If you're looking to save money, big purchases can be a great opportunity to do so. Unfortunately, when it comes to big-ticket items like a new car, most of us make mistakes and end up overpaying. The experienced and crafty car dealer doesn't help our cause, either.
I wrote an article on my tips to negotiating the price of a new car several months ago but this article on the tricks of your local car dealer is worth reading.
Here are some of the highlights, but I encourage you to jump over and read the entire article.
1. They start very low on the appraisal of your trade-in.
The first step in buying a new car is trading in your old one. The car dealer loves to price your old car much lower than it is actually worth and assume you will start negotiating from the price they suggest.
2. They get you in the door by offering low prices and then sell you something different (and more expensive).
A car dealer thrives on the classic bait-and-switch tactic. What they'll do is tell you a great deal is available to lure you into the store, knowing that they can switch you on to a different, pricier car. Or, they'll tell you the "great deal" was already sold, and proceed to selling you something more expensive.
3. A car dealer will try to sell you a bunch of protection services for your car that you don't actually need.
To avoid this pitfall, make sure you know exactly what these additional items cover and then ask yourself if you truly need them. Most of the time, you'll find you don't need so much protection.
4. They mark up the interest rate on the car.
When it comes to financing the car for you, a car dealer can make a lot of money by marking the interest rate up and consumers are completely oblivious that they're getting ripped off.
Customers with excellent credit (780 or above) should expect an interest rate between 1.49% and 3.49%, and customers with average credit should expect between 4% and 6%. The range accounts for factors such as income, debt, and the amount you want to borrow.
While a great dealer will always try and get you a competitive rate, they will also typically start at a slightly higher range to hold back a percentage for profit. The rule of thumb is that if a dealer is quoting you an interest rate for the first time, expect it to be 2% higher than what the bank is actually charging them.