A New Way to Buy Used Cars, Part 2
Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager
Editor’s Note: this is the second of a two part series on a new way to buy used cars. Part 1 explains the business model and Part 2 proves how the essential business practices still apply. For a step by step guide on “How to Buy a New or Used Car and Save Thousands”, click on this link.
Last week, we cited the appeal to some of buying used cars online through E-tailers like Carvana, DriveTime, and Vroom.com. A perceived major advantage to the dealership-o-phobic crowd who detest the traditional car buy/sell torture-tango is that one needs never to set foot in a dealership or talk to a salesperson – AND, the transaction is all haggle free!
This sigh of relief at short circuiting the process may come with a hidden cost if you also obtain financing with the E-tailer. Resist the urge to surrender to the tacit promise of haggle free financing for reasons we discussed in previous posts such as this one.
Auto loans
Most car buyers do not pay cash and therefore must finance their purchase with a loan. The auto dealers who offer loans do not finance vehicles from their own operating cash. Instead, they refer that service to financial institutions such as commercial banks, credit unions, and financial subsidiaries of the auto maker like Ford Motor Credit Company (FoMoCo) and General Motors Acceptance Company (GMAC). Every major auto manufacturer has a finance unit, many of which earn greater profits from financing than from selling cars!
In return, the lenders pay a commission or fee to the dealership for successful referrals. That fee is usually a percentage added onto the loan interest rate. The Finance and Insurance (F&I) specialist at the dealership is in fact another commission salesman. You are much better served to obtain your own bank financing, especially if you have good credit.
For buyers with poor credit histories and low FICO scores, that percentage is added to the loan rate. For buyers of excellent credit scores, the dealership will often quote the same lowest percentage interest rate as the bank or credit union. When that happens, ask the bank or credit union for a further discount to eliminate the “referral fee” they pay to the dealership. If you have a high enough credit score, the rate will be reduced.
Personal credit
The value of your personal credit score cannot be under stated. This recent story from the Dallas Morning News shows how a poor credit score can cost consumers twice as much for auto and home insurance rates as those with high credit scores. Poor credit scores also affect the rate lenders will offer. The importance of your credit score cannot be overstated.
For an independent look at how much it can cost to borrow money for a car purchase, visit this Loan Calculator site. For a $20,000 loan at 5% for five years, the total interest paid is $2,645.58. The same principal at 10% for five years equates to $5,496.47.
You can read more about car buying credit here.
Negotiation
A “no haggle” experience does not mean a “negotiation free” experience. The dealers may not deviate from the published price but it is up to the buyer to research the price. Good sources for this are sites such as Edmunds, Kelly Blue Book , and National Automobile Dealers Association , which are strongly recommended for all vehicle acquisition purposes.
You may negotiate for other terms such as warranty, upgrades, and special equipment and/or services. For help with negotiation skills, try this online course on the Science and Art of Negotiation.