Who should read this chapter? All parents contemplating a family car purchase.
Summary: Since the family car is a major budget item, this decision impacts future funds available for college. A luxury car runs well and is prestigious, but less expensive cars have many hidden advantages. The decision in a new car purchase can be simplified to purchasing a luxury car versus purchasing a less expensive car with a $20,000 college scholarship. The less expensive car should look like a better choice since you get a college scholarship with it. The main purpose of this chapter is to consider some of the advantages of purchasing a less expensive car. The rest of this chapter is optional but you might find it interesting. Once you decide what type of car to purchase, some tips on getting a good deal on a car purchase are presented. My favorite savings strategy is to use the "buy the bait" method.
The family car is a major item in the family budget. We all love our cars. Driving a luxury car feels good because it drives well and it gives the driver the prestige of driving such a great car. Luxury cars often have more safety features. Often, families will stretch their finances to pay for a car that is more expensive than they had planned on. To save more money we should more carefully consider less expensive cars. Automobile prices are highly variable but most would consider the following to be luxury cars: Mercedes, Lincoln, Acura, Lexus, Cadillac, Chrysler, Infiniti, BMW, Jaguar, Rolls Royce, Saab, Porsche, etc. Less expensive automobiles would be: Dodge, Saturn, Ford, Plymouth, Chevrolet, etc. Let's compare a typical $36,000 luxury car with a $20,000 less expensive car in the table below:
Assuming you are a two car family and you replace your cars after eight years of use, you would need to purchase a new car about four times over a 15 year period. If you chose a less expensive car over a luxury car each time, you would save $86,000. The future value of this at the end of the 15 year period would be roughly $136,790.
Less expensive cars are less prestigious and less luxurious, but they have many advantages. They are less likely to be stolen. Owners worry less about them getting scratched, thus you can park it closer to the stores during the holiday Christmas rush. Valets expect a smaller tip when returning these cars (they'll only expect $1 instead of $5). We spend less time washing and waxing them. We don't mind as much taking less expensive cars to the beach or driving the baseball or soccer team home after a muddy game. We will be less upset with our children when they accidentally park their bicycle too close to the car (denting it).
I suspect that police officers are more sympathetic to drivers with less expensive cars. Pretend that you are a police officer pointing a speed radar gun down the road. Coming at you in the distance, you see two cars going 35 mph down the street in a 25 mph zone. One is a brand new luxury car. The other car is a brand new plain vanilla economy car. Since you can only stop one of these cars, which car are you more likely to stop? Most would stop the luxury car (another subtle benefit of less expensive cars).
When we buy an expensive luxury car, we feel good, but our children have less money available for their future. My sister-in-law purchased a $40,000 Lincoln at about the same time we purchased an $18,000 Buick Skylark. My children went riding in the Lincoln and they told me what a great car this was. I asked my children if it would be better to buy TWO cars that we have (two Buick Skylarks) or one car like their aunt's car (the Lincoln). They preferred the two Skylarks, but they were amazed to find out that one car could cost so much more than another. Should we by a Lincoln or should we buy a small Buick and save the extra $22,000? I don't see any comparison. Even children can appreciate the difference. How can the purchase of such an expensive car be justified when one compares a car+$20,000 versus a car alone? Many families choose to take the car alone. In 15 years, this $20,000 will be worth $60,000. This could be a substantial college "scholarship." Some people believe that an expensive luxury car is an "investment." This is just an excuse because, the value of a car always declines in value (it never appreciates). An investment in our children will pay lifetime dividends, while it is unclear how an investment in a luxury car can match this. Let me ask the question again; would you prefer a luxury car versus a less expensive car plus a college scholarship? If we chose the less expensive car, college would be more affordable.
This next section is rather long. Consider reading this if you are planning on purchasing a car.
Once you decide which type of car to purchase (hopefully a less expensive car), then use some of the following tips to save money on the purchase. The first rule is to NEVER purchase a car at the sticker price (with the exception of Saturn). In general here are some other suggestions:
1. Purchase a Saturn.
2. Use a discount car buying program.
3. Use an automobile purchasing discount broker.
4. Don't be fooled by a "good deal" on the trade in value of your old car.
5. Don't be fooled by terms such as "priced below MSRP" or "below dealer's cost."
6. Don't be fooled by "good deals" on financing.
7. My favorite method is to use the "bait and switch" method of advertising to your advantage. I call this, "buying the bait."
