Do all the online car-buying research you want; your dealer's still got plenty of tricks up his sleeve.
1. "I buy my inventory for a lot less than you think."
Haggling over price has always been the most unbearable part of buying a car. But since the Internet came along, things have become a lot easier for consumers: Car-buying sites like CarsDirect.com and Greenlight.com will tell you any car's invoice, or wholesale, price; the consumer information Web site Edmunds.com even lists the invoice price of options (though critics say Internet pricing is sometimes out of date). At last, we can know what dealers really pay for vehicles. Or so we think.
In reality, a practice called "holdback" allows dealers to pay 1% to 3% below invoice for vehicles. The dealer buys the car from the manufacturer at the invoice price. Then after the car is sold, the manufacturer reimburses the dealer for the cost of keeping it in inventory for 90 days. When a dealer sells the car faster than that, part of the holdback payment becomes pure profit, even if the car is sold at invoice price. "You'll never get holdback money back from a dealer," says Burke Leon, owner of car-buying service BL Auto Enterprises and author of "The Insider's Guide to Buying a New or Used Car," but just knowing about it can help when a dealer whines that he can't meet your price.
2. "Our lenders aren't as tough as I make them seem."
Car dealers' reputations have been so bad for so long, some will do anything to pass the buck regarding pricing and sales tactics. One common trick? Blame everything on the lender. For example, some dealers who don't want to give you the price you're asking for will say that the leasing company requires all deals to be based on the sticker price, says Mark Eskeldson, a consumer advocate who runs the watchdog Web site CarInfo.com and wrote "What Car Dealers Don't Want You to Know." This probably isn't the case, since lenders can't control a car's price.
Likewise, some dealers will try to sell you an extended warranty, claiming the lender requires it. Don't be fooled, warns the Federal Trade Commission in its online FTC Facts for Consumers report on auto-service contracts, adding that you should contact the lender to check this out yourself. "I don't think you'll find many mainstream lenders that require that," says Art Spinella, vice president of CNW, an auto-industry market research firm.
3. "State lawmakers are in my back pocket."
Since auto dealers deliver huge sums in sales taxes to state coffers, they have powerful local and state lobbies and have succeeded in pushing through a lot of legislation to protect their interests. One of their biggest targets? Not surprisingly, direct sales over the Internet.
Most states' franchise laws make it illegal to sell cars in a particular state without a bricks-and-mortar dealership there, and the dealer lobby has been particularly effective at suppressing auto makers' attempts to sell over the Web. In 1998 Ford began a program in which car buyers could choose from used Fords online at no-haggle prices, then complete the purchase at a local dealership. A year later, Texas regulators filed a complaint against Ford for acting as a dealer without a franchisee's license. Ford sued, claiming that Texas law favors local dealerships, discriminating against interstate commerce. A district judge ruled against it.
4. "The bait-and-switch is alive and well."
You walk onto the car lot, your heart set on a certain model, but immediately the dealer starts ticking off all the reasons why that car simply isn't good enough for you. Before you know it, you've signed on for a car that's bigger and better and, of course, more expensive.
This old trick has a new twist, thanks to the Internet. These days car shoppers are showing up armed with all sorts of information they've gotten online, from the invoice price of the car right down to the cost of heated seats. The dealer's best defense is steering you into unfamiliar territory, says Phil Reed, a car-buying consultant at Edmunds.com.
That's exactly what happened to Christine Kemp, an Orange, Calif., junior high school teacher who got sucked into leasing a $40,690 Toyota 4Runner Limited last year, despite the fact that she'd been researching lower-priced models for over a year. At a California Toyota dealership that had advertised a 4Runner sale, the salesman immediately discouraged her from looking at the base model. "You don't want that car," Kemp says the dealer told her. "Its engine isn't powerful enough for towing" — a feature Kemp had said was important, since she was planning to buy Jet Skis. The dealer steered Kemp toward the Limited for a test-drive, talking up its perks. But in fact, even the four-cylinder base model is strong enough to tow Jet Skis, according to Toyota.
5. "I'll give you a great price — and then lowball your trade-in..."
If you're trading in an old car, explains Leon, the dealer's greatest potential for profit is in giving you a low value on your trade-in. How come? Most people have no idea what their car is worth, and besides, you're less likely to play hardball on this point when that new car is much more interesting. "They get you involved in loving the new car," says Leon. "And your old car seems kind of punk in comparison, so they 'do you a favor' and get it off your hands." For this reason, Leon recommends always settling on a trade-in price before even considering a new or used car, even though the conventional wisdom is to do it the other way around.
Last year, Reed went undercover as a salesman in two Los Angeles-area dealerships and then wrote about it for Edmunds.com. During those three months, he saw firsthand how much money can be made in used-car departments. One day, he says, he watched a man drive into the dealership's parking lot, scurry over to the used cars and then rush back to his car. "He said he had just traded in his Chevy Cavalier here a week ago," says Reed, "and wanted to know what they were selling it for." The answer? While the customer had gotten $5,000 for the car, its asking price on the lot was $12,000.
6. "...and you won't know, since the Blue Book favors me."
