How to get a Better Deal?
There is a hierarchy of things that improve the deal to you as buyer.
Reduce the Screen Price: First is always price of the vehicle. Every penny you get off the headline price is money you can spend on whatever your thing is.
Dealer and Finance Contributions: Second are the “contributions” from the dealer and the finance company. Listen carefully here, because if this is new to you, it is all going to get a bit strange.
Always Finance Your Car, it saves you money. WTF? or something similar should be your immediate response to this if you are cash rich or from a Protestant background. Every Lutheran (and for that matter Muslim) knows that borrowing is a sin. “Neither a borrower nor a lender be” was drummed into me as a child, which is ironic given what I do for a living, but hey-ho, things move on. In cars, this advice is plain dumb. The reason is that car dealers make money from selling loans to you and car manufacturers are the fastest growing financial companies in the world.
Don’t believe me? Well VAG group (VW/Audi) revealed that its finance loan book was £10bn, in the UK alone. It seems that post the financial crisis we have all paid off our credit card bills but ran up car loans to keep us close to the edge of insolvency.
Borrow the right amount of money: Anyway, the result of this credit boom is that the finance companies literally pay the dealers to sell loans. In consequence they have a budget to bribe you to borrow from them. If you don’t borrow you don’t get the bribe. Now, the smart amongst you will note that the only reason they are paying a bribe is to get you to borrow money you either don’t need, or can’t afford. And, you are absolutely right. But here’s the thing, if you borrow and repay the loan straight away, you keep the bribe but don’t pay the interest. The more you borrow, the bigger the bribe.So figure out the right amount to borrow, it's more than you think.
Don’t Be a Cash Buyer: So, don’t walk in as a cash buyer expecting the best deal. Walk in as a creditworthy pauper and borrow the money. Get the “finance contribution” from the dealer and then pay it back straight away. Do the dealers and finance companies know this? Yes of course they do, but they are smart.
Firstly they charge fees to make it costly to play the system - you need to repay after a month or two to avoid embarrassing the dealer, who will usually conspire with you to use the cheapest finance (if you ask). Check the repayment charges and the set up fees closely.
Secondly they know that once you have borrowed the money, you will be reluctant to repay early, even if you can, because you have the alternative to spend your excess cash on Colombian Drugs or a new garden shed, depending on your preferences. The data is very, very clear on this: People can make a car significantly cheaper by borrowing and repaying, but they don’t do it. They go halfway and borrow, but then don’t pay it back early.
The astute amongst you may have noticed that I am in that camp myself!
Negotiate the Residual: If you want to get the monthly cost of your car down, the easiest way is to argue that the “guaranteed buy back” is too low. You can increase the residual if are prepared to commit to a low annual mileage. But be careful...
Avoid penalties. If you do borrow and then fail to repay straight away (like most people) you'll need to keep a close eye on mileages. You will contract not to exceed a mileage. If you agreed to a low cap to push up the residual you are at greater risk of getting a mileage penalty when you hand back the car,. you can get hit with a potentially huge penalty. The penalty on my agreement is 9p per mile plus VAT (i.e. 10.8p per mile.) If you forget that you are on a PCP and go on an unplanned trip to Europe and your holiday could cost you a lot more than you thought. Similarly change job and start to commute in the car and you can run into the mileage cap before you know it. Of course if you are going to repay early this doesn't matter, but be careful.
Negotiate the Interest Rate: car dealers are not financially astute. They don’t really know how PCPs work and to stop them from acting like US mortgage salesmen in the 2005-2007 boom, they have little discretion. However, the finance companies do want to lend. So, my suggestion is that you put the dealer under a bit of pressure to “find a better deal”. If you are buying a high end car you will be surprised what they will do: Aston Martin for instance will introduce an IFAs whose only job is to find you a good finance package. This is peculiar to AML, they seem have no in-house finance company, but try and see what you can do.
The key thing to remember is that car dealers are taught to “Close the Deal”. The evidence is that if you leave the showroom, you probably won’t buy the car. This conflicts with your best negotiating tactic which is to say:
“I love the car, it’s just the cost we need to work on – can I leave it with you for a couple of days to see what you can do?”
[from a blog I wrote a while back at
www.honestjg.com]
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