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How to buy a car

I’ve recently been emailed and asked about how to negotiate for a used car, since I’ve done a reasonable amount of car-buying in my life.  I was writing an email in reply, when I decided to turn it into a blog post instead, since the tips could also be of help to others who might be interested in buying cars.

I prefer buying cars from dealers because it’s easier to negotiate hard with them. They’re salespeople, and negotiating is what they do.  At the end of the day, the dealer just wants to move stock, whereas private sellers often have emotional interests in the sale of their cars and how much they want for it.  Unless it’s an ‘urgent sale’, the private seller will quite happily wait for someone to come along and give them the money they want.  Negotiating with a private seller is not as easy as it is with car dealers.

Used car dealers sell stock that has been traded in on other cars.  They sell the cars that someone else has no longer wanted.  They’ve usually got the car extremely cheaply, and added their margins onto it in order to make their profit, and it means there is often a considerable amount of ‘room to move’ (eg. that margin means considerable discounts if you can negotiate for them).  They also want to try and get rid of that car as fast as they can, to make room for more cars that come in as trade-ins or cheap purchases elsewhere (eg. auctions, etc.).

Here’s what to do if you want to buy a used car from a dealer:

Take it for a test drive to find out if you really want it. That’s step #1.  If you don’t like ANYTHING about it, move on.  You have to LOVE the car before you actually spend money on it.  Of course, if you’re only spending $500 – $5,000 then ‘love’ doesn’t really play a part in it.  You’re likely buying it because you need it, and anything will do!  If you’re spending more than $5,000 though, then you really have to start liking what you’re buying.  The more money you’re willing to spend, the more emotional interest you are going to have in the car.

Understand what you’re buying the car for. Is it for transporting a family, or going out bush, or just casual driving around town, or maybe you want a sports car?  Knowing what you really want in a car, and why, is essential to finding the right car for you.  Only test drive the cars that will satisfy your needs.

Make sure there’s a recent mechanical inspection report. If not, ask if you can have one done for you. A reputable dealer will either have one available, or will get one done for you. If they don’t want to do this, walk away.  If the report shows repairs are needed or concerns are raised, walk away.If anything about the dealer or the cars is suspicious to you, walk away.  Try a different dealer. There’s a lot of dodgy car dealers out there, but there’s a lot of good ones too.  Avoid the ones that leave you suspicious, and seek out the ones that actually make you feel important.  To a reputable dealer, you ARE important.  Your happiness is important to their business.  If a dealer cares more about your money than they care about you, then avoid doing business with them.

If you can, have a car you can trade in. It can increase your negotiation power.  I once bought a car for $500 to drive around in until I got my ‘real’ car (a month later).  When it came time to talk about trade-ins, they asked me how much I wanted for mine.  I said $3,000.  They laughed and said it’s only worth $1,000.  I said “I know, but $3,000 is what I want.” They stopped laughing, and negotiated me down to $2,500 and went halves with me on insurance.

You don’t always need a car to trade in.  I helped a friend buy a used car, and she only had $10,000 to spend. We went test driving.  She liked a car that was reduced to $13,000 from $14,000 so I went to the salesman and said, “Ok, she likes the car and she’d be happy to take it for $10,000.” They laughed and said it’s already discounted as far as they can.  (Salesmen laugh a lot during negotations. Think nothing of it, they’re just trying to discourage you from succeeding with your negotiations.)  I said “Sure, but if you want to sell the car, we’ll take it for $10,000 today, cash.  Here’s my number – give me a call when you’ve made your decision. We will definitely take it for $10,000 and pay you today.” Then we walked away.  Half an hour later they called and said we can have it for that price.

Work out exactly how much you’re willing to spend on a car, and DO NOT go over that amount. Salesmen will try to talk you into buying more – don’t accept their sales talk.  All they want from you is your money.  They’re not your friend, and do not try to be their friend.  It will not get you any discounts.  I always offer 20-25% less than what they’re asking, and let them talk me up.  If they won’t give you the price you want to pay for the car you want, then walk away.  Make sure they have your phone number if they change their mind, but do not go above your budget.  There are a lot of cars out there. Keep looking.  You’ll find what you want.

Do not compromise. Compromising on what you want only satisfies the dealer, not you.  You’re spending a lot of money on a car, make sure you get exactly what you want.