8. Purchasing a car with a credit card.
First of all you should know that nearly all automobile sticker prices are purposefully higher than they should be because this gives the salesperson some bargaining room to negotiate with the customer. It makes customers THINK that they are getting a good deal, when in fact, they are getting an average deal. The experience of purchasing a car typically involves high pressure sales tactics using the assistance of the "manager" or the "vice-president" of the dealership to help in this highly staged procedure. The goal of a salesperson is to sell you a car TODAY. They know that if you leave, you will probably not come back. Thus, they are under pressure to sell you that car today. If you have not gone through this sales procedure before, just say NO to everything they suggest until you have had time to examine the process, think about it and make a decision that you will be happy with.
Saturn's policy is to price their car fairly up front. There is no negotiating over price at a Saturn dealer. Saturn sales agents have struck me as being very honest. They provide a lot of information and there is very little sales pressure on customers. I have never purchased a Saturn, but have I visited the local Saturn dealer each time I have looked for a new car. I like their style. If you are on the timid side and you don't like dealing with high pressure car salespersons, then you may be happier at a Saturn dealer.
Using a discount buying program can usually get you a fair price. Large buying groups such as credit unions, Costco and Sam's Club will negotiate prices in a given community. They do this by requesting sales price bids on representative cars from each dealer. The dealers that send in the lowest bids are selected by the buying club to be their designated buyer club program dealers. They feature these dealers in a club flyer that is sent to all club members. By calling these dealers, you will automatically get the price that was submitted during the bidding competition. This is usually a fair deal, but not a great deal.
A purchasing broker is a dealer who generally operates out of an office instead of a car lot. Such brokers have fewer employees and lease expenses since they don't need to maintain a lot. They obtain their cars from a wholesale lot. You go to the broker, tell them exactly what kind of car you want and they calculate a price estimate using reference books. The broker can give you a range of prices with various combinations of options. They then call wholesale lots in the area to find a car with the closest match. The broker then calls you on the availability of the car and the final price. This price is usually a fair price, but it is usually not a great price. If you like browsing a lot for cars and kicking tires, you will have to go to a regular car dealer.
When you negotiate with an automobile salesperson the trade-in allowance on your old car must be considered. The "Blue Book" value is the standard used to place a value on used cars. Anyone can access this value by purchasing a blue book or looking it up on the internet. Blue books list two values; the selling price and the buying price. The selling price, which is lower, is the price that most used car dealers will purchase the car from you for. The selling price should be the value of the trade-in that you should expect. The buying price is the price that you could expect to pay if you purchased this car at a used car lot. You should always look up the blue book value prior to trading your car in.
Consider an example in which you currently own an old car with a selling blue book value of $2,000 and you would like to purchase a new car with a sticker price of $21,000. The salesperson could offer you a "Guaranteed" trade in value of $3,000 without even seeing your car. This sounds like a good deal at first glance, but it likely that the car dealer was planning on a $1,100 discount anyway. They could give you the great deal on the trade in of $3,000 plus a $100 rebate off the sticker price. This is no different than getting only $2,000 for the trade in with a $1,100 rebate or discount off the sticker price. No matter how the "good deals" are distributed, you will end up handing over your old car plus $17,900. This is only an average deal. Don't be fooled into thinking that you are getting a great deal.
In most instances, trading your car in to the dealer is a convenient way of getting at least some money for your old car, but you can generally get more for your old car by selling it yourself. Recall the difference between the selling and buying blue book values. There are three other ways to sell your old car. You can take it to a used car dealer who will quickly assess the value of your car. They will offer you a price similar to the blue book selling price. This will be similar to trading it in when you bought the new car, but it is usually slightly better. Look in the newspaper classified ads for "cars wanted." Some used car dealers are often short of cars to sell. These dealers are advertising for you to bring your used car to sell to them. They may be willing to give you a little bit more. You can try this at several used car dealers to see which one gives you the most for the car. This option may be good if you need your old car as an extra car for another few weeks or months. You can then easily sell the car when you no longer need it. Don't hold onto the car unnecessarily. Sell it promptly because a few months delay may significantly reduce its blue book value.
Selling your used car through the newspaper classified will get you the higher blue book "buying" price. This is substantially higher than the lower blue book selling price. The difference between these two prices represents the profit made by used car dealers. Advertise your car at the blue book buying price and see what happens. The price can be adjusted downward depending how many inquiries you get. Be cautious when letting a stranger test drive your car. Ask for proper I.D. and some type of security deposit such as their car. In most cases, you should be able to get at least $500 more for your car than you would at a used car dealer.
