Drive Virtually Free: Smart Used Car Buying Advice

Surely you’ve heard about the “Cash for Clunkers” program which subsidizes the purchase of new cars for those who get rid of their old, polluting gas guzzlers.  I won’t go into the details, but basically, if you purchase a new car that gets a certain number of miles per gallon more than your current car, you are entitled to a voucher worth $3,500 or $4,500, depending on the amount that your car’s fuel economy has improved.  This is basically another form of stimulus from the government to increase new car sales.

Smart is currently advertising a deal with $99/mo payments on a purchase of a Smart ForTwo for 36 months when you get rid of a vehicle which qualifies for the $4,500 “Cash for Clunkers” voucher.  Sounds great, right?  Well, wait until you read the fine print: there is a $6,667 balloon payment due at the end of the loan!

Subject to credit approval by the lender and the terms and requirements of the CARS Program and associated regulations promulgated by the United States Department of Transportation. $99.00 monthly payment based on customer trade-in of an eligible vehicle qualifying for the CARS $4,500 voucher level, a $70.57 combined contribution by Daimler Financial Services and smart USA, and a 36-month balloon loan with $0 cash due at signing and a final balloon payment of $6,667.50 at the end of the loan term and a $ 13,335 MSRP which includes the destination charge and excludes tax, title and dealer fees. 5.9% APR financing for 35 months at $11.30 per month, per $1,000 financed, plus the final balloon payment.

Now, to be fair, if you are able to use this incentive, financially it is not a bad deal at all for a new car (only because of the $4,500 voucher).  My gripe with this is not really about the cost, but about the way that it is advertised.  The $99/mo payments are advertised very prominently to get people in the door, and only when you’re about to sign off on the paperwork so that you can drive home will you find out about the big balloon payment.

This is, of course, similar to how we got into the “credit crunch” that we’re in right now – people getting lured in by initially low payments and getting hit with something they can’t afford a few years down the road in the form of higher interest rates.  Hopefully the finance people at Smart will keep this in mind and properly qualify their buyers.

The moral of the story is this: never, ever make a decision to buy based on monthly payments alone.  Always consider the entire deal – the sum total of the payments.  Never negotiate on monthly payments either, because car dealers will try and put you into more expensive cars with longer loans which still end up with lower monthly payments.  Or, they may try to give you a low monthly payment as long as you give them a big down payment, which still does not end up in a good deal.  Worse yet, they may stick you with a lease which has low payments, but costs you more in the overall scheme of things.

Going beyond just the terms of the loan, before you purchase a car, always focus on the total cost of ownership.  Make sure you have at least looked at what the depreciation, fuel economy, insurance, repairs, maintenance and interest are going to cost you, and that you can actually afford it.  Old supercars, for example, can be had for $20,000 to $30,000, but the fuel, maintenance and insurance costs will be a killer if you aren’t expecting them.  Don’t be caught off-guard.

It may go against your instincts since appearing powerful seems like the more effective way to negotiate, but having the final say in a decision actually weakens your bargaining position.

Car salesmen know this – if you’ve ever been haggling at a car dealership, you’ve seen them do it in every single negotiation.

Here’s the scene: After 30 minutes to an hour of haggling, the sheet of paper with four squares on it is covered in random numbers and “calculations.”

Salesman: Mr. Johnson, if I sell this car for a dollar under $25,224.43, I’ll get fired!

Customer: I truly can’t afford more than $24,000 for this car.  That’s the best offer I can make.

Salesman: Well, I’ll see if I can convince my manager to go for it.  He’s not going to like it, but I’ll see what I can do.

[Salesman leaves, to go "plead with his manager" (often, the salesman just sits in the office and the manager doesn't talk to him at all, just continues working and ignores him)]

10 minutes later…

[Salesman comes running back, panting from exhaustion]

Salesman: Well, I talked to my manager.  He says that $24,000 is $1,000 under invoice, so we can’t possibly go that low…

…And the negotiation continues like this for another 2-5 hours.

