You have now followed our advice and got yourself a great deal on a car. Congratulations!
But don’t rest just yet as only half of the car buying game is over. A great deal
can turn into a terrible deal in a matter of minutes.
The Finance room at a dealership is where they make the highest percentage of their
profit. Why is that? Because once you make the decision to buy a car, you become
excited and emotionally attached to your purchase. That is a prime opportunity for
the dealership to sell you add-ons and packages. Do not fall for it! There are
a few things to keep in mind before you enter the finance room:
1) In many cases, the person you will sit with is not only the finance person but
a well trained salesperson who usually gets a nice incentive to sell you extras.
2) Just about everything you can buy in the finance room is greatly overpriced and
is something you can buy later and at a lower price, regardless of what they tell
3) Dealers also make money by setting up the loan for your purchase. You can lose
a lot of money here if you do not do your homework ahead of time. Fortunately, we
will tell you what that homework is!
The BEST way to explain to you this part of your car sale is to walk you through
an example. There are many variations of it but this one will cover a lot of what
you will see. We will break down the example and give you the knowledge you need.
Step 1-Have you have agreed on an out-the-door price?
Before you sign anything, have you seen the full purchase invoice with the “out the
door” price? If you followed our buying advice you will have already completed this
step. But have you seen everything in writing? If not, then do not go any further.
Make sure that your salesperson shows you this BEFORE you agree to move to another
room. Why is that? Because this is where they like to throw on “mandatory” packages
and charges. Some invoices will already have a typed-in option package which can
have many names: Appearance Package, Pro-Pack, Protection Package, Etching fee, advertising
fee, etc. These are all just fancy terms for overpriced options and dealers fees
that you do not need.
If you do want these, you can certainly get them cheaper later on. Or you can negotiate
them. Many salespeople will say that they cannot take these off the invoice and
they are mandatory. That is not true. You can insist they be removed, or tell the
salesperson you are not going to pay for them. If they still say they are mandatory,
you should consider canceling the deal and walking away. In many cases either they
will remove the options or more likely they will cross off the charge but keep them
on the car. As a last resort, you can negotiate a lower price. Regardless, you
MUST know your final “out-the-door” price before going into the finance room.
Step 2-How are you financing the car?
Did you know that dealers can make a nice profit by arranging the financing? There
is little to no profit if they give you a manufacturers promotional financing package,
such as 0%-1.9% low advertised rates. They can tell you that you do not qualify
for that rate but that they can get you CLOSE to it with another bank. When they
are able to get your loan to another bank, that is where they make money. There
is a set rate for the dealer, or a “cost” with that bank. Lets say it is 2%. The
dealer will get a percentage of your loans total interest charge above the 2%. So
obviously the higher the rate, the more the profit they get.
Here is what you do: Before you go in to buy the car, check rates in your local
area and consider getting pre-approved at your local bank. Use www.bankrate.com
to see what banks in your area are offering. You can get pre-approved for a rate
and an amount quickly. Some banks will give you a blank check up to a certain amount.
If you know the lowest rate you qualify outside of the dealer, you will be in a much
better position to bargain. You can then tell the dealer that they will need to
beat that rate in order to get your loan. You should consider the rate on the loan
just like you do the price of the car. It is negotiable, there is a true “cost”
to the dealer, and you can shop it around. Obviously the better your credit score
the more leverage you will have. If you go in without doing your homework, you are
at the mercy of the dealer. Again this is where you may need to threaten to cancel
the deal if you are getting pushed around.
Some numbers: Total interest on a $30,000 car, 5 year term at 3%=$2,344
Same loan at 1%=$768, 2%=$1,549, 4%=$3,150 5%=$3,968
So while you may think a 1% difference on the loan isn’t a big deal, it will cost
you about an extra $800 over the life of the loan.
Step 3-What extra add-ons do you want?
This is where a big sales pitch can come from the finance person. They may put a
sheet in front of you with a whole bunch of different packages, prices, etc, and
show you how they are “discounted”. They know you are excited about your purchase
and will want to protect it. The more you buy the more they say you will save. Don’t
fall for it! Here is some common ones:
Window/parts etching with theft registration: a waste of money, the car may already
be etched and have stickers on it anyway. Dealerships that offer this tend to have
all their cars done at once. So when you refuse this it will not be taken off of
course. Just say no to this and the fee for them to register it.
Dent/Window/Rim/Tire/Fabric/Carpet Protection packages: They sound good, if anything
happens they will repair or replace. But you would probably need at least 2 issues
in order to just break even on this. And there are a lot of exclusions and situations
where you aren’t covered. There is a huge profit on these, don’t go for it.
