Even car dealers know that they have a bad reputation for good reason. Most won’t admit it, but they know it nonetheless. Part of that bad reputation results from using tricks to get customers to pay more than they want versus being upfront and transparent in their business dealings.
Over the next few weeks, I’ll be describing many of the tricks that car dealers use so you’ll be prepared when you walk into a dealership to buy your next car, truck, or SUV. As an ex-Internet Manager for a major car dealer, I know that “forewarned is forearmed.”
Trading In Your Car
Taking cars on trade can be one of the biggest profit points for a car dealer. The others are the actual selling price, making money when they arrange financing, and selling products like extended warranties and security systems when the final paperwork is completed.
There can be a lot of money riding on the actual value of your trade. Establishing that value is often done through old fashioned haggling, something most customers tend not to like doing. Yet, establishing the price of the trade is an important step in the car buying process. The less the dealer allows the more profit for them. The higher the trade value, the more money in your pocket and less for the dealer. How do you decide? In this day and age, the Internet has independent websites that verify how much a car is actually worth in your geographical area. You don’t want a dealer alone to establish the price of your trade because they have a vested interest in making the value as low as possible. This makes independent sources of information a critical resource for the customer.
Kelly Blue Book
The industry standard for reflecting the actual value of a used car is Kelly Blue Book, located on the Internet at www.kbb.com. Input the particulars of your used car and KBB lets you know three important values: 1) a dealer’s initial selling price, 2) the private party value, and 3) the trade value. The lowest of these is the trade value.
Let’s take the example of a 2006 Honda Civic EX sedan with automatic transmission and 50,000 miles. KBB offers different prices depending on the condition. For this exercise we’re using “Excellent” condition, even though less than 5 percent of vehicles qualify for this category. We do this because, in estimating retail value, KBB assumes that dealers only sell vehicles that qualify as “Excellent.”
This is how KBB.com breaks out the different values:
- Trade-in value: $11,300
- Private Party value: $13,580
- Suggest Retail value: $15,780
These figures tell us that dealers in my area are allowing $11,300 on average as a trade value for my car. They turn around and attempt to sell the same car for $15,780. If they get the full asking price, they expect to make $4,480 less the cost of getting the car ready for sale (mechanical inspection and repairs) and any administrative expenses. The suggested retail value is the initial asking price, not necessarily what the car will actually sell for.
Tomorrow we look at a specific trick that dealers use to try to make more money on trades by getting around valid independent websites like KBB.com.