By Holger Reinel | Updated on June 11, 2020
There is always room for negotiation when buying a new car. Car dealers know that so they expect you to negotiate.
On my first year of business school, my law class professor shared a story that changed the way I think when buying cars. My law professor had just bought a new car and was happy that he had negotiated a $2,000 discount. Not bad, he thought.
A few days later the vehicle was ready to be picked up. When he arrived at the dealership, the salesperson and the sales manager met my professor with a bottle of Champaign and the keys to his new car.
This made him wonder if he had actually overpaid for the car and by how much.
This story made me wonder if I am buying a new car, how can I determine a fair price and how do I know what fair price is?
Here is what I found:
No, it is not. In fact, the salesperson expects you to negotiate. That’s not to say they won’t try hard to get the most money out you. The salesperson will likely say “let me check with my manager”, or “I want to make this work for you, but we are not making any money at that price”.
They want to get the most money out of you – Your job is to try to get the most money out of them – Negotiate.
Suppose you are buying a new car and the MSRP price is $28,000; freight PDI $1,800, other fees $200, plus sales taxes 13% for $3,926 (the sales tax rate depends on the city/state/province where you are buying) = $34,126 total.
How much discount can you negotiate from this $34,126 total amount?
The first thing you have to do is find out what the dealer pays for the vehicle (dealer’s cost).
First, find out the invoice price (the amount dealers pay the manufacturer)
The next step is to find out how much the dealer will get as discounts from the manufacturer.
The mistake my law professor did is he negotiated a $2,000 discount from the total price he was initially quoted, but he did not know the dealer’s cost or much the dealer was making on the sale. This is why he could not tell a good deal from a bad one.
Car Pricing Tips You Should Know:
The MSRP or even the invoice price is not the true costs dealers pay. The net dealer’s cost is lower.
Knowing the true net cost dealers pay will give you the upper hand when negotiating the best price.
Get a breakdown of each item that makes the total price; that includes MSRP, Freight/PDI, other costs, sales taxes.
Use online tools that allow you to receive quotes from multiple manufacturers.
Dear cost = Invoice Price – Holdback – Rebates & Incentives (if any)
Before starting the negotiation, it is important that you understand where the numbers are coming from. Ask for a breakdown of the fees; the dealer may add some additional charges or fees that you don’t need to pay for.
Freight/PDI + Other Fees + Sales taxes = Total Dealers Want You to Pay</strong
Also, some charges are non-negotiable such as sales taxes, or freight/PDI. Being able to see each of the fees that make up the total price will allow you to focus on the items that the dealership has flexibility to negotiate.
For example, if you say you don’t want to pay taxes on top of the car price, there is nothing that the salesperson or sales manager can do. Taxes are taxes; however, if you say you want to get a discount for the same total as the taxes, that’s something that may be possible.
Car sales representatives are skilled negotiators; even the newly hired ones are trained to negotiate deals that maximize profits for the dealership. They will try to convince you that you are getting a great deal for a great vehicle.
I am not too concerned about “the great vehicle part” because everyone has their own preference of what represents a great vehicle, but I do care about you getting the best deal possible.
Here are a few tips that will help you negotiate a great deal on the purchase of your next car.
Tell the salesperson you are serious and ready to make a deal
Car sales representatives talk to a lot of people on any given day; if they know you are serious about purchasing a car, you will gain their full attention. So go ahead and be upfront with them; tell them you have done the research and are ready to make a deal for the right number.
Start the negotiations with a pre-calculated low offer
Your pre-calculated low offer should be the dealer’s cost plus a small reasonable amount for profit the dealer should make.
Most dealers would agree to sell at the invoice price; the dealer knows they will get holdbacks and rebate incentives from the manufacturer but you can do even better than the invoice price.
Dear cost = Invoice Price – Holdback – Rebates & Incentives (if any)
Here is where many buyers fail. I once was helping my mother negotiate the purchase of a new car for her; when the salesperson asked “what monthly payment would you be happy with”. To my surprise, my mother immediately responded “$400 per month”.
Do not do that!
Don’t tell the salesperson the monthly payment you can afford; that information is for you only. It helps you determine what you can afford; it should not help the dealer find out how to get more money out of you.
If you are not sure what your monthly payment will be you can download our car loan calculator.
Many people make the purchase of a new car about being able to afford the monthly payments vs. focusing on the total price of the car.
Shifting the conversation from the monthly payments to the total price of the car will make the salesperson work harder in offering a better deal.
One of the most powerful negotiation tactics is being open to walk away from the negotiation knowing that you can get the deal you want elsewhere. In fact, you can use the information you learn from the first dealer to negotiate with the second dealer, but the second time you are way more knowledgeable.
Two months ago my father-in-law was in the market to buy an Infinity QX50; he asked for my help, so we started with the basics, gathered some numbers, and then visited a Nissan dealership.
We had done the research and were trying to negotiate a $7,995 discount from the total price. The sales manager’s offer came down by about $5,000 but then he refused to move any further.
So we walked away and went to a different dealership, but this time we only negotiated for about 15 minutes because we already had all the information about the car and the only thing left was to ask for the $7,995 which we were granted by the second dealership.
Without much effort on your part, car dealerships will grant you a better deal when you buy a car on December 31, and on the last day of any month. The reason is that their bonuses and sales quotas are based on how many vehicles they sell for that month, quarter, or year.
A deal that does not make sense on the 15th of the month might actually work out on the 30th or 31st.
This is my favorite car buying technique. You don’t need to negotiate. All you need to do is get dealerships to compete for your business, and in the end, you simply pick the best option.
This is what I did when buying the last two cars I bought. Here are the steps
Use a car price comparison website to find out the MRSP, Invoice price, and discounts incentives dealer receive on the same model you want to buy.
Let nearby dealerships know the vehicle you want to buy
Receive quotes from dealerships
Evaluate the best option
Pick the best deal
Make no mistake, car sales representatives are trained negotiators. To come out the winner you will need information; simply visiting a dealership, testing driving so vehicles, and hoping to wing it won’t do the trick.
I am glad my law class professor shared his car buying experience with the class. That story has saved me tens of thousands of dollars in the last three cars I bought, and now you can do the same.
Happy car negotiating!
If you want to increase your income so you can buy your dream car you should check out Our Salary Negotiation Online Course.