To help prevent a trade-in disaster, some consumers try to learn their old car's worth beforehand by looking at the Kelley Blue Book, long held as the gold standard for used-car prices. But both Leon and Spinella warn that those numbers aren't gospel. Here's why: Kelley Blue Book publishes two different guides, one for dealers, which prints wholesale prices, and one for consumers, which has retail prices (and is therefore of little help in determining what your car is worth to the dealer). Plus, at Kelley's Web site, you can look up trade-in figures that, even for a car in excellent shape, are below the dealer's lowest figure (the wholesale price). So even if the dealer gives you the best Blue Book value, there's a built-in profit if he turns around and sells the car for wholesale.
"Kelley Blue Book is an industry publication, and its loyalties are less to consumers than to dealers," says Leon. Stephen Henson, vice president of marketing and business development at Kelley Blue Book, argues that the spread between trade-in and wholesale values is accounted for by any expenses the dealer incurs in readying the car for sale. Nonetheless, the best way to estimate your car's value, says Spinella, is to look at newspaper classifieds to see what vehicles similar to yours are going for. (Just remember you won't get that full amount, since it's retail.)
7. "The car you're buying was totaled last month."
When Annette Sloan bought a used 1993 Chevy Astro from Morse Chevrolet in Overland Park, Kan., she noticed that the interior trim was cracked in a few spots. But she had no idea what an examination by an auto-body expert would reveal: The van had once been wrecked. In fact, according to the mechanic, it was actually two separate vans welded together, with a seam running beneath the carpeting. When Sloan returned to the dealership, she was shown a document with her signature on it (which she says she doesn't remember signing) acknowledging that "Morse Chevrolet believes the van has had previous paint and metal work." "That's like saying someone who stepped on a land mine has a flesh wound," says her attorney, Bernard Brown. Sloan is suing Morse Chevrolet for fraud. Morse Chevrolet declined to comment, since the case is pending.
While Sloan's is an extreme case, such problems are far from rare in the used-car market. The advocacy group Consumers for Auto Reliability and Safety estimates that one in nine used cars sold has hidden damage, including more than a million cars each year that are totaled, rebuilt and often sold as if free of damage. The best way to avoid being taken is to have any used car that you're considering buying inspected by an independent mechanic (which can cost between $60 and $100).
How do dealers get away with it? Titling laws vary enough from state to state that a totaled car can be "cleansed" of its salvage brand by being retitled in a new state. Such cars are often shuffled around the country through auctions, and while the final dealer may make a legal claim that he didn't know about any damage, Brown says that it's a case of see-no-evil. "Dealers know what they're buying at these auctions," he says.
8. "Your loan puts cash in my pocket."
Ever wonder why that dealer is so keen on finding you an auto loan, even after you say you can pay cash? He might be sniffing out an extra source of profit. When dealers set up loans, they commonly take the rate offered by the lender, then tack up to two percentage points on top. All or part of that so-called dealer markup is given by the lender to the dealer as a kickback. And dealers aren't required by law to disclose the practice.
The National Automobile Dealers Association, or NADA, says that dealers are entitled to a markup for arranging financing. "Because dealers buy credit in bulk and provide the retail infrastructure for serving individual customers, they get lower rates than a consumer would if dealing directly with a bank," says a NADA spokesman in a written statement.
The problem isn't so much that the markup exists, says attorney Aurora Dawn Harris, but that it's not disclosed. "Dealers say, 'We'll get you the best deal we can' — and pretend that they're providing you a free service. And sometimes they're making most of their profit on it."
9. "Our 'new and improved' customer service is a farce."
After years of having the worst of all possible raps, car dealers are now insisting that they've cleaned up their act. In a speech last year, NADA Chairman Harold Wells proudly cited a 1998 Gallup poll showing that 76% of Americans who bought cars were satisfied with their experience.
Too bad he left out the rest of the picture. For one, franchised auto dealers still top the Better Business Bureau's list of businesses receiving the most complaints — by a long shot. In 1999 auto dealers were the source of 17,686 complaints compared with 9,538 complaints for the No. 2 business, computer dealers. And some of the car manufacturers' attempts to inspire better customer service among dealers have turned out to be a joke. Take, for example, the Customer Satisfaction Index, a set of scores that manufacturers give dealers based on customer surveys. Since car makers have begun looking at the numbers closely, dealers have become hip to ways to persuade customers to dole out better scores — say, by offering a disgruntled customer a free tank of gas before he answers the survey.
Reed's advice: Before you go to the dealership, call. If the dealership refuses to answer any questions about prices, urging you instead to "come on down to the lot for a deal," move on.
10. "A lease is a great deal...for me."
You may have noticed that many dealers would rather you lease than buy. The reason is simple: Leases generally bring dealerships more profit than sales, even for the exact same car. Why? Well, consumers tend to know less about leasing than buying. So, while 80% of car buyers haggle over the car's purchase price, only 10% of leasing customers do, according to Spinella. Plus, lease customers tend to choose more expensive cars.
In the past few years, consumers often got better leases than they realized, since leasing companies overestimated many cars' residual values, yielding lower monthly payments. After huge losses, the banks have wised up, meaning you'll now pay more.
So be extra wary if your dealer does whatever possible to steer you into a lease. One common tactic, says Eskeldson, is to give customers an "apples-to-oranges" chart comparing payments on a lease vs. a loan — quoting a low interest rate on the lease and a high one on the sale. Says Eskeldson, "If the consumer doesn't know how to calculate his own lease payment, he is ripe for a rip-off."
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