When I actively sold cars for a major dealership, I quickly discovered that the customers who got the best deals almost always focused on the selling price of the car and not the monthly payments. Let’s take the example of Stan, who is trading in a large SUV on a fuel efficient, basic sedan.
Stan tells his salesperson that he has to get the monthly payment down to $300 a month so he’ll be able to meet his other monthly obligations. But he is disappointed when he discovers that the dealership can only get his payment down to $360 per month on the vehicle he wants to buy. Stan gets upset. He says he won’t make the deal at this price, that the payment had to be reduced to $300 or less, or he’ll take his business elsewhere.
After hearing Stan’s ultimatum, the salesperson asks, “If I can get your payment down to $300 per month do we have a deal and you drive this car home today?” Stan says yes. Big mistake. Let’s watch what happened next.
Follow the Money
The dealership comes back with a monthly payment of $300 per month. This is exactly what Stan wanted. A reasonable person sees a drop of $60 per month in the payment structure (from $360 to $300) and sees this as a good thing. After all, the length of the car loan is 60 months so Bob does some quick math in his head and sees that the saving should be:
-- $60/month x 60 months = $3,600
However, Bob is only concerned with his monthly payment. He didn’t notice that the dealership reduced his payment to $300 per month by extending the term of the loan from 60 to 72 months instead of lowering the selling price of the car. So instead of Bob paying:
-- $300/month x 60 months = $18,000 total cost of the vehicle
Bob is instead paying:
-- $300/month x 72 months = $21,600 total cost of the vehicle
The difference between the two is:
-- $21,600 less $18,000 = $3,600
The dealership was able to lower Bob’s payments but didn’t discount the price of the car one penny.
Good News or Bad News
The good news for Bob is that he was able to buy a car for $300 per month. The bad news is the dealership made a huge profit on a deal that Bob will be paying for over the next 72 months. If Bob had negotiated the selling price of the car and the terms of the loan instead of monthly payments, he would have saved a lot of money and still been able to get his monthly payment down to where it needed to be.
The moral of the story is negotiate the selling price of the vehicle and not the monthly payment. Do that and you’ll keep more of your hard-earned money in your pocket.