Planning to visit a car showroom on Black Friday? Car dealers are unlikely to let you go without a tussle, new research suggests.
Many car manufacturers are launching Black Friday deals. As Autotrader reports, “The deals will also differ from past practices. Gone are the big discounts or cashback offers, and in their place, you are likely to find more lease deals, 90-day no-payment and zero/low-interest loan offers from the manufacturers’ captive finance arms.”
But finance deals sometimes are not quite as lucrative as they may seem. Just as IKEA store planners tactfully place cheaper items they know many people won’t want to buy near more expensive items so the latter look too good to refuse, car salespeople often advertise higher prices of cars relative to the repayment plan they offer consumers.
That’s because consumers are much more price-sensitive to car prices than finance charges, according to research findings circulated by the National Bureau of Economic Research this week.
“If dealers have discretion to price both the loan and the car, they can tailor the bundle of prices to specific consumer types,” researchers from Massachusetts Institute of Technology, the Frankfurt School of Finance and Management, the Federal Reserve Bank of Chicago and the Consumer Financial Protection Bureau, wrote.
“This leads to high interest rates for consumers that are less responsive to loan charges and low interest rates for consumers that are more responsive to loan charges.”
“ ‘If dealers have discretion to price both the loan and the car, they can tailor the bundle of prices to specific consumer type’ ”
“On average, consumers behave as if they would pay a dollar more in finance charges to reduce the vehicle price by $0.86.” They also “act as if they perceive finance charges to be at least $380 less than actual finance charges.”
The researchers arrived at that conclusion based on an analysis of millions of car transactions from 2010 to 2014, the CFPB’s Consumer Credit Panel that tracks auto loan originations and Experian’s EXPN, -2.45% AutoCount database which tracks “market shares of lenders and dealers for the majority of states in the U.S.”
Here are some rules of thumb you can follow to avoid getting overcharged for a new or used car:
Don’t let your emotions take over — stick to your budget
“Buying a car is a business decision, not an emotional one,” David Bennett, repair systems manager for the American Automobile Association, told MarketWatch. But it’s “easy to be wooed by the ‘new car smell’ and lose focus,” he added.
That’s why he recommended consumers enter auto showrooms with a budget in mind and that they stick to it. You should also factor in potential increases in your car insurance payments, gasoline and auto-repair expenses when you construct your budget.
“The biggest thing people do wrong when entering an auto showroom is falling in love with a particular car, and giving up their ability to walk away,” said Timothy Vogus, a professor at Vanderbilt University’s Owen Graduate School of Business Management. “Not having an alternative always makes it likely one will pay more.”
During the pandemic, the top ten personal car-insurance sellers in the U.S. slashed more than $7 billion in premiums as a form of financial relief to Americans dealing with the impact of the coronavirus-induced recession. That doesn’t necessarily mean car insurance companies won’t raise premiums in the coming months.
“Once you narrowed your vehicle choices down to two or three, it’s a good idea to call your insurance company and obtain a quote for each vehicle,” Bennet said.
Get a ‘second opinion’ from your bank
Before even discussing finance rates with a car dealer, “consumers should obtain pre-approval based on their financial institution,” Bennett told MarketWatch. “By doing so, you’ll have a threshold of the highest lending rate that you’ll pay. If the dealer offers a lower rate, then good news — you have saved money,” he said.
It could also give you leverage in negotiating lower terms with the auto dealership, said Vogus, who has taught negotiation classes at Vanderbilt for more than 15 years. “Dealerships will meet often meet or beat those rates,” he said referring to the quotes consumers get from outside sources.
There is always room to negotiate
“Consumers may have less choice due to limited supply, but that doesn’t necessarily mean less power to negotiate,” Bennett said. “There are, typically, three negotiations that occur when purchasing a vehicle: The cost of the car; the finance rate; and the trade-in value. Deal with each of those negotiations separately from the others.”
Furthermore, the high demand for used cars may open the door to negotiate a better deal on new cars, Vogus said.
“ ‘Consumers may have less choice due to limited supply, but that doesn’t necessarily mean less power to negotiate’ ”
But even when it comes to used cars, “there is always an opportunity to negotiate.”
“The high demand for used cars is unevenly distributed so not everyone is experiencing high demand. It may take a little time to find the right deal and it might require more walking away.”
“Know your walkaway price and stick to your target,” he added. “Don’t assume because you can’t get there right away doesn’t mean a good or better deal isn’t possible.”
There is nothing special about Black Friday
In fact, Vogus recommends avoiding “high activity days” like Black Friday.
“There’s lots of potential interest on those days so any given customer is less worth negotiating with because there’s a potentially live option nearby.” Waiting until the end of the month, quarter, or year is better “because dealerships are often up against quotas to receive incentives.”
“You’re more likely to be able to negotiate a better deal when your business is especially valuable or unique,” he added.