how to buy a used car in 2012 ish

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But if I don’t hit publish it will just sit there forever. so you get a half baked version. Sorry.

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On buying a car, a few notes from a guy who used to teach dealerships how to use their computer system to maximize profit. There are some honest dealers out there. When you are buying used this number goes down significantly. So this is mostly about buying a used car and focused on the younger reader who might not have experience buying cars.

How car dealerships make money:

First note that dealerships make money and move money between four boxes to maximize profit.

  1. Sale of the new car versus the dealers cost.
  2. Buying your trade-in vehicle and selling it on the used car lot for more
  3. Financing your vehicle (bank offers 5%, dealer charges 6.5% so they profit 1.5% on the financing)
  4. Insurance and after market options. (extended warranties, rims, upgraded sound system, etc).

If the goal is to make $3k on the sale, they really don’t care if they sell it to you below invoice price as long as they make it up in one of the other three areas. Hence cutting deals like “OK, I’ll get you to 5.5% interest, which is below myst cost (white lie here) if you will promise to purchase one of the warranties which are a great deal regardless.” etc….

How car dealerships lose money:

In defense of the car guys, people are trying to rob them constantly. From stealing cars. Car jackings on a test drive. Porters swapping out RIMS on a new Tahoe with similar but cheaper rims. Used car guys paying their wholesaler too much for used cars and taking a kick back because they know they are leaving in a month. The guy who paints the emblems gold with “14 carat gold” is really using gold pain that will fleck off in six months and the dealer has to pay for it again. The finance companies changing how they loan money for the dealer to have cars on their lot (called floor-plans). Manufacturers playing favorites and giving the “hot car of the year” to one dealer more than another out of favoritism. People kiting checks. Etc… In other words, it is a rough and street smart type of business and they have to be a little rough just to survive.

So yes, I’m asking that you have a little bit of sympathy for the plight of the car dealers of the world.

That said, let’s have some sympathy for you too and talk about the best way to navigate through the used car buying process, shall we?

Insurance:

Have your insurance already. If you qualify, I really like USAA if at ALL possible for insurance. Switching away would be penny wise and pound foolish (just gonna have to trust the old man on this one.) If you must, raise your deductible, but stay with USAA. USAA is the ONLY customer owned insurance company I know of.  They don’t try to be the cheapest, but they are usually competitive. And even if you are paying more it is worth it to not get hosed.

In the world of insurance, I ask you “how can that duck advertise so much?” and  “Where does the lizard get all that money to advertise?” The caveman? The hands people? All of them. They can advertise that much because they make it difficult to get your claims paid. Or by just not paying claims.

Back to your trip to the dealership. You will need a copy of your insurance and your driver’s license to test drive a car. They will either photocopy or take your driver’s license during the test drive. Don’t get mad. The problem is people would go in for test drives and steal the cars. Or worse, the sales person might be car jacked and injured. They have a right to protect themselves and their employees so don’t give the dealer a hard time about photocopying your license. It’s for their safety.

Oh, and they also add you to their system for follow up calls while you are out on your test drive. Such is life. But they are loaning you a big expensive machine so some collateral seems fair to me.

Getting a Car Note:

BE PRE-APPROVED for your loan before you walk on the lot. Period.

Call or go online and apply to be pre-approved for a car loan. This is step 1. Allow a couple days for this to go through. State your income correctly as they will ask for your last two or three paycheck stubs (see last email to get the intuit link). If your compensation varies due to commission or bonuses bring last year’s W-2. If last year’s W-2 is higher use that. If you just got a raise, bring your recent paycheck stubs as those will calculate to your new pay rate.

Your next goal is to pick a car and get a fair drive out cash price without showing any other cards yet (cards being trade-ins, warranties, add-on rims, etc…)

Credit checks. As few as possible.

Credit checks are bad for your credit (oh the irony). The the dealer will eventually run your credit to determine if you actually work at said company because they want to beat your preapproved rate. But don’t allow this until you have a final “cash” price for the vehicle. Think of a credit check like an X-ray. One isn’t such a bad deal. But if you had to get 50 xrays in one day you’d turn into the green hulk dude.

The risk to your credit is if three dealerships all pull your credit then it hurts your credit rating because it looks like you are trying to buy three cars and over extend yourself. Then nobody is going to give you a good deal or take you seriously. When preapproved for your car note you can tell the dealer specifically to NOT run your credit until you have picked out a car and negotiated the final sale price. Your goal is to negotiate a cash drive out price without letting the dealer look at your trade in or pull your credit rating.

Note: this is probably where you will get your first “Turn Over.” This simply means the sales person brings in a new face who tells you the exact same thing because psychology tells us that we are likely to do it if a new voice says the same thing. Expect this. And it will be a very very like-able Finance and Insurance professional who makes Brangelina look like they work community theater. Or the opposite – the folks type who gosh shucks just wants to take care of you. They’ll ask about your dog while they are printing forms and they will always have a picture of their family facing the customer. Think about it. Most of us have pictures of our family on our desk that face US. Hmmmmm.

