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5 Big Car Buying Mistakes

Last Saturday I was out to dinner at one of those Japanese Hibachi places. Over a scorpion bowl, I was talking to a friend who works as a sales manager at a luxury car dealership. He was mulling over getting out of the industry because—as you might imagine—car shoppers aren’t the nicest people to deal with every day.

“Customers logon to Kelly Blue Book once and think they know everything about the car business,” he said. “The minute they walk in the door they hate us just because we’re trying to make a profit.”

Regardless of how ruthlessly you’ve ever negotiated with a car dealership, you have to admit it’s odd that we’re so loathe to pay car dealerships a profit. After all, we will happily pay a department store a markup on clothes and realtors a commission when we buy a home.

Yet last week, I asked my focus group about their experiences buying cars, including their biggest fears when they think about the process. Out of 50+ responses, the majority shared a singular theme. Here’s a sample:

  • “Getting ripped off on price.”
  • “Overpaying because I am a woman and the salesman would take advantage of that. I am not good at negotiating.”
  • “I didn’t want to get screwed over on the price.”
  • “Getting screwed.”
  • “Getting ripped off.”
  • “Getting ripped off by a salesman. Paying too much.”
  • “That the salesman would try to intimidate me into paying too much or push me into something I didn’t want.”

This isn’t just what my friend is up against; it’s how we all set out to buy a car…with our guard up and feathers out. And because of that, we frequently make several mistakes in the car buying process. 

1. We overfocus on price.

Look at the words people used when talking about their fears of car buying. Not only do they mention “getting ripped off”, the say “getting ripped off on price” and “paying too much” for the car.

The price we pay for a car is one element of the transaction of buying a new car, and arguably the largest. When we buy a car, we ask ourselves: Did I get a good deal? (for the specific year, make and model we purchased). In other words, we want to know if we paid more or less than the average person for that particular car. Among identically-equipped new cars, it’s possible to find this out, and indeed sites like Edmund’s try. Of course, due to mileage and condition factors, no two used cars are identical, so this is a much harder game.

More important than price is whether you’re getting the right car for your needs and not buying more car than you can afford. (So if you have to finance the car, should you be going for the leather?)

Or, should you consider a recent-year used car instead of a brand new model? It will likely save you far more than you can haggle off a new car sticker price. If you “have to have” a new car, I get it; go for it. But if you’re on the fence, remember: Everybody drives a used car!

2. We ignore financing terms.

This makes no sense: Fighting tooth and nail with a car salesman for three hours to get an extra $500 off the price, and then financing the car with no money down at 6.0% for four years at a cost of over $2,000.

But we do this all the time because in our heads, the $500 we saved now on the sticker price is tangible while the $2,000 we’re paying to finance the car isn’t. When I asked my focus group about any regrets they had about their last car buying experience, there was another common thread—the loans!

  • “We should’ve put more of a down payment.”
  • “The loan.”
  • “I didn’t shop around for my loan rate.”
  • “My only major regret is that I let them sucker me with an 11% interest rate out of the gate…”

The wrong loan can quickly cost more than savings you’ll get negotiating on price. Here’s an example:

Looking at Edmunds.com pricing on a 2012 Honda Civic LX Sedan, the difference in MSRP ($17,855) and Dealer Invoice ($16,452 — what the dealership pays for the car) is $1,402. Nothing to scoff at, and a smart buyer will attempt to dicker the dealer down from the MSRP or up from the invoice.

But if the buyer then finances the car for 48 months at 6.0%, he’ll pay $2,094 in total interest over the four years. I suspect fewer buyers negotiate interest rates, but if this buyer could get a loan at 4% instead of 6%, he’d save $716 in interest. And if he could pay off the car at 4.0% in three years instead of four, he’d save another $344. Adding a $1,500 down payment would drop the total interest to $934—a savings of over $1,000 off the original financing quote.

Unless you’re looking at 0% or other low incentivized interest rates, it’s best to buy a car with cash. If you have to borrow, my advice is this: Do so conservatively. Obviously get the best rate you can. Stick with loans no longer than 36 months. And try to put 20% down.

