We’re looking at tricks that car dealers use to get more money out of customers than they want to pay. This compares to being upfront and transparent in their business dealings. Part II describes the specific trick of using a supposedly independent trade valuing source to buy a trade for less than the going rate.
In Part I we saw how Kelly Blue Book (www.kbb.com) reflects actual used car values for each geographic area. In our example, we used a 2006 Honda Civic EX sedan with automatic transmission and 50,000 miles. This is how KBB.com breaks out the different values for this car:
- Trade-in value: $11,300
- Private Party value: $13,580
- Suggest Retail value: $15,780
If I were going to trade in my car, I would expect to get $11,300 from a dealer in my area. If I did the extra work to sell it privately, I would get substantially more: $13,580. The final figure that KBB provides is the Suggested Retail value, or the initial dealer asking price. This is not necessarily the actual selling price, but the initial price before negotiations.
KBB’s pricing lets us know that dealers in my area will--on average--allow $11,300 for my car after the bargaining is done. Dealers turn around and attempt to sell the same car for $15,780. This tells me that dealers hope to make a profit of $4,480, less the cost to get the car ready for sale.
To be fair to dealers, most will not actually pocket this much profit. They use a pricing strategy where the initial price is set higher than what they expect it to sell for--though someone occasionally comes along and pays the full price without negotiating, which is why they do it. They then slowly lower that price depending upon interest. The actual selling price will probably be lowered again as a result of negotiations. In either case, the gross profit is reduced.
Trick or Treat?
Some dealers use a trick to try to buy your trade for less money, thereby increasing their profit. They set up a supposedly independent trade valuing source on their website. It can look and feel similar to Kelly Blue Book, except the values it provides are significantly less.
I just went online and pulled off figures from a dealer who uses this trick. The trade value they gave me for the example we’re using--a 2006 Honda Civic sedan, auto, and 50k miles--was a range between $6,860 and $9,695.
If I’m naive about this process and don’t know how to trade my car in, and I take this independent value as valid, I’m leaving thousands of dollars on the table. Also, if the dealer allows the maximum of this low quote, or $9,695, I believe that I’m getting a great deal when I’m not. After all, they gave me the maximum amount quoted by an independent source, right? In fact, if I get the maximum that this independent site says I should, I’m losing over $1,600, or 14 percent compared to what I should get. If I were to accept this website’s lowest value (and some people do), I can expect to lose over four thousand dollars, a whopping 39 percent less than the going rate for this car.
Tomorrow: the final insult to consumers resulting from this dealer trick to buy your trade for less.