As for credit checks, I should mention one possible exception here for luxury car buyers or industrial buyers (like F350s or Fleet Vans). If you are looking at a used BMW it doesn’t hurt for the dealer to see that the Mercedes dealership pulled your credit yesterday. But stop there.

The dealer will not want to negotiate a final sale price before running your credit as that tells them how much he might be able to make on the back end (finance and insurance). Stick to your guns. THEN and only then can they run your credit to see if they can do a better deal than USAA. And some credit unions can. But you have the upper hand by being preapproved.

You will probably have had a second turn over at this point. Three very likeable folks “on your side just trying to help you.” And they actually are trying to help you. They just want to make the most possible money doing it because that is how they eat and provide for their families. But the really good ones? They aren’t worried about feeding their families, they are trying to maximize profit because it is how they keep score. Competition drives them.

On credit ratings – few people actually lie about their credit ratings so a seasoned car guy will respond to “my credit it perfect” and leave it alone because usually when folks say that, they are telling the truth. On the other hand, don’t lie. If you have some bumps run your own credit report BEFORE going to the dealership and give them a copy with an explanation. Sure they’ll have to run their own, but they will match and you have established trust. And avoided an extra credit pull until you are ready.

At this point you have your insurance and you are preapproved. Yea! Next:

The Trade In.

When you arrive on the lot one of the first things they will ask is if you have a trade in “so we can have the guys in the back appraise it.” You can risk it, or just say “no, I’m giving that to my friend.” Then after you negotiate a cash price for the car you can say “you know, just for grins, what would you give me for my car?”  Be sure to spend $100 having it detailed (not washed, I said DETAILED) before going to the dealer. It should be spotless if you want the best price. It might not work, but having a filthy car definitely won’t work.

And don’t be dishonest to them either. If you know it has a bad oil leak, don’t just fill it up and wipe off the excess right before having it appraised. That makes you, well, let’s call it what it is. You would be at a minimum a liar and an attempted thief. This happens to dealers a LOT and then whoever buys the car beats them up for selling them a lemon when their mechanic had no way of knowing it leaked oil after long road trips. How could they? Only the person trading the car in knows that. Don’t fix it, but tell them because their cost to repair it is significantly less than yours and they will appreciate your honesty. And that just might get you a better deal (yes really.)

Despite my advice above I usually just detail my trade-in and let them appraise it right away. I tell them I have no more than one hour to be on the dealers lot and I stick to it and leave no matter what. I might come back, but I leave in one hour no matter what. And I also make sure that I know the trade in price and private sale price from Edmunds. If you aren’t sure what options your car has sometimes you can look that up by VIN number.

The dealer will come back with a offer for your trade in which you can cross check with the trade in value on http://www.edmunds.com/  If they are close to the trade in value I usually trade it in because selling a car is a pain. And it involves inviting strangers to your house from Craig’s list which sucks. But hey, if they low-ball you on the trade in push back. And if that doesn’t work then just say “nah, I’ll sell it myself on a consignment lot.” You won’t get quite as much as trade in, but more than the low ball offer they throw at you. And they will probably throw low because they are not used to anyone negotiating the cash price before anything else.

Choice of Vehicle:

Buy a reliable make of car that is popular. Popular cars means more of them wind up in the junk yards over time which means you can usually find used parts. Hence a Toyota Camry, Ford F-150 or Honda Civic are all good options. A Delorean on the other hand would be a terrible idea as used flux capacitors are rare. Very rare.

I am partial to Hondas and Mercedes personally. Although Mercedes is expensive to repair, they last forever. I haven’t had a car payment in three years.

Finding your car. Be picky? Pay the price.

Now to find the car. You need to buy a car with four seats as two seater cars have higher insurance. Red and Yellow cars have higher insurance. Tan cars are invisible and unsafe in my opinion as people pull out in front of you. So that leaves the other colors like Maroon, Silver, Black, White, etc…. Sorry kid – it’s a used car. It takes you from point A to point B. Period. You can’t pick a color so much as avoid those three “bad” colors – Red, Yellow, (expensive) and Tan (invisible – lots of accidents.) if you are trying to get the best deal.

This morning we looked up a 2005 Toyota Camry and the dealer has it listed at $9,991 + Tax Title and License (figure another 1k)

http://www.edmunds.com/inventory/used/vin.html?vin=4T1BE32K45U079954&radius=50&make=Toyota&model=Camry&year=2005&defaultType=&mode=&invtype=USED

Then we flipped it around and I said “hey, if I were trading this car in what is this 2005 Toyota Camry worth?” This generates three prices.

  1. Wholesale/Trade-in (selling to a wholesaler or an auction house),
  2. Private Party (person to person sale) or
  3. Dealer Retail.

