Let’s be honest, when it comes to personal finance…you either love it or hate it. But…
The car buying experience can be exhausting. The research that goes into it and the pain of dealing with car salespeople takes a lot out of you. But it doesn’t have to be cumbersome and painful experience. You don’t have to deal with salespeople, negotiate with the dealership, and do all that much research thanks to the power of the internet. Instead, we can use an old economic theory to help us buy a car for the lowest price possible. The theory is called “game theory” and it lets us get the best price possible on a new car without ever stepping into a car lot to negotiate with a car salesperson. The method described below should take 1-2 hours at most once you have narrowed down the car you want.
What is Game Theory
Although game theory originated as an economic decision making theory, it now applies to a wide range of behavioral models. Game theory implies that the decision makers are all rational beings and will act in their own best interest. Game theory (also called the prisoner’s dilemna) is a zero-sum “game”, meaning that there can be only one winner.
So how does this apply to us? Well when it comes to car buying, the players in the game are the car dealerships. We assume that they are rational beings and will act on their own best interest, knowing that there can be only one winner in the game. The winner is the dealership getting your business.
How to Get the Best Price on a New Car
1. Go find out what car you want. This means the make, model, year, and all options you want.
2. Find out the invoice price and the MSRP price for the car you want.
3. Find out what the dealership holdback is. Dealership holdback is the money the factory pays the dealership after every car sold. So the invoice price is not the real price that the dealership paid for the car. The real price that the dealership paid for the car is the invoice price + the holdback + any other factory incentives (if applicable). The dealer holdback will vary with each car manufacturer but will usually be 1-3% of the MSRP price. Here is a chart of the dealer kickback for each car make, courtesy of Auto Cheat Sheet:
Example: If the MSRP price of a Toyota Camry you want is $32,000, then the dealership will get an additional $960 (3% of MSRP) once the car is sold. That is more than enough money to pay out the commission and keep some money in the dealership’s pocket. So knowing this, do not be afraid to force the dealership to pay invoice price for the car. After all, the holdback will earn them plenty of money.
4. After finding the MSRP, invoice price, and dealer holdback of the car you want, get a roundup of about 10-15 dealerships that carry the car in your area. You can do this by simply typing into Google or searching car sites like Edmunds, Craiglist, Cars, etc. If you want, you can put the list of 10-15 dealerships on an excel spreadsheet such as this one you can download: new car buying spreadsheet
5. Call up each dealership and tell them that you are calling around the area and looking for the best deal on the car. Tell them that you will buy from the lowest dealership today. You need to stress that you are ready to buy today and not just asking for prices. The immediacy of the deal will make the saleperson feel that the deal is more imminent and thus may be willing to discount more to get the deal done today.
Of course the person on the phone will try to get you to come down to the dealership to give you the “car buying experience” and try to convince you that buying a car cannot be done over the phone. However, you can retort by saying that it can be done and if they do not agree to give you a price over the phone, thank them for their time and move on. But most likely, they will all give you a quote over the phone.
6. Once you have called all the dealerships around the area, narrow down the list of the 2-3 cheapest—call them back and see if they can beat each other’s prices. Once you have the lowest price, go in and buy the car.
Easy, there is no negotiating at all. You just call them up and ask them to give you the best price for the car you are asking for. There is no back-and-forth negotiation that will waste hours of your time. This works because new cars are commodities—the car at Dealership A is the same car as Dealership B—there no difference in condition, mileage, or engine condition because all new cars are the same. Calling for prices should take no more than 1-2 hours of your time. This is extremely quick compared to going in and having to spending hours negotiating with multiple dealerships.
Some More Tips for Buying a New Car
- This should be done at the end of the month because dealerships are eager to make their numbers.
- Dealerships are more likely to answer the phone earlier on in the week, from Monday to Wednesday.
- The price you get should be less than MSRP. You should never pay sticker price, for a used car or a new car. Do not be afraid to pay invoice price for a car. As we discussed above, the dealership still makes a hefty profit as a result of dealer holdbacks.
- It is good to get qualified for a loan at a bank or credit union first. Some car manufacturers will have dealer financing but most of the time, the rate at the credit union will always be better. However, there are times where the car maker will offer 0-1.9% interest.
- If you have to take dealer financing in order to qualify for a rebate and the dealer financing interest rate is higher than what you would find elsewhere, then find out how long you have to hold onto the dealer loan for. It will usually be a minimum of several months. Once that required time limit has passed, refinance your car loan elsewhere for a lower interest rate.
- Again, the above tips will only work on new cars as new cars are commodities; one new blue Toyota Corolla Type S at one dealership is the same as another new blue Toyota Corolla Type S at another dealership.