How to Save 20% OFF MSRP on a Brand New Car Purchase

The following is a guest post from Sunil at the Extra Money Blog. FYI, here's how I save buying a car.

My lovely Wife is looking to buy a brand new SUV this year.  Why would she want to give up her beautiful Silver Honda Accord Coupe up is beyond me? Buy anyway . . .

I got myself a General Motors vehicle in 2010 (late 2009 model).  It’s a 4 door crystalline black sedan with the GM sports package built in.  I bought it because of its slick look and 34 Miles Per Gallon (MPG) fuel economy.

The sticker on the car was just under $25k, and I ended up paying just under $15k for it.  Now that included a $5k rebate from the cash for clunkers program since I traded in my SUV which only got 18 MPG.

But nonetheless, the vehicle cost me just under $20k without factoring in the CC rebate, a net savings of 20% off Manufacturer’s Suggested Retail Price (MSRP).

Here are some key lessons learned from research, talking with others as well as personal experience.

Give Yourself Ample Time

The single biggest negotiating factor you can give yourself is time.  Shopping early is critical because it allows you to walk away from pressure and unfavorable circumstances such as nasty last minute surprises like changes in the agreed upon purchase price.

Give yourself three full weekends at the least to test drive and physically shop around.  However, start your paper/internet research months in advance to narrow in on the types of vehicles you are considering.  You should have your top 2 or 3 selected before visiting dealership showrooms.

Hold Your Ground

No offense to car salesmen reading this, but dealerships are generally perceived to be dirty swamps and sales men like piranhas.  Be ready to walk away if unfavorable changes are made to your agreed upon price at the last minute.

Dealerships operate under the assumption that you absolutely need a vehicle immediately, and rightfully so, many customers do.  That’s why giving yourself ample time is important.  Be firm in all your negotiation, and try not to be rude. But make sure you let them know they lost a customer and why.

You Work for the Big Three

When you start working with a salesman, tell them you worked for one of the big 3 Ford, GM and Chrysler at some point in your career. Employees of these companies know how car pricing, bargaining, rebates and discounts work.  It is less likely that salesmen will blow smoke up yours when they know this.

But that’s considered lying? Trust me it won’t kill anyone.  If you are not comfortable lying (who would be?), tell them a very good friend or relative does. I bet you can find a friend that has some ties to the auto industry.  After all, we are all 6 degrees of separation away from each other right?

Year-End Shopping Bargains

To make sales numbers, companies often offer excessive discounts and bargains toward year end.  Late in a given year, the new model for the upcoming year is usually released.  For example, the 2012 model of the vehicle you want may be releasing in October of this year (2011).

So if you can afford to wait, near year-end is a great time to find good bargains on new vehicle purchases.  Similarly, if you are shopping early in the year (say right now), see if there are previous year models on the lot.  For example, I bought my 2009 GM vehicle in 2010.

Despite brand new, there is a good chance to get better bargains on these as dealerships look to rid of them.

Learn the Ropes

OK, this is how dealership pricing works for brand new vehicles.

When dealerships purchase vehicles from manufacturers, they are given a vehicle invoice unique to each specific vehicle.  This dealer invoice shows the amount it cost the dealership to buy the vehicle.

On the vehicle comes a sticker price, often the MSRP, or what the manufacturer suggests the price of its vehicle is.  I don’t know exactly how and who comes up with this, but I really don’t care. I turn a blind eye to this number until after the fact (after I have bought the vehicle).

Sure it’s nice to benchmark and know and compare how much you saved relative to the MSRP, but what does it really mean? I don’t know.

Back to the point, the dealership sells the vehicle for the invoice price plus its profit margin.  Salesmen have to eat too.  What is interesting however is that manufacturers often times have additional incentives for dealerships when they sell certain vehicles.  These are called manufacturer rebates, concessions, subsidies, incentives and discounts.

