives us an additional $4,800 in depreciation.
If we add the depreciation from years 1 and 2, that puts us at a total of $12,800 in depreciation in just 2 years. The car’s value is now down to $27,200 in just 2 years.
Onto year 3.
In year 3, depreciation continues at about 10% per year which is a loss of another $2,720. This drops the value to around $24,480.
By the end of three years, the cars value has decreased by $15,520, meaning the car is worth only $24,480.
As you can see, depreciation significantly affects the overall value of a vehicle pretty quickly, so with that in mind, be sure stick to your budget becasue a new car is not worth wrecking your finances over.
#5 – To Lease or Not Lease Your Next Vehicle?
Lastly, let’s dive into the controversial topic of leases. Both sides of the argument bring up some very good points. We’ll start with a quick side-by-side comparison.
Buying a Car VS Leasing a Car
Why Buy a Car?
• It’s yours
• No wear-and-tear or mileage fees
• No need to return it after the term ends
• On the path to owning an asset
Why Lease a Car?
• Avoid depreciation costs
• Avoid maintenance costs
• May have better rates (compared to buying)
• May be able to afford to drive a more expensive car than you would if financing
In most cases, buying a car is what I recommend most. Why is that you ask? Well, mainly because on most leases, you are limited to the number of miles you can put on the car before you start paying more money.
So if you are limited to 15,000 miles each year on a car leased for 3 years and you consistently drive 25,000 miles each year, that puts you over by 30,000 miles. And the car dealer is going to want payment as soon as you turn the car back into the dealership.
Those additional 30,000 miles, at a cost of 35 cents a mile, will run you an additional $10,500.
So, you might have thought you were getting a great deal on your lease. Your monthly payments seemed affordable, but once you turn that car back in, you better be ready
At the end, the lease did not cost you any less.
But for some people enjoy changing cars every three years without having to worry about maintenance, and they like the convenience of always having a newer vehicle. But as always, just remember to live within your means.
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If you don’t already know me, my name is Sonia Narvaez. I’m a licensed CPA and wealth building strategist with over 25 years experience.
If you have any questions about how to take advantage of the latest tax savings strategies, don’t hesitate to contact us.
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