The last way to get something for your used car is to donate it to a charity. Many charities will take your car as a donation in exchange for a "generous" valuation receipt that you can use for a tax deduction. The charity then sells your car to a used car dealer for cash which is kept by the charity. If you are in a very high tax bracket, you may benefit from this method more than others, but in actuality, this method results in the fewest actual dollars returned to you in exchange for the car.
Don't be fooled by terms such as "priced below MSRP" or "below dealer's cost." MSRP stands for manufacturer's suggested retail price. In other words, this is not a discounted price. Fees, taxes and dealer mark ups are added to this price. "Dealer's cost" is an ambiguous term. We think it might be the amount of dollars that the dealer paid the automobile manufacturer for the car. If this is what is meant by "dealer's cost", then this would really be a good deal. But what I just described is the "dealer's marginal cost." The marginal cost is only part of the dealer's cost. The actual dealer's cost of the car must include part of the salaries and fixed costs of the car dealership such as rent on the property, employee salaries and maintenance expenses of the facility. How much is this? Accountants would have difficulty agreeing on an exact amount so the true dealer's cost is not very objective. The dealer can make up almost any value and potentially justify it. Thus, the term "below dealer's cost" is not necessarily a great deal. Don't be fooled by this.
Don't be fooled by "good deals" on financing which are similar to good deals on trade-ins. Most factory discount programs give customers a choice of a cash rebate or a discount on the customer financing. A customer generally cannot receive both. To maximize your discount, you should avoid financing as much as possible. Pay for the car as much as you can (preferably more than half), then finance the remainder at the lowest possible interest rate. If you can't pay for at least one-third of the car up front, then you should consider purchasing a less expensive car.
My favorite method is to use the "bait and switch" strategy of advertising by car dealers to your advantage. This is my favorite method because it saves the most money. Browse through the advertised prices in the automobile sales section of a newspaper. You will find that these prices are very attractive, almost too good to be true. These prices are used as "bait." When you see this bargain price in the ad, it will tempt you to go down to the dealer's car lot. The bait (the low price) has gotten you to bite. Now that you're at the dealer's lot, they will attempt to reel you in and make the sale. They don't want to sell you the "bait" car because it's too inexpensive and they won't make a profit. Instead, they will convince you to purchase a better car which is more expensive. This is the "switch" involved in bait and switch. To get a great deal on a car purchase, you must avoid getting switched. Instead of buying the expensive car that they want you to buy, you should buy the bargain car instead. Car dealers call this the "ad car" because this car is used for ad purposes only. The dealership does not profit by selling the ad car. I call this, "buying the bait." The ad car is the bait used to get you down to the dealer's lot. By buying the bait, you get the best possible bargain.
Let's go through an example of this. I see an ad for a car at $14,999. I know that my uncle just bought one of these for $21,000. The $14,999 price sounds like a really good deal. The ad describes the car as having a 5-speed manual transmission and a stereo. I would prefer an automatic transmission and air conditioning. By using a reference, I find out that an automatic transmission is $500 more and air conditioning is $1,000 more. By adding this to the $14,999 price, I estimate that I should be able to get the car I want for $16,499 which is still a lot cheaper than what my uncle paid. I guess my uncle doesn't know how to get a good deal. I decide to buy this car since the price is such a bargain. I go down to the dealer's lot where I meet a salesman named Egor. The "bait" has worked since I'm now down on the lot. I tell Egor that I saw their car ad for $14,999, but I would like the same model with an automatic transmission and air conditioning. Egor finds five such cars for me in several different colors. This is the "switch". I didn't like the bait car, so Egor switched me. These cars look beautiful. I fall in love with the teal color. Egor encourages me to take a test drive. We go for a test drive and the car feels great. I'm hooked. I notice that the sticker price says $24,999. I tell Egor that this car should have a sale price. Egor tells me not to worry about it since he can ask the manager to lower the price.
Egor takes me to a small office and gets me some chips and a soda pop. Egor prepares some paperwork to purchase the car and apply for a loan. We now start discussing price. Here's the conversation:
Egor: The retail price of this car is $24,999, but I will get a discount for you. How much are you willing to pay for this car?
Me: Well, I saw the $14,999 price advertised. I know that an automatic transmission and air conditioning are $1,500 more so the price should be $16,499.
Egor: You sure drive a hard bargain. It sounds like you know a lot about cars. That is a really nice car that you have chosen. We have many satisfied customers who have paid much more than that for this type of car. But I try to get special deals for all of my customers. I just want them to be happy. Let me discuss this matter with the vice-president. I'm sure we can get you a good deal.