For example, let’s say you are buying a Toyota Camry from your neighborhood dealership for $20,000, and the invoice on it says $19,000. This means the dealership profits $1,000 on the sale.  But if Toyota Motor Corporation incentivizes a dealer a rebate of $500 for each Camry sold, the dealer will end up profiting $1,500 ($1,000 from you and $500 from Toyota).

Because of “back-end” or “back-door” rebates and price agreements, it is possible for dealerships to make money on a vehicle sale even if they sell the vehicle at the dealer invoice price, or even lower. In this case, if you bought the vehicle for $18,750, which is under the $19,000 invoice, the dealer will still get the $500 rebate and therefore net $250 in profit.

Another kicker is employee discounts, family and friends incentives, etc.  You can get even a better bargain if you are an employee or know someone who is an employee of an automotive company. Employees can generally extend friends and family discounts to people they know.  This is additional money that can be taken-off the dealer invoice price to arrive at the amount you should be paying for the vehicle purchase.

Here is a simple equation to keep in mind:

• Dealer Invoice Price
• Minus Dealer Incentives & Rebates
• Minus Employee, Friends or Family Discount
• Minus Affiliate Financing Rebates (discussed below)
• Equals = The Price YOU Should Pay

But the dealership has to eat too right? Not in this case.  There are enough others who will consistently overpay for their vehicles, and they can feed the dealer all they want.  But you won’t! You will feed your own family instead.

Just because a dealership doesn’t make a buck on a vehicle sale doesn’t mean its world will be ending the next day.  Each sale, even at breakeven or a loss counts toward total volume of units moved (or sold).  The sales person who is credited with the sale of your vehicle gets a chance to meet their sales goals, which many times dictates the commission or bonus bracket (the more units sold the higher the bonus bracket).

But there are too many variables involved in this process.  Just how do you find what the nitty-gritty numbers involved are?  Ask the dealer for the invoice of the specific vehicle you want (not a similar one).  This will give you the invoice price.  Scour the web to find out what kind of rebates and incentives the manufacturers are handing out for the vehicle you want.  This will give you the back-end dealer incentives.

Look for financing related incentives as well.  For example, if you were to buy a GM vehicle and obtain financing from GMAC, GMAC may rebate the dealership an extra $500 for the financing business. Knowing this will help you negotiate better.  Search the internet, and better yet talk to people who might have that info such as company employees (read on).

Many times the internet won’t have the information you are looking for.  Your next best bet is to reach out to friends and family and try to get connected with someone who works in the industry.  It is rare for automotive industry employees not to know how their company’s vehicle purchase program works.

If all fails, go online and join LinkedIn.  Without getting into the million and one benefits of this network, suffice it to say that you can search for folks who work in the automotive industry and shamelessly solicit their feedback.  You might find a good soul or two willing to help. If not who cares? You can always start a bidding war.

Competitive Bidding

Dealerships have figured out that consumers are getting smarter and have figured out the system.  So despite the relatively straight-forward invoicing and pricing process described above, dealerships find ways to squeeze in costs here and there.  That is where competitive bidding comes into play.

After conducting thorough research independently, start calling or emailing dealerships nearby and ask them for vehicle pricing.  Don’t be afraid to ask questions such as what is the dealer invoice price and such.

I prefer email because I can draft a generic email message and shoot it out to multiple dealerships. It is also easier and more automated to keep track off.  Whenever asking for a final price, ask about a complete out the door price, with tax, title and license plate or you are risking last minute surprises at the dealership when picking up your car.  Get all quotes in writing, preferably email over fax. Print your emails out when visiting the dealership.

You will get some dealers that will tell you over email that they don’t do competitive bidding.  Pick up the phone and call the dealership and ask for the most senior salesman or the manager.  Tell them you want a competitive bid. If they turn you down, tell them you have the cash and are ready to buy if they have the best offer for you.  You will likely start getting some cooperation.

Up-sells

Beware of costly up-sells.  After your purchase, you will likely get a tour of the service facility where an oil change costs 2 fingers and a tune up will cost you your right leg.  As much as they insist this is a great value, trust me that you will find the same service for much less on your own.

