Car Buying Guide: Pre-Negotiate Your Interest Rate

June 22, 2010
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The question we’ve been exploring is how to shop for a new car so you get the best deal possible. We’ve discovered that buyers who begin their vehicle search by walking into the front doors of their local dealer often pay more than necessary. As odd as it sounds, the longer you stay away from the dealership--lining up the terms of the deal in advance--the more you can probably save.

Why Negotiate Just the Selling Price?
Why is it that the savviest of new car buyers are satisfied to negotiate only one price, the selling price of the car they want to buy? Most buyers simply don’t realize that there are more profit points waiting to be dealt with after the price of the car is established. Mishandling any one of these can significantly add to the cost of the deal. I have seen customers pay hundreds, even thousands of dollars more than necessary after negotiating the price of the vehicle down to the invoice cost or below.

For example, why don’t buyers nail down the interest rate they are going to pay on their car loan prior to seeing their dealer in person? Paying an extra point or two or three on your car loan may not seem like much until you do your math.

So Let’s Do the Math
I live in the San Francisco Bay Area of California. Let’s say that I just made a smokin’ deal on a new car that gets great gas mileage. As a savvy buyer I did my research. By going to, I knew that if the dealer sold me the car for the Manufacturer’s Suggested Retail Price (MSRP), their profit was $1,675, which is the difference between MSRP and the invoice cost. (The actual dealer's cost will be covered in a later column.)

I was thrilled when I negotiated the selling price right down to invoice, seemingly eliminating any profit for the dealer. This told me that I saved $1675 on the deal compared to what the dealer initially asked for. Right about now I’m feeling pretty good about my ability to get more than a good deal.

Below is my actual cost prior to the salesperson and I moving on to my application for a car loan:

Selling Price:                           $20,000

State Sales Tax (9.75%):             1,950

Title & Registration Fees:               300

Total Vehicle Cost:                $22,250

The Car Loan
I was so happy about getting such a great selling price that I didn’t pay attention to the figures after I completed the loan application with my salesperson. I fell into the trap that many customers fall into: assuming the dealership will give you the best possible interest rate. In fact, the difference between the dealer’s “buy rate” (the interest rate you actually qualify for) and the higher rate the dealer quotes you, is a profit point that can significantly add to your cost of the vehicle.

The following chart outlines the added cost I might face. I have an excellent credit rating, so I qualify for a 5.99% loan. But the dealer might slip me an extra point or two if I’m not looking:

                                                             5.99%           6.99%           7.99%          

Cost of Car                                         $22,250.00    $22,250.00   $22,250.00    

Monthly Payment Over 60 Months              430.05          440.47          451.04        

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