Egor leaves the room leaving me in the office. I'm thinking to myself that I am really lucky to have gotten Egor as my salesman. He seems like he is really trying hard to get me a good deal.
Egor returns: Sorry I took so long, but I have good news. The vice-president said that he can give you a $1,000 discount. I tried to get him to give a little more because I told him that you are my special friend so then he authorized a $2,000 discount. Isn't that great!!
Me: So what is the final price here?
Egor: The MSRP is $24,999. Your $2,000 discount results in a price of only $22,999 for that beautiful car.
Me: But Egor, I figured that I would only be paying $16,499. Didn't you remember the newspaper ad I told you about?
Egor: The vice-president told me that the sale price on the ad car applies only to the ad car. You see there is a stock number on the ad indicating that this sale price applies only to the ad car.
Egor shows me a copy of the newspaper ad. Below the ad, the fine print indicates #2AC45623. This is the stock number of the car that is being advertised. This is the only car on sale at the $14,999 price. This sale price does not apply to any other car.
Me: Well Egor, I came down here thinking that I was going to spend only $16,499. If you're telling me that the price is $22,999, I can't afford that.
Egor: I see. Let me tell the vice-president about your misunderstanding. Maybe he'll be willing to give you a bigger discount. I heard that they are trying to sell a lot of cars this month. They might be willing to price it really low to make a sale. He's very busy, but I will talk to him again.
Me: Wait a minute Egor. Could I see the ad car?
Egor: No problem. It's right here.
I follow Egor to a poorly lit section of the car lot. There I find car #2AC45623. It has a 5-speed manual transmission and a stereo just like the ad said. It is bright orange and it has mud on the hood. The sticker price is $19,999. The sale price of $14,999 is truly a bargain. But if I am going to spend this much on a car, I would like it in a better color. Oh, and I forgot, my wife doesn't know how to drive a manual transmission. I could teach her, but she might not like it. This is a typical ad car. Nobody wants it even at the bargain price. As long as they can keep this car on the lot, the dealership can continue to advertise the low price to use as bait. If someone who likes orange and a manual transmission came by one day, the dealer would have to sell them the car at the advertised price.
Me: You're right Egor, I really don't want this car. Could you talk to the vice-president again to see if I could get a better deal?
Egor: For you, I will do this. Give me a few minutes and I'll return.
Egor returns: I have great news. The vice-president told me this month, he was planning to sell one of these cars below dealer cost. So he said he would do this for you only. He will give you a $3,000 discount. That is almost unheard of.
Me: Did you know that my uncle bought a car just like this for $21,000?
Egor: I don't think so. That would be almost unheard of. Perhaps he is a really hard bargainer or he bought one with a manual transmission. I tell you what, I will take you to see the vice-president in person and we can all discuss this together.
This story is long enough so I will abbreviate it. After ganging up on me, Egor and the vice-president convinced me to buy the car at $21,999. The final price I paid was $23,600 because of other fees added on which included tax, title fees, license fees, registration fees and Egor talked me into buying an extended warranty for my new car. Although I spent about $7,000 more than I had planned, it's a beautiful car and I'm glad I got such a "good deal." I asked my uncle how he got such a good deal. He told me that he traded in his old car and they gave him a great deal on the trade in so he only had to pay $21,000. His actual purchase price was $23,900. Actually, this is not a real story, but it describes typical tactics that are used.
This example demonstrates the bait and switch strategy used by car dealers. It also demonstrates that everyone wants to get a good deal on a car. Dealers make sure everyone believes that they got a good deal. When bragging about one's new car, proud new car owner's will tell you that they got a good deal and to make the story even better, the actual price paid for the car is rarely accurate. Most proud new owners will exaggerate the greatness of their deal by quoting the purchase price before taxes and fees or the purchase price after a trade-in credit on their old car (just like my uncle did).
To get the best deal using the “buying the bait” method, patience is required. For example, I am looking for a compact to mid sized car with an automatic transmission and air conditioning. Cars in this class are made by Chevrolet, Ford, Dodge, Plymouth, Mercury, Toyota, Nissan, Saturn, Mazda, Buick, Pontiac, and many others. I'm not particular about exactly which model I want. I mostly want to get a good price. One day, I find a small Buick advertised at $16,999 with auto, AC, PS, PB, PW, am/fm/cassette (automatic transmission, air conditioning, power steering, power brakes, power windows, am/fm radio and a cassette tape player). I decide not to get this because I don't need power windows.