3. We don’t value our time.

The average American spends 10 hours shopping for a car, compared to only five hours shopping for a home loan. Some shoppers become so obsessed with getting the “best deal” that they’re willing to spend weeks car shopping. But at what price?

Although everybody values time differently, let’s say a free hour is worth $15 to you (if you earn a lot, it could obviously be much more).

Spend 10 hours buying a car and you’ve invested $150 worth of your time.

Spend double that and you’ve invested $300.

The more you value your time, the more the cost of additional hours spent car shopping, and the bigger a chunk that takes out of your potential savings.

4. We underestimate total cost of ownership.

When you decide to buy a new car, your Emotional Brain is already sold—it can picture itself behind the wheel and it loves it!

Your Practical Brain, however, is like: “Whoa, not so fast! Is this a good deal? Is it reliable? What’s the mileage? What’s the resale value?”

And then you try to calculate those things to justify the purchase. You may, for example, tell yourself you’ll keep the car for 10 years to justify the depreciation.

But that estimate (and similar estimates of the car’s future value) may be overly optimistic thanks to something psychologists call the optimism bias. Everybody who marries thinks they’ll stay married forever even though sociologists predict that between 40 and 50 percent of marriages will end in divorce.

And according to the USDOT’s 2009 National Highway Travel Study, the average length of car ownership is 59 months—just shy of five years. So just remember that the next time you think you’ll keep your next one for 10.

You may also overestimate the gas you’ll save and underestimate ongoing costs like maintenance, insurance, and excise taxes. Consumer Reports attempts to put some numbers on true cost of vehicle ownership. Accurate or not, you can at least see how different models compare.

5. We set our expectations too high.

Psychologist Barry Schwartz shows that the abundance of choice we have in affluent society wrecks havoc on our happiness. With so many choices, we feel constant pressure to choose perfectly, making us anxious about the choice and depressed when we choose poorly.

If the product we choose doesn’t live up to our expectations, we’re disappointed. We’re rarely, if ever, pleasantly surprised. Schwartz jokes that the secret to happiness is lowering our expectations. Only it’s not entirely a joke.

This rings true for car buying.

Given cars’ high price tags, the infrequency in which we buy them, and the adversarial nature of the buying process, we stress out about getting the perfect car at the perfect price. Then, regardless of how well we do, we drive off the lot with this lingering suspicion we’ve been screwed.

If you do your homework, open your eyes to the true costs of owning a car, and avoid making expensive mistakes (like ignoring the financing terms), you can get a good car at a good price. And that’s the goal.

Recap

Buying a car doesn’t have to be a miserable experience. Spend most of your time choosing a car that you can afford, meets your needs, and you will be happy to drive. Yes, get online pricing and competing dealer quotes from a site like Edmund’s, but don’t kill yourself fighting with the dealership unless you like that sort of thing. And borrow smartly: Get the best interest rate you can and put money down. And remember: once you have the car compare insurance quotes from different companies to make sure you’re paying as little as possible over the long-run.

Soon I’ll post more about auto financing (when to do it, how to get the best deal, how to refinance a bad loan, etc.) I’m also working on a post on negotiating skills (even for shy people). I’m shy and it has taken practice to be able to negotiate at all. I’ve had some successes, which I’ll share in the post, but still have some work to do, so I’ll show you what I’m doing and how you can practice negotiating (for a new car, for a raise, for anything). Talk soon.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I read that dealerships receive kickbacks for selling interest rates to you from banks they work with so the higher interest rate they get you for, the more money they (and the bank) make. Is that accurate? I also read that when they ask you what you want your monthly payment to be, they adjust the car’s price and interest rate so that it comes to a certain amount you’re willing to pay. Is that accurate as well?

    I went with a friend of mine who was buying a car and he was trying to negotiate down the price. They gave him the price he asked for, but at a high interest rate. When he tried to haggle the interest rate, they said sure, but he had to buy gap insurance and roll it into his loan, making the total price higher. I told him not to roll the gap insurance into the loan since he had a decent down payment and made no sense to increase his loan from buying gap insurance, which he would only need if he bought it!

