New Car Buying tips - Don't get taken by the dealership

I would like to make one thing very clear. As with anything, there are the "goods and the bads." Not all car dealers are unethical and there are quite a lot of honest, hardworking professional car salesmen in this industry. But as an insider of the industry, I have also seen or heard of many ways, tricks and frauds.

A common joke in the dealerships is the customers thinking that there is a "Red Cross" on the building. To be sure, car dealerships are businesses and are in the business to earn a profit. The fact is, they are a foundation for the American economic system.

So, the hope of this page is to educate you on some of the things that happen in car dealerships that take advantage of the uneducated, unaware customers. I also hope to offer advice on how to get the best deal on a car and the best process for buying a new car or buying a used car. I also hope to expose the real truth behind how much money is to be made in car dealerships!

There are numerous things that come into play to come up with the actual cost of a new car to a dealership. To a customer, the lines get blurred when a salesman pulls out the invoice from the manufacturer and says "this is what we paid for the car."

There has been legislation in the California legislature to stop salesmen from saying "this is what we paid for the car" because it is a fraudulent statement. But lets be honest, who is going to police that? Are the overworked DMV, the FTC, the "watchdog" groups? I don't think so. The point is, the customer needs to look out for their own interest "caveat emptor (let the buyer beware)"right?

The true, total cost, of a car can only be determined by the people at the dealership, but here is a guide to what to think about:

MSRP - Manufacturer Suggested Retail Price, the price that the manufacturer suggests the vehicle is sold for. "Suggested" is the key word. If a car is hot, dealers put "Market Value Adjustments" or "Dealer Mark-ups" on the vehicles to make as much as they can when a car is hot!

Invoice Price - This is a completely irrelevant number to a dealer other than for the accounting department and the calculation of salespeople commissions.

Holdback - This is a number (generally 2-3% of the invoice price), that is held back from the dealer by the manufacturer as a way to keep the price of the vehicles afloat. It is also a way for dealerships to recognize additional gross profit without paying sales people on the profit.

Dealer Cash - This is an incentive given by the manufacturer to a dealership to assist them in moving the inventory. This is given out when a model gets stagnate or when there are too many of these vehicles in stock. Dealer cash is never advertised and unless a dealer representative lets you in on the secret, you would never know.

Customer Cash/Rebates - These are incentives given to the customer by the Manufacturer as a way to motivate sales. It is similar to Dealer Cash, except it can be used as down payment, or a way to lessen the sales price of the vehicle to a customer.

Flooring credit - Additional money given to a dealership by a manufacturer to assist in holding the vehicles in inventory. This is generally paid on all vehicles in stock and can actually be a profit center to a dealership if they turn the inventory quick enough.

Advertising credits - Additional money given to a dealership by the manufacturer to assist in local, dealership advertising campaigns. This also includes "Co-Op credits" which generally means the manufacturer will pay 30%-50% of an ad campaign by the dealer if it meets the manufacturer approval.

Delivery incentives - These are additional profits given to a dealer by the manufacturer to entice the dealer to purchase more vehicles from the manufacturer. Again, if a dealer turns their inventory fast enough, this can be an enormous profit center.

On top of all of these confusing numbers, there are "stair step incentives" which scale payments to a dealer based on the number of cars sold in a particular time period.

So as you can see, there are many numbers that come into play when it comes to the true cost of a new car. With this knowledge, hopefully you will have additional ammunition when negotiating a new car deal.

Dealership advertising has to be one of the wildest things a dealership gets into. Obviously, they are in business to "play the numbers game." Which, in layman's terms, means bring as many people through the doors, and you will land a few extra customers.

Some of the most known ways of advertising is the ol' "Loss Leader" scheme in the newspaper. Dealerships advertise a vehicle (usually an off color, damaged, or a demo) at an extremely low price. The consumer, when reading the newspaper says "wow, what a deal" and goes in to buy the car. Low and behold, the customer finds out the car is puke green, or has been damaged in some fashion (dealers need to disclose damage over 3% of MSRP or $600 by law). The other thing a customer may find out is that the car "was sold yesterday", when really the car was sold days ago... what a shame! Then the salesman offers up a nice compromise like the nice colored model at a slightly higher price...sound reasonable?

The other way dealerships generate their traffic from advertising is the ol' "freebees" deal. Ever read "come in for a free $100 worth of gas for a test drive?" This is a way to get customers through the doors because they know that when a customer gets behind the wheel of a new car and smells that new car scent, they are hooked. The real issue is that if a customer does not buy, the free gas is so hard to claim that it isn't worth the hassle for a customer.

"Free food" is a way to get customers to stay around, because the longer they stay, the more apt they are to buy.

"Slasher sales" are ridiculous! Dealerships raise the price way above what they would already sell the car for and then "slash" it to where they would have been advertising it in the first place. It's all about emotions!!

Dealerships advertise low lease payments now...the newest trend. But look into the details, and you will find the drive offs are actually more than what a good down payment would be to purchase the car!

0% APR, what a crock! That just means dealerships are rolling the buy down into the upfront cost of the car!

Car Manufacturers and state governments are all cracking down on these practices, which is good to see. But lets be honest, a manufacturer wants to sell cars to dealers...so the more they sell, the better the manufacturer is. States (in these days), don't have the resources to guard the consumer from deceptive practices, so dealerships fly under the radar. Consumer Advocacy Groups don't have the time to check on every violation... so it comes down to YOU!

Don't get caught up in these practices. Make sure you know everything up front before even stepping foot in the dealership. Do your homework and stick to your guns. You will be happy you did!

There have been numerous complaints lately about people who either came into a dealership to trade in their vehicle, or finally made their last payment, only to find out what they actually signed was a lease agreement. How does this happen?

