Remember the shell game? It was a con you’d see on street corners in big cities (like my native Chicago). The “dealer” would move a ball or a pea rapidly among three cups, and you’d have to guess where it ended up. It would seem easy until you started betting on the outcome, at which point the dealer would hide the ball using sleight of hand. The ball would vanish, as would your money.
You don’t see the shell game much anymore, but we’re all still easily distracted when we don’t know how a system works — and especially when we’re trying to make the most of our money.
Follow the Ball
Why do I bring this up? While developing CoPilot, we realized that the car-buying business has a lot in common with those street-corner shell games. Don’t get me wrong; most dealers are honest, but some will use tricks to pull you away from your goal of getting the best deal. It’s not a ball under a shell; this kind of misdirection uses unfamiliar terms that sound good to make you part with your money.
It’s important to understand that a car dealership makes money from markups on:
the wholesale price of the car
an auto loan arranged by the dealership
your trade-in by giving you a low-ball offer
various other financing and insurance products
Here’s the thing to remember: If a dealer is profiting on a given aspect of a sale, that aspect is negotiable. Learning how to strategically approach each of these areas will ultimately save you money. Let’s look at a few examples of the automotive shell game.
DID YOU KNOW?
Most car dealerships are independently owned and operated, so you might pay thousands more in fees at one dealership than at another. Here’s how to find a good car dealership.
Dealers Fool You with the “Four-Square”
One of the oldest tricks in the book is something called the “Four-Square.” It looks like this:
If you’ve bought a car or truck before, chances are you’ve sat down with a salesperson as they drew the diagram above on the back of a sheet of paper. You may have even though they were being particularly transparent with you!
But the Four-Square method is really a way for the salesperson to keep you focused on everything except what really matters — the purchase price of the vehicle. A pro will keep making “concessions” on the down payment, monthly payment, and the trade-in value while never budging on the actual price of the car.
Beat the Four-Square by knowing what’s going on. Always start by negotiating the purchase price of the vehicle first. Next, negotiate a fair trade-in price for your old car or truck (more on this in a minute). Only start discussing monthly and down payments once you’ve reached a fair deal on these two aspects of the sale. Don’t get distracted by the square.
Dealers Keep Discounts to Themselves
Manufacturers offer their own incentives to consumers in the form of cash back or discounts for students or members of the military. Dealers usually make these offers clear, as it sweetens the deal for the consumer without affecting the cash they bring in themselves. What dealers won’t necessarily tell you is that the manufacturers will also incentivise purchases with promotional financing. Dealers keep this to themselves because it may cut into their ability to turn a larger profit on a bank loan arranged through the dealership. So, before you walk into the showroom, check the manufacturer’s website to see if you can get a better financing deal directly.
The bottom line: Cars for sale in the U.S. have about $4,000 worth of incentives attached to them, whether it’s cash back or subsidized interest rates. Don’t leave that money on the table.
BUY A CAR THAT KEEPS ITS VALUE
Some vehicles can lose 10-15% of their value just by being driven off the lot. Here are the fastest-depreciating cars to avoid.
Dealers Hide the Value of Your Own Car
When a dealership buys a car at auction, it’s usually bidding against a number of other buyers, making it more difficult to get the lowest price. But when a dealer is appraising your car’s trade-in value, there’s no competition, so he will usually try to low-ball you. In effect, the dealer is hiding the value of your trade-in.
But you can introduce competition! Spend a few minutes with Kelly Blue Book, or take an hour to get an independent Carmax trade-in appraisal, and bring this information to the dealership. Now the dealer has to at least match — or beat — the value you’ve already secured.
The only caveat here is that, depending on your state, the price of a trade-in made through a dealer can sometimes lower the sales tax on your new car. That is to say, if you were to trade in your old car for $5,000 and pay $20,000 for your new one, you’d only pay sales tax on $15,000 — but this only applies to trade-ins made at the dealership where you are buying your car. In this way, a lower offer from a dealer may still result in greater overall savings, so be sure to look up the law in your particular state.
DOWNLOAD THE APP
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Dealers Pull a Car Switch
There are a number of common mistakes consumers make when purchasing a car, new or used, from limiting their search to nearby cars to being unaware of hidden fees that could be negotiated. There’s another one, the biggest switch in the shell game: getting lured into buying a car they haven’t researched. Sure, it might happen if the car you wanted sold before you could make it to the lot, or if a different model catches your eye in the showroom. But it could also happen that a dealer has a car he wants to get rid of, and tries to sell you on this “switch car” instead.
Don’t get pulled into buying a car if you haven’t done your homework. If you find yourself in this situation, just walk away and do some research. Stepping back doesn’t necessarily mean that you need to go all the way back home. You can use CoPilot to research on your phone before diving back into a sales conversation. Hop into a coffee shop — or even your old car — and compare models, features, and prices on the car you just saw. Find a good comp to give you some good leverage. Then, walk back into the dealership and start negotiating.
Maybe you learned that the car is a great deal, or maybe you know that it’s actually priced above market value for the features it has. Either way, you now have a better chance of getting a reasonable deal and driving away in the car that’s right for you. Read about red flags to watch out for when talking to a car dealer.