    What are your thoughts?

    • Tom-

      I just purchased my first car in October and did a bazillion hours of research first (so much for including my time as money in the cost of the car right David?) and found that haggling on BOTTOMLINE PRICE was the best way to go for me. I had already applied to several banks and knew I would be getting a very low interest rate, so I made sure to set my car budget according to those interest rates over my five year loan term. The dealer tried over and over for me to tell him what monthly payment I wanted but I told him it didn’t matter, that I was focused more on out-the-door price. Instead of being able to move the interest rate and total paid to reach a specified monthly payment, the dealer had to get to a total number I was comfortable paying off.

      Car salesmen (and women) are people too- and David’s right, the customer can be a bear to deal with and can set their expecatations too high. I don’t know anyone who has haggled with the people at a department store over clothes though. Buying a car involves a little cat and mouse game- so my advice is to keep your financial cards close, but be straight forward. If you’re upfront about what price you’re willing to pay, you’ll save everybody time and effort.

  2. thank you for your great timing for this article! I am considering purchasing a car for the first time this year. However I am still debating whether to wait for dealership’s end of the year “specials” or just look for low or 0% financing if I can pay most of it in cash.

    All your articles have been a great help!

  3. The fact that dealers don’t put firm prices on cars, and you know you’re supposed to haggle, just makes you feel like they are trying to rip you off. As Americans, most of us aren’t used to haggling over prices. I have tried to work with dealers a few times, once worked out well, but the other times convinced me I don’t like working with dealers. As the buyer of three used cars, I think the biggest mistake car buyers make is thinking they have to get a new car in order to be safe. Financially, cars lose a ton of their value in the first few years. I knew one lady who crashed her car when it was only ~2 years old, and she ended up still owing thousands on the loan for the car she no longer had, because what she owed was more than the car was worth, and thus more than what the insurance company paid her (however, if you have the right insurance I think they can protect you against this). I bought two of my cars from private people. My first car had a salvage title – it was amazingly cheap, and performed excellently in a freeway accident a few years later (very little damage and no injuries). On that car, after three years of use, my insurance company valued my car at $300 less than I paid for it! I have had the same or less problems with my used cars than people I know who bought brand new cars. When you get a new car you have this expectation everything will work great, so it is emotionally harder when something goes wrong. Part of me wants to buy a new car, since I can afford it, but I really don’t like the idea of having to haggle with the dealer. I feel like if they wanted me to buy a car from them, they would make it known, simple and easy, not unknown, complex, and stressful.

  4. Loved it, will keep this in mind when buying my next car/motorcycle ;)

  5. Although this article is well written with some valid points, I still have to disagree. I don’t know if you’re somewhat blinded by the gentleness and relation with your friend, but don’t compare a car purchase and profit as the same as clothing. Retail stores don’t sell a shirt to one customer for $20 and then another for $40. If it was just profit for car dealers, then they’d mark the car with a price, with markup, and sell it. Period.

    Consumers give dealers a bad wrap because many are straight liars, saying and doing whatever is needed to make a sale. I recall when I was a kid standing around a dealership as my mother was considering a purchase. The salesperson pushed and shoved for her to get a lease, a balloon lease, saying that it was a cheaper deal and that in the long run, it was a better option for purchasing a new vehicle. A balloon lease.. think about it.

    You mention the value of time and then speak of ignoring financing terms. Well, the consumer HAS to do one or the other, if not both. If I don’t spend a great amount of time figuring out how to correctly finance, then the liar at the dealership is just going to do whatever to max their profit, not just make a profit, but MAX it. I personally don’t believe that traditional spare time should be valued the same as a wage. No one is saying take off work to research your next car. But if it is valued that way, then shame on coupon clippers, shame on people who change their own oil, shame on people who clean their own house.

