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Thursday, May 19, 2011

How To Buy A Car Without Getting Scammed

Business is business, some might say. If people are dumb enough to pay too much for a car then why shouldn't a dealership make a profit on them?  In my opinion, this is taking advantage of a person's lack of knowledge in a particular area and certainly doesn't mean they can afford to be taken advantage of. There will always be greedy people, I just hope this helps someone buying a car to navigate the transaction.

I was in need of a job near the end of my twenties and I had not yet acquired the many healthcare skills I now possess. Having grown up with a family steeped in the automotive industry, I was drawn by a newspaper job advertisement to seek employment with a local Toyota dealership.

I had no previous car sales knowledge but was willing to learn. The dealership sent new recruits to training seminars where I learned basic salesmanship. Keep track of everyone you talk to. Call them until they "buy or die." Cold call sales and friends/family referrals were pushed as potential buyers. The standard sales tips and tricks found in most "How-to sell" type books.

What I didn't learn until I got knee deep into car sales was how greedy and unethical this business truly was. And these unethical behaviors came from top management. It wasn't just lowly snake oil salesman trying to eek out a living. Our General Sales Manager was advocating this garbage.

I'll list these in the order that the scam goes down. First, note that cars which have been on the lot too long tend to have a sales BONUS. In order for a Sales Manager to encourage his sales team to push the not-so-appealing cars, he pays out an additional cash bonus to the team member that sells the unwanted. So the sales team is skewed from the get-go...meaning THEY want to sell you a specific group of cars, not necessarily the cars YOU want.

The Price Negotiations Scam
Let's say you've finally picked a car you want to buy. The people you are doing business with have NO idea what kind of intelligence you have. Just in case you are a complete moron, they are first and foremost going to offer you a price that is rediculously high just on the off-chance that you take the first offer handed to you. I actually saw this personally happen ONCE during my time as a car salesman. I offered full sticker price on a Toyota SUV. The lady turned to her 16 year old son and said "Do you want this one?" He emphatically said yes and she bought it. No haggling at all. Needless to say, I sat there stunned. When I went back to the sales desk to tell my sales manager (thinking I had done a great job), he mumbled that we should have offered a higher price. These guys weren't happy until they stripped every last red cent out of a customer. And this is just the first part of the negotiations.

In the event that you don't accept the first offer, the salesman parades back and forth between buyer and Manager. The salesman returns to the table, says the boss likes the way you negotiate and with a big, fat permanent marker writes the latest "these are the best we can do" numbers on paper. If you say the sales price is too high, they lower it but raise the monthly payments. If you can't afford those monthly payments, they lower the monthly but raise the total. When that doesn't work, they say you must raise the down payment. This can go on for hours. If you don't settle on some numbers and attempt to leave the negotiations, they send in a Closer.

A Closer is usually a veteran car salesman. He has negotiated deals long enough to know the key phrases and successful rebuttals to turn NO's into YES's. He slowly works you back to the negotiating table and tries to close the deal. I remember being a noob and letting a customer leave the lot. I was chastized for not "turning the customer" or telling management that the customer was losing interest so they could sick a Closer on the customer. To me, these inital stages of negotiations seemed to last unnecessarily long and appeared to keep many customers hostage long enough that hunger became an issue. Once the customer became hungry and was tired of negotiating, they began to give in to the deal presented before them.

The High Interest Rate Scam
After a sales price is agreed upon, the buyer is turned over from the Sales Team to the Finance Team. Now, I had bought several vehicles in my time. I had always thought that once I made it past the sale and onto the financing, it was all just routine paperwork. Did I want a warranty? Did I want a plain detail package or chrome lettering, leather seats versus cloth, etc?  Little did I know, this was just another step down the path of getting milked.

Every single potential customer, in the beginning stage of the purchase negotiations, had their credit report pulled (obtained.) This credit report, as we all know, tells any lender how much of a risk is involved with this particular buyer. What I learned AFTER working in this dealership was that the Finance Team followed the same rules as the Sales Team. They don't know how stupid you are, so they immediately offer a rediculously high interest rate. There was a fair amount of people that didn't know how interest rates worked. Few, but some, accepted the first offer. They accepted 13% when they could have qualified for 3% or 5%. There's thousands of dollars hidden in finance fees that the uneducated buyer doesn't see up front because it is added as the loan progresses.

