Monday, April 2, 2012

New or used?

If you've ever bought a car (and hopefully if you're reading my site, you have) you'll have always come that point in your decision as to whether to buy new or used. New is nice - you get a shiny new toy, unsullied by any other driver. You take it in the pants on depreciation though - the second the ink dries on the contract of sale, you lose 30% of the value. Used means you don't have the depreciation problem but you have the uncertainty of the car's history. So what are the pitfalls and benefits of both? This week I'll deal with new cars. Next week we'll look at used.
The biggest pitfall of a new car is that the dealer will see money signs floating all around you and will attempt to get you to buy an extended warranty and pay top dollar for the car. The extended warranty is a complete no-no unless it's a manufacturer extension AND you're planning to keep the car for 5 years or more. But what about the price? A new car is expensive, right? Yes, but don't ever pay what the dealer is asking or you're a fool, and you know the saying about a fool and their money. So how do you get a good deal on the price? Research is the answer. Here in the US, there are companies like Consumer Reports and FightingChance that offer new car pricing reports. It's been a while since I lived in the UK so I don't know if there are places there that do the same thing, but these are well worth the money you'll spend on them - typically less than $20. But you need to buy them very close to when you're ready to commit to the sale because they contain information that is normally only relevant for a couple of weeks. They'll contain info on what the various deals are in place for dealers around the country (special financing rates, cashback deals etc), as well as the holdback amount. Holdback is what the dealer is paid by the manufacturer for every sale, and it's why when you buy "below invoice" the dealer still makes money. Most importantly, these reports will tell you what the true invoice price is - how much the dealer paid for the car you're about to buy from them. Knowing this, and knowing the holdback amount, you can normally beat a dealer down in price. For example when I bought a Honda Element in 2009, the sticker price was $24,070. The pricing report I bought showed that the Honda invoice to my dealer was $22,398, that the dealer would get a $1,200 holdback and that for another 13 days, there was a dealer incentive to sell Elements that resulted in Honda corporate giving them an additional $900 per vehicle sold. Finally it also showed that the dealers could go as low as 1.1% on finance rates (whereas they would only advertise 2.9%). What does all that mean? If I'd walked on to the dealer lot and paid $24,070 and taken out a 2.9% loan, they'd have known I was a total idiot. (Only idiots go and buy a new car "on impulse"). Between the documentation fees, the markup, the holdback and the manufacturer incentive, the dealer would have made $4,022 profit which is insane in this day and age. Over the life of the loan I would have paid $1200 in interest. Because I knew how much they were getting back from Honda, and because I knew the loan rates they could do, I actually walked out the door having paid $20,500 with a loan that only cost me $357 in interest. Honda corporate made $200 off me, and the dealer made zero off me but ultimately received $2,100 in profit from Honda.
See how it works? Research is absolutely the key, and if you get a stubborn dealer who thinks it's still the nineties and tries to bully you into paying stupid money with high pressure sales tactics, just walk out. There are plenty of other dealers who will work with you on a decent price and very often you'll find a dealer who appreciates that you've done your homework because it means a quick sale to you with very little messing about and they can then get on an roll another punter once you've left.
Of course the downside of that story is that the instant I turned the key in the ignition, the car depreciated to $14,350 but that's why next week's post is about used cars.


Unknown said...
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Unknown said...

Here is an interesting article on the topic of dealers. It's a bit old, but still very interesting to read :)