Generally, terms of a car deal are negotiated and agreed to based on a monthly payment and what a customer can and will pay. Dealerships do this for one specific reason, and its not in the best interest of a customer.

If a deal is worked from a payment perspective without disclosing the down payment, interest rate, the vehicle price, and the term, then the dealer has an opportunity to deceive the customer. For example, a customer is looking a particular car with a sticker price of $20,000. The customer wants to put $5,000 down and the sales manager works a deal with that figure. He comes out with a payment of $400 per month x 60 months.

The customer says that he wants to pay only $300 a month and he is going to walk if they don't get that payment. So the sales manager adjusts the deal, and low and behold, comes up with the $400 payment. But, there has been no mention of interest rate or term. Only when the customer is in finance does he find out that the term has been changed to 72 months, or he has been switched into a lease. (requiring less down, and a smaller payment) Of course, the customer complains, the deal is redone the the correct terms and the customer drives away (unhappy, but in his car.)

Now, what happens if the customer, in a highly emotional state because they are buying a new car, or is in a hurry because its dinner time, or they have taken so long to negotiate a car deal that they just want to get out of there, doesn't read the contract? The customer signs the contract or lease agreement and drives away. He now gets home and finally has a chance to read what he signed (if he does at all), and finds out he is now in a lease. He calls the dealership and they say "you agreed to it because you signed the document."

Or what happens when the customer gets a call from the bank saying, "its time to turn in your lease?" Thinking that they had purchased the car, they realize they had been taken and there isn't anyone at the dealership that they worked with anymore.

Point being, make sure everything is disclosed and in writing. Interest rate, term, down payment, vehicle price, and trade-in value if trading a car in. Without a dealership giving all that information, it is very easy to be taken at the car dealer!

One of the easiest ways for a car dealer to make some additional money is by packing "back end" products into the payment of a car. It is by far one of the most deceitful ways of doing business, but it is so frequently done, it is almost tolerated.

The scam goes as such:

When you are negotiating the price of a new car, the salesman will find out all of the specific information from you that will be needed to put together a deal. He will ask, how much you would like to put down, if you have a trade and the MSRP of the vehicle. (No where does he ask, how long you intend to finance, what you credit situation is, or what you would like to pay for the car). This is intentional, because the offer that comes back from the sales desk always is in the form of a payment. (i.e. $500 for 60 months).

Sometimes, the dealership does not even give the full term and just will write "$500 per month". The reason for doing this is to narrow down what you are willing to pay per month. It does not have anything to do with the price of the car, or what you would be buying. It is just chiseling the customer down.

Back and forth the negotiations go, and every time a customer asks a question like "what is the price of the car, or what is the interest rate," the salesman is taught to get the customer back onto the payment. Once a customer accepts the payment, the sales desk generally has added enough "leg" or room into the deal that will allow for additional back end products to be added without changing the payment. How is this possible? Well, the dealer quotes an interest rate of say...8%, but the customer qualifies for 5%, with a 3% spread. Banks will only finance 2-2 1/2% spreads or "finance reserve," so the dealer can adjust the products added to the contract and reduce the interest rate so the payment falls in line.

Whoa! Now that is deceit!

There are numerous things that come into play to come up with the actual cost of a new car to a dealership. To a customer, the lines get blurred when a salesman pulls out the invoice from the manufacturer and says "this is what we paid for the car."

There has been legislation in the California legislature to stop salesmen from saying "this is what we paid for the car" because it is a fraudulent statement. But lets be honest, who is going to police that? Are the overworked DMV, the FTC, the "watchdog" groups? I don't think so. The point is, the customer needs to look out for their own interest "caveat emptor (let the buyer beware)"right?

The true, total cost, of a car can only be determined by the people at the dealership, but here is a guide to what to think about:

MSRP - Manufacturer Suggested Retail Price, the price that the manufacturer suggests the vehicle is sold for. "Suggested" is the key word. If a car is hot, dealers put "Market Value Adjustments" or "Dealer Mark-ups" on the vehicles to make as much as they can when a car is hot!

Invoice Price - This is a completely irrelevant number to a dealer other than for the accounting department and the calculation of salespeople commissions.

Holdback - This is a number (generally 2-3% of the invoice price), that is held back from the dealer by the manufacturer as a way to keep the price of the vehicles afloat. It is also a way for dealerships to recognize additional gross profit without paying sales people on the profit.

Dealer Cash - This is an incentive given by the manufacturer to a dealership to assist them in moving the inventory. This is given out when a model gets stagnate or when there are too many of these vehicles in stock. Dealer cash is never advertised and unless a dealer representative lets you in on the secret, you would never know.

Customer Cash/Rebates - These are incentives given to the customer by the Manufacturer as a way to motivate sales. It is similar to Dealer Cash, except it can be used as down payment, or a way to lessen the sales price of the vehicle to a customer.

Flooring credit - Additional money given to a dealership by a manufacturer to assist in holding the vehicles in inventory. This is generally paid on all vehicles in stock and can actually be a profit center to a dealership if they turn the inventory quick enough.

Advertising credits - Additional money given to a dealership by the manufacturer to assist in local, dealership advertising campaigns. This also includes "Co-Op credits" which generally means the manufacturer will pay 30%-50% of an ad campaign by the dealer if it meets the manufacturer approval.

Delivery incentives - These are additional profits given to a dealer by the manufacturer to entice the dealer to purchase more vehicles from the manufacturer. Again, if a dealer turns their inventory fast enough, this can be an enormous profit center.

On top of all of these confusing numbers, there are "stair step incentives" which scale payments to a dealer based on the number of cars sold in a particular time period.

So as you can see, there are many numbers that come into play when it comes to the true cost of a new car. With this knowledge, hopefully you will have additional ammunition when negotiating a new car deal.