Remember on-road costs like fees, taxes, stamp duty, insurance, registration, etc… These are essential costs that need to be factored into used car purchases where applicable, and your budget needs to take those into account.  Everything is negotiable, however, so don’t let that put you off.  I’ve purchased cars that have included extra registration and insurance ‘thrown in’ for free, at the dealer’s expense.

Do not be afraid to ask for what you want. The worst that can happen is that the dealer will say NO.  It’s not the end of the world.  If they don’t want to give it to you for the price you want to pay, WALK AWAY.  Don’t be afraid to walk away!  You’ll be amazed at how many dealers will come back to you and say “If we were to give you what you want, will you take the car at that price today?” YES!

And now for the new car. I’m not an expert on this, by any means, but there’s a few things to do when you’re looking for a new car.

Understand how much you’re willing to spend, including all fees, etc.

Do your research into what kind of new car will satisfy your needs.

Test drive the cars that fit what you’re looking for. Most new cars will be nice to drive, but that’s why you need to understand your needs, so that you can see if the car will fit them.  Visualise owning the car in a year’s time, and whether or not it will be doing everything for you that you want it to.  If you don’t think it will satisfy you, don’t get it. Keep looking for the car that will satisfy you.  Some new car dealers will only let you test drive a car by appointment only.  Do not be afraid to make appointments to test drive their cars.  You’re the buyer, you have all the power.  Booking an appointment shows you’re interested, and they will do what they can to make sure your experiences are satisfying.

Sales people will try to ‘close you’ by asking you questions that you have to say ‘yes’ to. Every ‘yes’ you say is one ‘yes’ closer to “So you’ll take the car now?” Buying a car has to be on your terms, not theirs.  Avoid answering the questions that are designed to lead you to buying the car.  Give them information they might need to know to help you out, but don’t say yes until you’re ready to sign on the dotted line.

Use a car broker. Tell them what you want, including the options you want on the car, and they’ll put out a ‘request for quote’ to all the new car dealers around the country.  These dealers will try to outbid each other to give you the lowest price available in order to move their stock. Not many people use brokers, but for the nominal fee they charge, the savings they can bring you are definitely worth it.

Research the best way to buy a new car for yourself. Ideally, pay cash for it.  If you can’t pay cash (not many can!) then you’ll need to organise finance.  Shop around for the best interest rate.Investigate whether or not you can lease a car.  This will be determined by your career or employment situation.

You might also be able to salary sacrifice your lease, depending on the laws and facilities within your country.  In Australia, you can salary sacrifice all kinds of things, including leased cars.

You can get a ‘novated lease’, which includes all running costs in the cost of the lease (like petrol, insurance, registration, maintenance, etc), and you can ‘salary sacrifice’ the payments. And don’t forget that you can get fleet discounts and you don’t pay GST on the value of the car, which reduces the price even further. What this means is that your lease payments are deducted from your pre-tax income, which then reduces your taxable income, resulting in you paying less tax.  To my calculations, the savings are usually equivalent to the approximate value of your tax rate.

How this works is like this.  (I’ll use the tax rate in Australia, because that’s what I’m familiar with, but make sure you do your research in your own country.)  If you earn $85k a year, you pay 38% tax which leaves you with about $64k.  Let’s say you lease a $40,000 car and you’re paying $17,000 a year in total for the lease (including all costs like petrol, insurance, etc).  This $17k comes out of your $85k before tax, leaving you with a taxable income of $68k.  You pay 30% tax on this, leaving you with $53k.So, in effect, the lease has only cost you ($64k – $53k =) $11k a year instead of $17k.  You’ve just made a saving of $6k a year, or 35%.  And this is a saving applying to all costs included in the lease (eg. petrol, insurance, etc).

Never use the finance provided by the car dealer. They have an incentive to get you to use their finance because they get a percentage of the interest you pay.  For this reason, dealer financing will always be more expensive than other financing.

I think that should do for now.  I guess above all, don’t rush in to buy a car.  Research, test drive as many as you want, and take your time to make this decision that’s going to affect you for the next few years.

And enjoy your car when you get it!

If you’re reading this and you have some tips of your own, please feel free to add them in the Comments section.  And if you think this is worth sharing, please don’t hesitate to share!

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