    • Best comment on here. Agree 100 percent with this comment. The author of this article is clearly blinded by their friendship. Car dealers try to maximize profit, often times by using confusing sales tactics many of us would call underhanded. Getting a straight answer from a sales person when shopping for a car is nearly impossible. They bring the reputation on themselves. I’m very suprised that this article made it on this blog, sounds like we’re being told to do less research on a purchase, not negotiate price as hard, and to just except that the dealership should be able to maximize their profit off of us without a concerted effort on our part to talk the price down. I agree the terms of the loan are important, but they are a separate issue from the price of the car. Deal only with the car price, then only value of your trade in, and then only the loan terms. Do not allow them to be discussed together in some confusing shell game.

      All car salesman hate customers that read up about buying a car and think we’re experts. Of course they’d hate that. But tough for them, I’m certainly not just doing what they want without thinking for myself. I once had a car salesman refuse to give me the price of a car till I test drove it. When I told him I didn’t want to test drive it unless I could afford it he started going off on some rant about how customers think they know the best way to buy a car, but really his way was better and I should just do what he says. I left, and when he tried forcing his card into my hand when I was walking out the door I let it fall to the ground.

      I also agree that personal time is not the same as time at work. If I evaluated everything that way I would barely do anything around the house, and I’d be near broke as well paying everybody else to do things I could easily do. I really don’t understand this being prescribed in this blog…

    • David Weliver says:

      Thank you for the comments.

      I used the conversation with my friend as a lead to this piece, but I think you and some others misunderstand me; I’m NOT saying that we should feel bad for car dealers or simply walk in and just sign on the dotted line without homework and appropriate negotiation. I’m asking everybody to put this in perspective. If a salesperson shits on you—withholding price until you test drive, for example—run, don’t walk, off the lot, but not everybody in the business is like that.

      Everyone should understand how the business works and negotiate a fair deal, but it’s silly to blow a gasket because dealers are trying to sell stuff. It is, after all, a business.

      As for the value of time, to me personal time is far MORE valuable than working time. I can always earn more money, but I only have so much time on this planet. Does that mean I have servants to do everything or never clip a coupon? Of course not. But I draw the line on how much time I’ll put into things I don’t necessarily enjoy doing when there are diminishing returns.

      I’ve known people blow two or three entire weekends playing different car dealerships off of each other just to save an extra $300 or so. Unless they’re enjoying themselves, that seems like a poor use of time…at least to me. My weekends are precious. Would I take an extra weekend car shopping to save $1,000 or more? Probably. Two extra weekends? I don’t know. That line is different for everybody.

  6. I think that buyers should invest time and a few dollars on a service such as http://www.fightingchance.com. I’ve used them several times over the years and, with the actual costs of what the dealer paid for the car, shipping charges, cost of the accessories and/or trim packages, plus the holdback info, you can get a good idea as to what to offer for a vehicle.

    And yes, the dealer has to make a profit. No argument on that, but no dealer will sell you a vehicle unless they are making some money on it, and holdbacks are one way for them to insure they will make a profit, even if they sell you a vehicle at cost. Most buyers are not even aware of that fact.

    My advice is to avoid trading in your old car, that will only complicate things. Sell that one yourself. Research and determine exactly what vehicle you want. Then negotiate with several dealership managers over fax or email.

  7. Never, ever trade in a car you owe money on. I’ve done it twice without realizing what I was doing. They roll what you owe into your next loan so you start your next loan upside down…some times by several thousands of dollars.

    Before the internet exploded dealers in different areas could sell a car for whatever they wanted. I think they have a lot less room for markup now that we can compare car price fast and easy.

    I understand they have to make a profit. One dealership in my area tells you up front that all the sales people don’t get commission, they get a standard salary. They call it their “true value pricing” and say it’s “haggle-free” meaning they’re not negotiating. Does this mean you shouldn’t try?

    It seems to me the average consumer wouldn’t even know if they got a good deal because the dealers have tricks to makeup for losses in the negotiation process.

  8. Great article, David. Look forward to the upcoming post on negotiating skills!

  9. Good article! I’ll keep these in mind when I go to buy a new car in a couple months!!!