Randal Ankeney, studied at University of Colorado Law School (1999)
I’ve
had the privilege of working closely with a few dealerships, and have
been intimately involved with their processes and procedures. I’ve seen
what goes on “behind the desk” first hand and learned a lot about how to
negotiate a car sale. First, the job of the salesperson and the sales
manager are typically quite different - the salesperson’s job is to show
you the vehicle, explain the features, and make you fall in love with
it. The sales manager’s job is to structure the deal correctly and to
make sure the deal makes sense for both the customer and the store.
When
your salesperson is working on numbers to present to you, it’s a fairly
complex combination, and the actual sales price of the car you’re
buying is usually a very small part of the equation. Just as important
are: (i) your interest rate; (ii) the term of your loan; (iii) the
amount of money you’re putting as a down payment; (iv) the value of your
trade; and (v) what, if anything, you still owe on your trade-in.
So
to answer your question - a good salesperson will bring the “desk” (or
the sales manager) the information he or she needs to structure a deal.
It’s rarely as simple as just negotiating what the price is.
Here’s
why: if you have crappy credit, the dealership will often have to pay a
fee to a bank to get them to finance your loan. If you have excellent
credit, a bank or credit union will usually pay a “flat” or “spread”
where the dealership makes money for arranging the financing. This makes
a big difference on whether the dealer will negotiate the price of
their car, or if they’ll even be able to make a deal with you.
Credit
also makes a big difference on how much cash you have to pay as a down
payment. Excellent credit customers are given low interest rates, and
can borrow up to 120–125% of the retail book value of a car. That means a
customer might not need to pay any down payment. Bad credit customers
have higher interest rates, and can sometimes only borrow 70% of the
wholesale book value of a car (which is much lower than the retail
value). That can obviously result in a HUGE difference in how much of a
down payment you need to have to buy a car.
Credit
also makes a difference in the term of your loan. With excellent
credit, you can often get a loan that lasts for 72 or 84 months, keeping
your payment exceptionally low. With poor credit, you might be limited
to a 36 or 48 month term. When combined with a higher interest rate,
that mean you will likely have a much higher payment.
The
other thing your salespeople are working on is the value of your trade.
All dealers go to the same auctions and use the same “books” and market
reports when evaluating trades. However, sometimes dealerships will
“over-allow” on your trade-in. This means they give you more than the
true market value or ACV (actual cash value). But they have to account
for this properly, so when they build their deal, they’ll “show” one
number (maybe $10,000, for example) but assign an ACV of less (maybe
$8,000). That means they’re losing $2,000 on your trade-in. THEY WILL
ONLY DO THAT IF THEY’RE MAKING IT UP ON THE FRONT END. In other words,
if you’re getting significantly more for your trade at one dealership
than another, it’s probably because they’re making significantly more on
the car they're selling you.
How
much is owed on any trade is another important factor. Most people
trading in their cars haven’t completely paid those cars off yet. If you
owe less than is owed, your trade has equity and it’s just like putting
cash down toward your new vehicle. However, some people owe more than
their trade-in is worth. The dealership still has to pay off your car,
then add the negative equity of your trade into the new loan. Just like
your credit, negative equity can affect your interest rate, your term,
and how much money you need to put as a down payment.
So there’s actually quite a few numbers your salesperson might be running. I hope this answers your question!
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