Instead of being switched to a more expensive car, the cheapest way to buy a new car is to buy the ad car itself. Most ad cars are not orange. Car dealers will eventually have to sell the ad car so the ad car is often not so bad. To get a good deal on an ad car, you must be patient and flexible. Patience is required because you must check the automobile ads every week looking for a good ad car deal. Make sure it has the options that you want because you will NOT be able to change these if you want the sale price. You must be flexible because the car may not be exactly what you want or be in the right color. The more flexible you are, the more likely you are to successfully find an ad car bargain.
Next week, I find a Mazda advertised at $14,299 with auto, AC, PS, PB, am/fm/cass. Perfect. I call the dealer to find out what color it is and whether it is still on the lot. It is white and it is still on the lot for sale. I go down to the lot to find that the ad car is not on the lot. Someone else has bought it. They have four other identical cars, but these are at $17,300. Only the ad car with the advertised serial number is at that price.
After some thinking, we decide not to replace our family sedan, but rather to replace our family van which is getting older. A new van would be a better decision. I find a Plymouth van advertised at $14,500. I call the lot, but it has already been sold. Next week, this dealer offers the same deal. I call the dealer and it is still available. I find out that it is red. My wife does not like the color and suggests that we wait. Every week for the next three weeks, the same sale price is advertised, but the vans are always red. Well that's a good bait and switch strategy since most van buyers are families who generally prefer colors other than red. Finally we decide to go check out this van hoping it would be a nice subdued shade of red like a brick red, candy apple red or metallic magenta red. When we get to the lot, it is FLAME red. You could also describe it as stop sign red or fire engine red. It doesn't get any redder than this!! We decide not to buy it. The salesman unsuccessfully attempts to sell us a white van for $20,000. Over the next few weeks we see a lot of red vans on the road. Suddenly, we notice these a lot more. It doesn't look so bad after all. After some discussion, we decide to buy the red van. We wait for the ad and when it appears, we head down to the lot and purchase the van at a purchase price of $14,500. However, we must add $900 to this because the advertised price included a $400 recent college graduate rebate. Since I graduated over 15 years ago, I don't qualify for this rebate. The additional $500 is for a dealer installed anti-theft system that this dealer installs on all their cars to prevent theft of new cars from their lot. They merely pass the cost of this onto the customers (perhaps with a "bit" of a mark up). Tax, license and fees were added to this. Oh well, the deal wasn't as good as we thought it would be, but it was still better than anything else we could get. After driving this flame red van for a while, we got to actually like the color. In this case, flexibility in color preference saved us a lot of money.
My last trick is to use a credit card as an option to purchase the car. For this to be beneficial, you must be certain that you can pay off this rather large credit card balance when the due date approaches by accumulating cash or arranging a bank loan by this time. You would not want to pay credit card interest on such a large balance.
When you enter a car dealership you should ask the salesperson if they accept credit cards. If they don't, there will be no benefit, but if they do, this could amount to a hidden discount. After the final purchase price of the car has been settled, tell the salesperson that you would like to pay for the car with your charge cards. You may need more than one card if your credit limit is not high enough.
Any vendor who accepts payment by credit card must pay a small percentage of the purchase price to the credit card company. On a $20,000 purchase, a 3% to 4% credit card surcharge reduces the vendor's profit by $600 to $800. You now have a new bargaining tool with the car dealer. I could purchase the car with a credit card or you could give me an additional $400 discount and then I will pay in cash. The dealer actually is better off giving you the discount rather than accepting payment by credit card. I have attempted this four times now with only limited success. The first time I was told that since I was purchasing an ad car, they could not afford to take any further loss and they would only accept cash or conventional financing. The second time I tried this, I was told at the start they would not take a credit card because the surcharge would cost them too much. The third time, the dealership actually let me charge the entire purchase price rather than give me a cash discount. I still benefited by getting a free three week loan (due the delay in payment of the credit card bill) and a lot of frequent flier miles (bonus perk using an airline charge card). The most recent time I tried this, I was told that their policy was to allow a maximum credit card charge of $1500. They let me charge this much rather than give me a cash discount. Charging on a Discover Card could result in a cash back bonus of about 1%. On a $20,000 purchase, that's an additional cash savings of $200. Interestingly, my father and brother also tried this and they were allowed to charge the entire amount also. I find this interesting since the car dealership would make more money by giving the customer a 2% discount and accepting cash rather than accepting a credit card as payment in full.
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