Now there is something to be said for a dealership service facility, but since this article is about saving money, I prefer not to say something at this moment.

Trading-in Used Vehicles

You might have a used vehicle you want to trade in, but stop and think about this for a minute. Dealerships will severely low ball you on the price of your used vehicle because they have to turn around and make money from selling it. They cannot possibly offer you anywhere near your vehicle’s market value for the trade and still make money.

Instead, put your vehicle up for sale on Craigslist, or pick up a FOR SALE sign at the nearby hardware store and post it on your vehicle’s windows. Heck, donating it might give you more financial benefit. Just think it through.

When I was helping my father purchase his new vehicle, the dealership offered him $400 for his old Ford. What a Joke! I put it up on Craigslist for him and 2 days later it was sold for $2,000. What a bigger joke!

Financing

I won’t dwell on this topic much because I buy everything in cash. Well I whack it on the credit card so I get points and miles, but I end up paying all of the balance in cash when due. I don’t believe in buying on credit, even if it is a home other than a rental property.

All I will say is arrange financing before walking into a dealership. 9 out of 10 times, you are much better off independently seeking and pricing your car loan.

Fly to Mo-Town

If you can afford to fly to the world’s automotive capital, Detroit, Michigan (also known as Motor City), DO IT!  When I say “afford” I mean more from a time perspective.  The money (airfare cost) is a mute point and you will see why.

This one works particularly better if you are interested in a non-American vehicle, especially luxury brands like Mercedes, Volvo, BMW and the likes.  A friend of mine recently flew down to Michigan to purchase a Mercedes.  He saved $4,000 in the process net of airfare, hotel and car shipping costs.

All negotiation was conducted beforehand over phone, fax and email.  Another friend flew down to lease a BMW.  He was able to lease one for $110 less per month on a 24 month lease ($2,640 in total savings) compared to the deals he was getting in Los Angeles.

Here is how and why this works.  Because half of Detroit is affiliated with the auto industry, or so it seems, everyone is entitled to the top most discount package offered by big three American automotive companies (such as employee discounts, family and friends discounts, etc).

In order to compete with the American companies, dealerships of foreign vehicles have to price competitively in that market.  Because they have to eat too, it is not unusual to find better bargains on vehicles in Michigan compared to other states.

Living in Michigan, I know FMF can relate to this one.

So, anything that stood out? Or is it all old, stale, same old same old news?  Do you have anything to add / clarify / correct? 

I would love to hear your thoughts as my wife is about to embark on her spending spree. And since Crude Oil is about to hit $4,000 a barrel (or so it seems), at least help us save some dollars in the process.

Comments

[Zach]

Pretty good overview of the process. Being from the south, I'd never heard the "go to Detroit tip," so I'll have to tuck that one away for the future.

Now...grammar police time...Unless the point is actually silent, there's no such thing as a "mute point." it's really a "moot point." Just a pet peeve of mine, carry on.

[Yes, I would like some sprinkles.]

damn, ya beat me to it!, I am always surprised by the use of the word mute instead of moot.

Sure spell checker will pass it, but jeeshh, it's a word one should have learned in 7th grade. Well, that's enough nit-picking for the day.

[MBTN]

I am curious about the concept "the price you should pay". This implies that the price if somehow dealerships are ripping you off if you pay more than some mythical price. The price you should pay does not exist. Price is based upon two things and two things only:

1. Supply
2. Demand

If all of the dealerships in the area don't want to part with a particular car for less than MSRP, that means that they know there is enough demand or not enough supply, so they will not selling it to you for that mythical invoice price, no matter how much you beg. Why? Because they know that they can sell it to somebody else at a higher price.

The only piece of advice that makes sense is "competitve bidding". Get a quote from multiple dealerships and make them compete against one another. Buy the car from the lowest bidder. Very simple. Then you don't have to worry about all of the other "tricks".