Smart Buying Essentials

The Golden Rule

There is one golden rule when it comes to negotiating for a new car: Buying a new car, financing it, and trading in your old car may all occur at the same time, but these are three separate transactions and should be negotiated separately.

Imagine this scenario. A salesman is negotiating with a customer about the price of a new car. Negotiations have come to a standstill because the customer says he can not afford a penny more than $13,000 for a particular car that is priced at $13,200. The dialogue might sound like this:

"What are your current monthly payments?" asks the salesman.

"$275 a month," the customer replies, "and I only have two payments left."

"How about this," says the salesman, "if I can get you into that new car for $275 a month, have we got a deal?"

"That sounds reasonable," answers the customer.

The salesman smiles, "Do you want to trade your car in? I could probably get your monthly payments even lower."

"Well, sure. I'll trade my car in if you can give me a good deal," says the customer.

The salesman checks out the customer's car and says, "How about this, I will buy out the balance of your loan, give you a $2,000 check on top of that to use as a down payment for the new car, and then I'll finance the rest for 60 months at a monthly payment of only $250 - $25 lower than you're currently paying. Now, doesn't that sound terrific?"

Unfortunately, it isn't so terrific. In fact, the customer is going to pay more for his new car than he initially wanted to. The salesman has confused him. $250 a month has the illusion of a good deal because it is less than the customer's current payments. However, upon closer examination we can see what is really happening.

First of all, the salesman offered the customer $2,000 in addition to "buying out" his current loan on the old car. That means the customer receives a total value of $2,550 for his car. $550 will be paid to the title holder of the old car (for the last two payments) and the $2,000 will be applied as a down payment for the new car. If we then calculate the present value of $250 dollars per month over a 60-month term at 11% interest, it works out to be about $11,600. Combining all this together, we find that the customer has agreed to pay the equivalent of $13,600 for his car: $2,000 from the trade-in and $11,600 from the loan. This is $600 more than the customer originally said he'd pay. To add insult to injury, the customer is without a doubt going to get less on his trade-in than if he sells the car himself.

Even though this example is contrived, situations like this happen every day. Salespeople are experts at this tactic and employ it every chance they get. Even if you know all your facts, it is still easy to get confused. It can be difficult enough trying to negotiate a single transaction with a salesman, but when you try to do all three at once, you are stacking the deck in his favor. Don't even try; keep these three transactions separate.