Bark's Bites: The Mistakes You Make When Buying a Car, Vol. I
The best thing about writing the Ask Bark series since the beginning of the year has been the feedback that you, the Best and Brightest, have given to our questioners. I might have a few good answers, but I’m only one man, and there are literally thousands of people who read each Ask Bark column. Collectively, you have wonderful ideas.
However, individually, you have some real clunkers. Today, we’re going to talk about the often given advice I’ve seen in the comments. Some of it isn’t just wrong, it’s flat-out harmful.
“You should negotiate your trade separately.”
I see people say this all the time, to the point where it’s almost become some sort of commonly held truth, like saying “water is wet.” This might have made some sort of sense in the pre-Internet age, but in 2016, it makes absolutely zero sense.
The idea is this: you spend all damn day in a dealership hammering out the price of the new or used car you’re buying, and then after you’ve done all that, you say at the end, “Oh, I also have a trade.” In addition to making everybody in the dealership hate you, you’ve also made a foolish financial decision.
Why? Because you have failed to understand how a dealership works. If you’re buying a new car, you’ve now completely lost any leverage that you had on the trade value of your used car. Had you told them upfront that you had a trade, they could have rolled some extra value into it (or what a dealer calls “overallowing”) to help reduce the price of the new car. As a consumer, it doesn’t matter at all to you where the money comes from — you should just be worried about the net transaction price. However, to a dealership, it matters a lot. Sometimes the used department needs to underallow, and sometimes they are able to overallow, depending on what the financial statement looks like that month. Allow me to elaborate.
When I bought my Mazda RX-8 back in ’05, I was upside down a bit on my trade, a 2001 Hyundai Santa Fe GLX. In order to make the deal work, the dealer took all of my negative equity and rolled it into the trade value of my car. The new car manager was happy because he didn’t have to discount his car as much. The used car manager was pissed, but he accepted that he was going to eat the deal in order to make the new car deal happen. If I had done the transaction as two separate deals, the Used Car manager would have hosed me on my trade, and there would have been no incentive for him to overallow, because the new car price was already been negotiated.
You might say to yourself, “What difference does it make? The money all comes from the same dealership.” The answer lies in the way that the managers of the various departments are compensated. Most department managers are compensated through some combination of gross sales and net profitability. So if you’re buying a new car, the new car manager might not be able to move on his car as much as you’d like, but he might be able to convince the used car manager to overallow a bit on your trade, providing that the used car manager has the room in his budget and if he feels like he can move your trade quickly. So, as a result, they might tell you that you got a great price on your new car, but they might be putting it into their accounting system as an MSRP new car deal with a huge overvalue on the trade — or vice versa.
At the end of the day, it doesn’t matter to you. You’re just paying the net transaction price. But if you try to insert the trade at the end of the deal, you’re taking away any chance that your trade might be actually helping to lower the price of your new car.
“Always buy CPO or late-model used over new.”
In 2016, this is just stupid. Let me tell you why.
There’s a leasing bubble happening as we speak. The lease deals that are available on most C- and D-segment cars are maybe the best that we’ve ever seen. It’s common to see $200 or lower monthly payments over 36 month leases with zero dollars down. And these aren’t just loss leader deals, either — the Chevrolet Cruze has been leasing so low that most Detroit dealers have been out of Cruze inventory for months.
Conversely, the used car market is completely bonkers today. Used car values at the auction have never quite recovered from Hurricane Sandy. It’s not completely uncommon to see low-mileage used cars going close to or even above new car invoice price at auction. Why, you might ask? Simple. Independent dealers can’t sell new cars, but many of them specialize in late-model inventory.
This lease bubble can’t last forever. Ally won’t subsidize these deals for long. And maybe auction prices will eventually go down. But, while they are, you’d be absolutely foolish to buy a late-model or CPO car over leasing a new car. “But I drive a lot of miles,” you might say. Even better! Prepay for your lease miles and wash your hands of your high-mileage late-model car instead of being massively upside-down on your loan.
“You should always buy instead of lease.”
I can’t even with this nonsense. Seriously. Stop with your Dave Ramsey bullshit.
You’re seriously telling me that you’re not better off paying $189/month to lease your Accord than paying $583/month to buy it? That’s exactly what the difference would be if you financed a base Accord over 36 months at 1.9% versus a 36 month lease.
“Yeah, but at the end, I own it, dude.” Congrats! You own something that is absolutely, positively going to continue to depreciate, and you paid $20,000 to do it. Alternatively, you could have paid less than $7,000 to enjoy the same car for the same amount of time, and at the end, you can walk away from it, scot-free, into another new car with updated technology. So what if you don’t own it? Do you really want to own a three-year old car with 36,ooo miles on it? Or would you rather bank that $400/month and get another new car?
Here’s another truth that we never discuss because all TTAC readers have 800 beacon scores and can afford to buy a new F-Type for cash (they just choose not to): If your beacon is in the 580-660 range, you can probably still qualify for the best lease deal in most cases. You’re definitely not going to qualify for the best financing rates. So if you’re slightly sub-prime (like a lot of people are), and calculating a money factor on a lease doesn’t make you wet your pants in fear, you can probably figure out that you’d pay less money to lease a car than you are to finance it.
Listen, if you absolutely hate driving newer cars, or if you just don’t like cars at all, by all means, don’t ever lease anything. If you’d like to get a better car for your money, and if you’d like to drive a new car every three years, then explore leasing. It’s not just for people who can’t really afford a BMW 3 Series any more.
Come back next week for Volume II, where we discuss other crazy shit like “It’s always better to privately sell your car instead of trading it in” and “Japanese cars are always of higher quality than domestics.”
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