In this case those numbers are: http://www.edmunds.com/toyota/camry/2005/tmv-appraise-results.html

Have the numbers before you get to the dealership and have the iphone ready to look up prices. Or a regular phone to text your friend the VIN number so they can be at their computer and do the lookup for you. In this case Edmunds tells us the the dealer probably paid about 5k for the car. And they should probably be selling it at $6,500 but will likely list at $7,500 to give themselves a bigger buffer.

Customized True Market Value Prices

Trade-In Private Party Dealer Retail
National Base Price $6,455 $7,429 $8,528
Optional Equipment $0 $0 $0
Color Adjustment - Red $10 $11 $13
Regional Adjustment - for Zip Code 77002 $3 $4 $4
Mileage Adjustment - 100,000 miles $-177 $-177 $-177
Condition Adjustment - Average $-1,458 $-1,646 $-1,834
Total $4,833 $5,621 $6,534

OK, so now we know the dealer is asking 10k for a car he paid $4833 for. Even if you negotiate them down 3k, they are still going to make 2K and talk you into some protection policy ($900), ask you to pay for extras they “already installed on the car” like VIN etching on the windows or gold paint on the front hood ornament ($450) and underbody protection ($300). Refuse all of these. All. Tell them your brother is a mechanic (one of mine is) and leave off the part about him living in Florida.

These prices are dated, but the cost to the dealer for the “warranty insurance” is probably $150, the VIN etching is just a scam, but cost is maybe $100 to the dealer and gold paint on the hood ornament probably cost them $50 to $100. Same for pin-stripes.

Other thoughts

1) USAA – If you are preapproved for a loan you have the upper hand. And it is probably better to just say you don’t have a trade in car. That just gives them another variable to mess with you. Being preapproved by USAA is key.

2) Have print outs in your hand for at minimum of three (3) of the type of car you want to purchase. Also have print outs of the trade in value. It is OK to pay dealer retail, that is about a 1k profit and that is fair for what they go through. But getting hit up for 5k extra puts you “upside down” on the car and you can never sell it. Then it dies and you are making car payments on a car that doesn’t exist.

3) They will not want to talk “interest rate” but rather “payment.” Then they will say you are saving $50 a month on your payments when in fact USAA approved you for a 4 year loan and they just moved you to a six year loan and didn’t tell you.

4) Extended warranties. Don’t buy it. If you really want one you can buy them on the Internet for a fraction of what the dealer will want to sell it to you for.

5) Don’t worry about location. A dealer in Dallas has zero chance of selling you a car, right? So if a Dallas car dealer has an old car on his lot and it costs $250 to have it shipped, that dealer would settle for a lower margin Internet deal gladly. Thus frequently the best priced cars are from alternate cities. If you are in Houston call down to Rosenberg and check their prices.

6) Dealers hate old cars on their lot because they are paying interest (it’s called “Floorplanning”. When I traded in a Tahoe and bought a Honda Civic I literally walked up to the first salesperson I saw and said “show me the three oldest four door Honda civics on your lot regardless of color. And I have exactly one hour before I need to leave.” I bought the second oldest and it was a pretty quick car deal.

7) On a used car it is common practice for you to take it to your own mechanic and pay them $50 to look over the car and tell you if they see anything wrong with it. You yourself can look for stuff like “orange peel” paint jobs which means body work. Bolts under the hood that are not painted (the fender was replaced – new cars paint it all at once.)

8) CarFax is cheesy as hell, http://www.carfax.com/entry.cfx but it does give you the history of the car. When we bought used we usually did pay to get the history of the car (although back then you had to mail off for it). We bought a lemon that the salesman said was “the dealer’s wife’s car” when in fact it was a lease car out of Florida that never worked right and leaked on you when it rained. We made such a stink they took it back.

9) Used cars in the South are worth more than used cars from the Northeast. This is because of salt to remove snow and ice from the roads in the North which causes cars in the northeast to rust faster. Not as much of an issue these days, but still. On the flip side buying a pickup truck from North of the Mason Dixon line will be cheaper than buying one in Texas. Thus a lot of dealers will buy wholesale pickup trucks at auction in the North and have them shipped to the south. That $500 shipping cost is small compared to the 2k bump in price the vehicle will get, and you won’t know the history (see Carfax above).

7) New cars have something called “Hold Back.” which is basically a kick back of 1k to the dealer. So if you ask to see the invoice, which you are free to ask, they will show you that they paid 26k. They say “But you gotta give us a little!?” so you agree to $500 over invoice. So they are up 1.5k and send you to F&I (Finance and Insurance) and work you for the “pre-added accessorie, the interest rate spread, the extended warranty that doesn’t cover anything, etc.

Back to the beginning. Four buckets. Sale price. Trade in. Financing. And add-ons. If you can negotiate those individually you will do better. If you try to negotiate them all at once, it’s like trying to win against a carny. The game is rigged in their favor.

Your goal is to get a fair deal. Be civilized. Give them some margin because the dealership is a business too, but don’t let them charge you 10k for a car they paid 5k for because you will be upside down on your car note forever. Negotiate for a fair deal.