GAP Insurance: This is a big area of confusion for people, you came to the right
website! When you drive your car off the lot, it instantly depreciates, because
it is no longer “new”. In simple terms: A new car can be $30,000 but that same
car considered “used”, even with only a few hundred miles, could be worth $28,000
If you were to get in an accident and total that car, your insurance company may
pay you what they think a comparable car is (for example, $28K), not what you owe
on your loan ($30k). Call your insurance company to find out what would happen.
GAP insurance makes up the difference so that in most cases you would be covered
for the full amount ($30k). Odds are extremely low of you ever needing this, but
it does happen. You can insure yourself against a lot these days so this is another
Sometimes GAP insurance is already included in a car loan for free, especially on
a lease, so find that out as well. If it is not and you do want it, call your insurance
company and ask how much they charge for it. It could be very low $50-$75. Dealers
will try and charge you $400-$800 for this and through some 3rd party company as
opposed to your own. All that aside, lets say there is a $2,000 difference between
your loan and the cars value. Is it worth paying $500-$700 to insure that $2,000
for a very unlikely event? NO! And that difference shrinks over time as you pay
down your car. Is it worth $50-$75 from your insurance company? Possibly.
Lost key insurance: Just another form of insurance, if you can get the price down
low enough it may give you some sense of security, but most people don’t lose their
keys so this is a big profit maker. Or if you lose your key, you can get another
one for probably close to what you paid for this.
Maintenance plans: Might be worth it if you plan to take your car to the dealer anyway.
These can include oil changes and other maintenance items.
All-body paint protector: can be an actual clear wrap they put on the paint. You
can Google this but it is no recommended. If you did want it, someone else can do
it a much lower price.
Manufacturer accessories: As explained above, a lot of times they try to make these
mandatory as part of a protection package. You can always buy these later at a discounted
price. But if the price is reasonable (search online ahead of time, there are a
lot of sites out there), they are not a bad idea and can be built into your loan.
These can include all weather mats, trunk tray, wheel locks, mud guards, running
boards, etc. These are all a personal preference. Do not overpay!
Step 4-The warranty add-on
This is the single biggest item for a dealer to profit on. It is a key area that
you must do your homework ahead of time if you want a warranty. There are many websites,
consumer magazines and experts who say the warranty is not worth it. We go against
the grain on this one and disagree with them on some instances and we think the warranty
can be a good idea. Read our page here on why we think there is some value in getting
a warranty, especially if you plan to keep your car 5-7 years and then sell it: Tell
Me The Best Way to Maximize Car Value Page including a warranty
If you get a warranty, there are a few things to keep in mind:
1) It MUST be a warranty from the manufacturer. Just like the loans where dealers
get more money from 3rd party banks, they also get a lot more profit when selling
3rd party warranties. They will tell you over and over why their 3rd party warranty
is better, including fancy brochures and other advertising books. DO NOT FALL FOR
IT. It almost all cases, the manufacturer’s warranty is better, more convenient,
easier to use and covers more. We never recommend a 3rd party warranty. They can
always sell the manufacturer’s warranty, but many dealers do not like to, and won’t
even offer it to you unless you ask.
2) A warranty can have anywhere from a 100-500% markup for a dealer. The initial
price they may offer you could be something crazy like $2500-$3,500. You can buy
a manufacturers warranty from any dealer, and well after you buy the car, sometimes
up to when the original warranty expires. And depending on the brand, you can also
buy them online for a huge savings. After offering this crazy price, they will then
offer to save you money with a big discount. A discount on a complete rip-off is
just a slightly less rip-off, do not fall for it!
3) Your BEST strategy here is to get quotes online or from other dealers BEFORE you
buy your car. Take your best price in with you to the finance person. Tell them
they need to beat (or meet) the price and you will buy it now. Otherwise you will
just buy it from the other dealer. Remember also that if you buy it online from
an out of state dealer, there is usually no sales tax charged. Buying it from your
dealer means they have to charge tax, so keep that in mind. But including it in
your total loan is a nice option for the right price.
4) Many of these warranties include roadside assistance. Cars today usually come
with that during the initial warranty period. The extended warranty that has this
means you can cancel services such as AAA if you have it. Some insurance companies
now though offer roadside assistance free, although the benefit may not offer as
much as the warranty would.
Remember, everything is negotiable and just about everything can be bought later
when you have more time to think about it and are not so emotionally attached to
the situation. Do your homework, and feel free to email us with any questions you
have! When negotiating, dealers like to put numbers in front of you and say that
this is their “cost”. Do not believe that. If you leave without getting anything,
it does not look good on the finance person. So they will want to keep lowering
the price to get you to buy something. In the end, offer a very low price if you
really want something. If they say no, then just say you will do without it.