Car negotiation

A car negotiation is a discussion between two parties to settle on the purchase price of a new car. In a negotiation, each party tries to obtain the most favorable outcome for themselves on a transaction while compromising to accomplish both parties’ goals. In car purchase negotiations, the car salesman’s goal is to earn the biggest commission possible and therefore he/she wants to sell a car for the highest price possible. The car buyer’s goal is to obtain a car at the lowest price possible.

Elements of a car purchase transaction

There are several elements of a car purchase transaction and if a car salesman compromises in one area, they will do their best to make up the dollar amount in other areas. Their commission is typically based on a combination of all these elements.

Sale price of the new car: This is the final price that is agreed upon for the car purchase transaction. This price is typically somewhere between the MSRP (Manufacturer's Suggested Retail Price) and the invoice price (the amount the dealer paid for the car from the manufacturer).

Financing: This is a loan provided to the car buyer that allows them to purchase a car for more money than they pay as a down payment. Car dealerships provide these loans to consumers as well as most banks or credit unions.

Trade-in: The car dealer will often purchase the car buyer's used car and apply the agreed upon dollar amount to offset the amount paid for the new car.

Extras: Car dealerships' financing departments will typically try to sell additional items to car buyers while financing arrangements are being made. These extras include items like extended warranty, paint sealant, rustproofing, VIN etching, and fabric protection.

Car dealer negotiating tactics

Monthly payment selling: The car salesman will ask the car buyer how much they want their monthly payment to be. Once that amount is in the buyer's mind, the salesman can change around other factors of the deal like interest rate, length of loan, and amount of down payment in order to have the financing payments meet the desired target amount.

Low trade-in value: The car salesman will often low-ball the amount they are willing to pay for a trade-in. Many car buyers are unaware that this is negotiable and will accept this amount without question.

Sale of extras: Car dealership financing departments make their most money from the extras they sell when financing arrangements are being made. These items usually have a high margin built into the price.

Spot Delivery: The car dealership will have a car buyer sign all the paperwork on the vehicle before they're officially approved for a car loan on the assumption they will be able to get them approved at a later time. The dealer will then let the consumer take delivery of the vehicle. If the dealer cannot get the consumer approved for an auto loan they will call the customer and have them bring back the vehicle. The reason a car dealer will "spot deliver" a customer is to take them out of the car buying market until they've exhausted all possibilities of acquiring their business.^[1]

Payment Packing: Payment packing happens when a customer initially starts negotiating payments with the car salesman. The customer believes he is only negotiating the price and payments for the vehicle. However the initial payment presented to the customer has already been packed to include an extended warranty, high interest rate and other high profit, back-end products.^[2]

Car buyer negotiating tactics

Understand a reasonable target price: Services allow car buyers to research the cost structure of new car as well as view aggregate data on what people are currently paying for cars. Understanding what the average amount that other people have paid for a car allows a car buyer to have a reasonable target price to obtain and can assist in negotiations.

Separate car price, trade-in, and financing: Car buyers can negotiate the elements of the car purchase separately to get the most out of each component and prevent the salesman from combining these items to confuse the total cost of the deal.

Make dealers compete: Car buyers can use online pricing services to request car quotes from multiple dealers simultaneously. They can then negotiate over email with all the dealers to create a competitive bidding situation.

Online Car Buying Guides: Online consumer guides provide car buyers with professional advice and resources on all aspects of the new and used car buying process. Car buyers use these online guides as a road map to level the playing field when negotiating with car dealerships.

The changing industry

With more and more information available online, car buyers are becoming much more educated and demand more from car dealerships. Consumers will often arrive at the dealership equipped with Internet pricing and a list of desired options. Most dealerships have established Internet Departments to advertise their inventory and attract new buyers. Cars are undergoing more commoditization as car buyers utilize their ability to efficiently contact multiple dealerships via the web to find the best price.

References