The other aspect I learned about the Finance Team was that they, at least at this dealership, learned a scripted sales pitch. The way they presented the GAP insurance, leather seats, chrome trim package with floor mats and such wasn't just a mere "Hey, you want any of this?" Oh no, this stuff was scripted and memorized in a manner that glamorizes the top tier in each category. For every tier you moved up in each category, the dealership made more and more money. GPS, On-Star packages, heated seats, moon/sun roof, dvd players etc all inflated the final price higher and higher.

The Trade-In Scam
Now if you wanted to trade a used car in, and apply the value towards your purchase, you had a whole other scam to endur. Trained professionals would test drive your car and then proceed to nit-pick every single little problem in an effort to reduce the value of your trade. I routinely saw $7000 range used vehicles get traded in for $3000 or less. Sometimes owners just didn't want the hassle of selling the car themselves. Sometimes it was owners that just really didn't know what the value of the car was or how to calculate the value. Other times it was the only means of a down payment towards the new purchase. No matter how it got devalued, I don't remember ever seeing a trade-in traded for full kelley blue book value.

The Hold Back Scam
Most manufacturers offer incentives to dealerships to move the inventory quickly. The manufacturers, in my case Toyota, offered dealerships a bonus for each new car sold. This bonus was referred to as a Hold Back. One of the common sales lines I heard when up against a savvy negotiator was "But Mr. X, we're a business. We have to MAKE money somewhere. We can't just GIVE the car away."

Actually, they can GIVE the car away. When I was selling, the Hold Back on a new Toyota was between $300-$500 on EACH car/truck. This had nothing to do with the advertised sales incentives. If a dealership advertised $1000 cash back on a purchase, this has nothing to do with the Hold Back. Typically the "cash back" was really just subtracted from the overinflated retail sales price of the vehicle. The Hold Back is never given nor offered to the public. It is only given to the dealership. So, even if a dealership sold a car to a buyer at the actual cost the dealership paid for the car (aka wholesale price), the dealership still made $300-$500 dollars. Depending on the earnings structure, the salesman would be lucky to get $100 of that (usually more like $50 per new car.)

I did see a few of these type of sales. Typically it was friends or family of the Sales Manager or Owner of the dealership. New cars sold at cost and the dealership profited on the Hold Back. The Fleet Department sort of works on this principle but I won't get in to that. Sales Managers also have monthly quotas which earn THEM additional money. The dealership Owner may offer a Sales Manager an additional $2000 if x number of cars are sold in a particular month. I noticed that Managers were more apt to make a buyer-friendly negotiation on the last day of the month in order to reach quotas.

The Car Key Scam
I'll never forget the day of a large sales event. Flyers were sent by postal mail to a large local community. The event was to encourage local community members (aka potential buyers) to come visit the car lot and have some hotdogs and hamburgers from our parking lot grill. The main reason they came to visit: each mailbox had been sent an invitation with an attached car key. The invitation read that one of the car keys mailed out to the public would start the engine of a brand new car. I believed the whole thing up until the Sales Manager handed me a car key and said "Go put this in my office, top desk drawer, in the very back of the drawer." He then explained to me that this key is the only one that will actually start the prize car. The whole thing was a scam and I was naively shocked.

Some simple things to remember:

  • If you are going to buy a car from a dealership, please do your research. Car values can be found on the internet. Research the value of your trade-in AND the car you want to buy.
  • You can get financing from YOUR local bank before going to the dealership. That way you know what your interest rate is BEFORE you even go to the dealership.
  • Research all the features you want to add prior to shopping so the Finance Department doesn't lure you into more features at the last minute.
  • The last day of the month may be the best time to shop (think quotas.)
  • Set a time limit for your trip. Stick to it. If you feel pressured or bullied, just leave. There are 15 other car dealerships who want your business.

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