The point is that the dealership has intentionally created a situation in which the salesman is not the final decision-maker.  He has to get everything approved by his manager.  By doing this, he is able to pretend that he’s really on your side (good guy/bad guy), trying to help you out and convince his “crazy manager” to “give a break to a good person like yourself, just this once.”  Of course he’s not on your side – he’s working for the dealership, trying to earn a commission!  Using this tactic is a way to leverage the negotiation more in his favor, putting pressure on you without being confrontational.

How can you use this in car buying or selling?  After all, you don’t have a sales manager who needs to approve your decisions, it’s just you.  I’m sure some of you will cry out that this is unethical, but in order to use this very common negotiation tactic yourself, you will have to make it appear that you are not the final decision-maker, even if you are.

If you’re buying a car, you can use your significant other as the higher authority: “I think I can give you $14,500 for it, but I need to check with my wife first.  She would kill me if I didn’t check with her first.”

If you’re selling a car, you can potentially do the same thing – say that you are helping your friend sell a car, or that you need to just check with your significant other before letting the car go for that price.

Also, you should be aware of other people using this negotiation tactic against you and try to neutralize it as soon as possible by establishing that they are the final decision-maker early on.  Car salespeople will do this by asking you something like, “If I can find you the car that you’re looking for, is there any reason why you can’t buy today?”

I’ll leave you with a scene from the movie Boiler Room, which is about extremely aggressive stock brokers selling shares of fictional companies.  The main character, played by Giovanni Ribisi, is trying to remove a potential client’s higher authority to buy stock:

“I need to talk to my wife first, and then I’ll call you right back.”

“No, you don’t need to do that Harry…”

“I need to talk to her first.”

“Tell me, Harry, you’re at work right now, aren’t you?  What do you do for a living?”

“I’m a purchasing manager at a gourmet foods company.”

“So does part of your job involve making decisions?”

“Of course.”

“So, when you’re making a lot of these decisions, do you call your wife and ask her what you should do?”

“Of course not, but that’s a little bit different…”

I’m not advocating being a slimy salesperson, but you should always be aware of when the other party is using a higher authority to negotiate with you and try to remove that excuse before they get a chance to use it.

When most people think of negotiation – particularly over the price of a car – I’d venture a guess that they envision a hard-fought battle with their opponent.  The best negotiators know that learning to compromise and make the deal more of a win-win situation is what negotiation is all about.

If you can give something to the other side which you don’t care about, or were going to do anyway, you can ask for a concession from the other party to improve your deal.  An example of this when negotiating with a private seller would be that if they are in need of a quick sale, you can bring payment immediately in the form of a cashier’s check or money order.  In exchange for making the deal happen quickly, you might ask for a reduction in the price or that they perform a major service before you take delivery of the car.

If the seller needs a few days to find a new car before he sells his current car, accommodating him in that respect would also be grounds for a concession.

Roger Dawson, in his book Secrets of Power Negotiating, cautions that taking a confrontational or argumentative position at the outset of negotiations can be disastrous.  His advice is to use the widely known “Feel, Felt, Found” pattern in which you would say something to the effect of “I understand exactly how you feel about that.  Many other people have felt exactly that same way as you do right now.  But you know what we have always found?  When we take a closer look at it, we have always found that…”

If you ask for the seller, for instance, if he would be able to pay for a warranty extension since he is the original owner and he reacts by telling you that it is usually the responsibility of the buyer since he will be benefiting from it, you might respond with:

“I understand how you feel about that.  Many other sellers have felt the same way. But you know what I have always found?  In today’s market, owning used car without an extended warranty isn’t worth the risk, and having that warranty will really help to put my mind at ease.”

By defusing the situation with this dialogue, you can help to avoid negative feelings which will lead to a lack of concessions from either party, which hurts both of you.  A side benefit is, of course, that it’s much more pleasant to go through a negotiation this way rather than the normal high-pressure win-lose situation that typically transpires.