by Jim Thomas

The average consumer pays 5% to 15% or more than necessary when purchasing a new vehicle. To car dealers, customers are marks to be taken advantage of, but with a little knowledge, you’ll pay much less at dealers who negotiate than at ‘one price’ dealers. Here are five tips for car-buyers:

1. Know how car dealers make money

There are five main sources of potential profit for car dealers: mark-up, trade-in, financing “packs,” and fees. Mark-up is the difference between wholesale and retail. Like any other business, car dealers buy low (from the factory, at wholesale) and sell high (to consumers, at retail). They do the same thing when they take a car in trade. They buy low (from you, at wholesale) and, after cleaning up the car, they sell high (to other consumers, at retail). If the dealership arranges your financing, it gets a hefty referral fee from the bank making the loan. The longer the term and the higher the rate, the bigger the fee.

“Packs” are the small but highly profitable items that dealers push late in the negotiation, when customers are infused with new-car smell and are particularly vulnerable. Packs include extended warranties, vehicle protection packages (paint sealant, rustproofing, fabric protection, and door guards), tinted windows, anti-theft systems, and other extras.

Finally, a host of mock-official “conveyancing,” “document preparation,” “dealer preparation,” and “advertising” fees are added as the deal is totalled up.

2. Decide on the car

This isn’t as easy as it sounds. There are hundreds of models to choose from, each with a number of different trim lines. Each trim line, in turn, has a different set of standard and optional equipment. Visit showrooms twice: once to shop, and once to buy. Ask for the top salesperson, and work only with that person each time you visit.

Take lots of test drives, ask lots of questions, eyeball some window stickers (but don’t take them seriously), and collect lots of brochures. Don’t answer any questions about when or why you need a car, how much you’re willing to pay (monthly or in total), other models you’re looking at, other dealers you’re visiting, whether you’ll be trading in, or if you’ll be needing financing. Don’t leave any deposits for any reason. When you’ve got enough information, make a leisurely choice.

3. Find out what the dealer paid for the car

Your next task is to find out how much the car cost the dealer. The “window sticker” is the suggested retail price sheet that the manufacturer glues to the new car’s window – sheer fantasy, and irrelevant for negotiating purposes. The “factory invoice” or “dealer invoice” is the bill sent by the manufacturer to the dealer for each new car.

The dealer invoice is widely – and falsely – assumed to be the dealer’s actual wholesale cost for the vehicle. Dealers get a little-known discount off the factory invoice in almost all cases, known as “holdback.” Deducting the holdback from the dealer invoice gives you the true “dealer cost” for the car.

In the U.S., for a small fee, the Consumer Reports New Car Price Service ( will tell you the dealer cost for any make and model of new car, and the dealer cost for every option and option package the factory can stick on the car. They’ll also tell you about any factory-to-consumer and factory-to-dealer cash rebates, any low-cost factory financing, and what options are especially desirable. Another good car-pricing site is

(In Canada, dealer cost pricing is available for a fee from – ed.)

Your goal is to pay from (U.S.)$300 to $500 above dealer cost, inclusive of everything but sales tax and vehicle registration fees. The only exceptions to this “$300 to $500 over” goal are top-end luxury vehicles (on which you can expect to pay as much as $1,000 over) and high-demand “hot” models.

If you’re considering selling or trading in your current car, find out what it’s worth by tracking the local classifieds and the Web. Visit banks or credit unions and get pre-approved for your loan, but be sure to keep this a secret from the salesperson.

4. Pay no more than a few hundred dollars over dealer price

Return to the showrooms to buy as close to the last day of the month as possible. Working with the same salesperson you did on your “shopping” visit, select a car from the dealer’s on-the-lot inventory. Figure the dealer price, and offer to buy the car at that price. Your offer will be rejected, perhaps with vehemence. It’s O.K.; car salespeople always reject the customer’s first offer. Move toward your “$300 over” target in steadily decreasing increments. Only if absolutely necessary should you move past your target toward your “$500 over” bottom line.

Keep alive – in the dealer’s mind, at least – the prospects of your trading in, financing through the dealership, and loading the car with packs. If the dealer wants to appraise your potential trade, fine, but make it clear that you want separate offers for the new car and the trade.

5. Avoid the gauntlet of ingenious dealer gimmicks (trade-in, financing, packs, and fees) designed to get you to pay more

If the salesperson has not yet had your potential trade-in appraised, he will do so now. Remind him that you want the purchase price of the new car calculated independently of the allowance for your trade. When your appraisal comes back, the news about your car’s condition will not be good. Don’t debate the low “Book” offer on your trade. Tell the salesperson you’re interested, but remind him that you don’t want to finalize the trade until you’ve settled on a price for the new car.

The salesperson may now bring up the idea of financing through the dealership. Ask for his rates and terms. While dealers sometimes have below-market loans and leases, they often make them available only on slow-moving cars or to customers who are overspending. Your quote will probably be far less attractive than the ones you’ve already gotten from other lenders. Handle his financing offer the same way you handled your trade: Express interest, but defer further discussion until after the price for the new car has been settled.

It’s also time for the salesperson to try to “pack” the deal. Pass on the extended warranty, rustproofing, undercoating, paint and fabric protection. If you genuinely want pinstripes, door guards, side mouldings, mud flaps, tinted windows, an alarm system, or an upgraded radio, buy it later from a specialist. You’ll get more and pay less. No matter how much the salesperson may discount their prices, say “no” to packs. If the dealer has already installed an item, treat it as a freebie. Close the deal with a request for a few free extras like floor mats, touch-up paint, a full tank of gas, oil changes, and a full-sized spare tire. Sign the offer form.

You’ll now be escorted to the dreaded “F&I” (finance and insurance) guy. While he may resemble an accounting clerk, the F&I manager is really a skilled salesperson, hawking loans, extended warranties, fabric protection, anti-theft systems, and extra fees to customers who are “in the box” with him.

The F&I guy will inquire how you’ll be paying for the car. Ask him to review the trade-in allowance the dealership is offering. Most likely, it won’t be nearly enough. Withdraw the trade from the deal. Tell him “I think I’ll just keep my old car.”

Next, he’ll ask about financing. Have him re-quote his best available financing options. Don’t discuss monthly payments; concentrate strictly on rate and term. If his quote isn’t competitive (and it probably won’t be) tell him you’ll be using your own (pre-arranged) financing.

The F&I guy will also give the extended warranty and other packs another try, perhaps cutting the price even further. As before, pass. He’ll then prepare the sales contract. Read it very carefully before signing. Eliminate or sharply reduce any “conveyancing,” “document preparation,” or “dealer preparation” fees. All of this work is supposed to be included in the basic price of the car. Any “advertising” fee should be supported by an invoice to the dealer. Even if it can be documented, negotiate it aggressively. Advertising is a cost of doing business, and it should come out of the dealer’s mark-up. If he won’t cut a particular fee, try to get floor mats, oil changes, or something else in exchange for it.

When the sales contract is finished and checked, go ahead and sign. Take your contract to your bank within a day or two, sign the loan papers, pick up the check, and give it to the dealer. You did it!

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