How I Negotiated my Girlfriends Car (the Dealer Lost Money!)
It’s natural to want to trust someone that looks and acts professional. There was a study replicated on Jason Silva’s hit TV show Braingames which indicated people are more likely to trust someone if they look (and dress) the part. The study had a reporter (not a real reporter) telling random mall goers outrageous lies. No matter how ridiculous the lie from the “reporter”, the mall goers believed the story because the guy dressed like a reporter.
So there you have it; you naturally trust someone who dresses the part. Now, what outrageous lies are you believing from these slimy car salesman?
Car salesman are paid on a commission basis, meaning they get paid when they sell cars. The more cars they sell the more money they make. It doesn’t take a rocket surgeon to figure out selling cars is their primary objective, NOT you. They don’t care if the car is out of your budget, they want to sell you a vehicle TODAY.
Some may argue they do a credit check to ensure you can afford the vehicle, which is true. But, they put you in a generic equation, which may not fit your situation. Consumer Reports suggests a car buyer should stay below 36% debt-to-income ratio, meaning if you gross $100,000/yr then debt payments shouldn’t exceed $36,000/yr. A great rule of thumb for the car financing companies but horrible for individuals.
Example: Let’s say you have $100,000 in student loan debt at 7% over 15 years. Your monthly payment would be $899/mo or $10,788/yr. Your income is $50,000/yr. Using the 36% rule above, you would be able to spend $7,212/yr ($601/mo) on a car payment (36% X $50,000 = $18,000 – $10,788 = $7,212). Now, according to Edmunds Auto Loan Calculator, if you want a car with a $601/mo car payment (and no money down) that would equate to about a $30,000 car. Let’s recap:
- You have a $50,000/yr job
- You have $100,000 in student loan debt at 7% over 15 years ($899/mo payment)
- Based on the 36% debt-to-income rule you purchase a car worth $30,000 ($601/mo payment)
- You now have $130,000 in debt and a $50,000/yr job to support it.
According to Forbes, a person filing as single that makes $50,000/yr will pay $8,293.75 in JUST federal taxes alone, don’t forget about state and local taxes. The average annual expenses for a young person, excluding transportation costs, are between $15,800/yr and $35,500/yr as stated by Visually. The range is due to high rent in large cities, so let’s take that average, $25,650/yr or $2,138/mo.
From our example above your $50,000/yr will be spent as follows;
Expense CategoryYearlyMonthlyGeneral living expenses (phone, TV & internet, rent, food, etc.)$25,650$2,138Student loan payment$10,788$899Taxes (not including state and local)$8,300$692Car payment (not including insurance, repairs or an extended warranty)$7,212$601Total$51,960$4,330
You are abiding by the 36% debt-to-income rule but you have NO money leftover at the end of the year!!!!
This was the exact situation my girlfriend and I found ourselves in a few years ago. She had no idea how much she could afford to spend on a car, she just knew she needed one. So we sat down and used Mint to organize her finances. If you’re unfamiliar with Mint, it is a powerful tool to organize your finances in one easy-to-use location.
After we created a budget with Mint we could see exactly what she could afford, a whopping $175/mo. We NEVER brought up the 36% rule because it is general rule, not specific for you and your situation. Once we had a number the next step was to head to the dealerships. We went to several dealerships and this is exactly what we told them. “What car can we get for a $150-$175/mo with no money down?”
The first thing they did was put us in the brand new model of one of the nicest cars on the lot (this is a tactic they use to upsell you into a newer, more expensive car). Great, the car was sharp, it had the new car smell and had a smooth ride. Once we were done with the test drive they took us to the financing shop. “I have some great news we can put you in that brand new car for $250/mo with $500 down.”
“That’s not $175/mo with no money down,” we quickly answered. “What do you have that falls in our range? How about we run the numbers before we waste our time test driving a car?”
So we looked through a few other cars that were unappealing, one smelled like a mix between cigarette smoke and wet dog, and decided to leave.
Next day we tried a new dealership, Honda. We told them the same thing as before, “What car can we get for a $150-$175/mo with no money down?”
The salesman showed us a 2013 Chevy Spark and a Toyota Yaris that were in our price range. By this point I had my QuickenLoans app open on my phone, entering the price of the cars to see if our $175/mo payment was doable (I wasn’t relying on the salesman).
My girlfriend took the cars out for a test drive and liked the Spark better. The salesman then asked the classic question, “What will it take to get you in that car today?”
It was an easy response, “A $175/mo payment and no money down.” After a little deliberating he agreed and signed a paper with $175/mo payment and no money down. He told us to keep the paper and show it to the financing department. But, once we met with the financing department, it was a different story.
The young guy was nice and began by pulling my girlfriends credit. We knew she had good credit because Mint gives you a FREE quarterly report, so we knew she would get the best rates. Unfortunately when this gentlemen came back he said, “I have good news and bad news. You have a 745 credit score. But, it isn’t a real 745.” He was trying to belittle my girlfriend’s credit score because her credit history (how long you have had loans or a credit card) was short, even though all young people have short credit histories. He continued, “I can’t put you in the car with a $175/mo payment. I can however, put you in the car for $250/mo.”
“I’ll cosign for her on the loan. I have a +740 credit score. I have a mortgage and a car in my name so my credit is real.”
He stumbled through his reply, “Well…hmmm…it won’t matter. Even at the best interest rates we can’t get you to a $175/mo payment.”
“What do you mean it won’t matter? Right here (I pointed to the piece of paper signed by the salesman) we agreed to a $175/mo payment. The salesman signed it!” I was getting a little angry at this point for two reasons; (1) the financing company was trying to take advantage of us and (2) I could see how upset this was making my girlfriend.
“The salesman doesn’t deal with financing, I do,” barked the idiot.
“Then why is he the one making promises to customers about payments?” I responded with aggravation. Again he gave me a round-a-bout answer so I stopped him and said, “We are only paying $175/mo for this car. If you guys want to be liars and have your signatures mean nothing then that’s fine but we are NOT paying more than $175/mo!”
He left the room to “talk to with his manager”. I don’t know how true this is but I’ve heard some of the offices have microphones so when the salesman leaves, and you feel free to talk, they hope you say more about what you will and will not do. Just in case I looked over at my girlfriend and kept saying, “we are walking out if they can’t do $175/mo.”
He came back and stated, “The best we can do is $225/mo.”
“This is bullsh*t! You guys are liars. We already agreed on $175/mo. If you can’t do that then take the car back!” I shouted.
“Sir, you need to lower your voice,” he calmly responded. I think at this point he could tell I was frustrated and we weren’t going to budge on the price.
“I wouldn’t have to raise my voice if you guys would do what you say you’ll do.” He left the room again to “talk with the manager”.
At this point he came back and looked like a whipped dog. “Okay, we can do $175/mo, but we are losing money on the deal so you won’t get the extended warranty discount.”
“Good, we don’t want the extended warranty,” I said in a tone to pour the proverbial salt in his wound.
That was pretty much the extent of our conversation. My girlfriend signed the paperwork and we hopped in her new car headed home.
I don’t know if they truly lost money on the deal but a few days later my girlfriend called to see if she could get a spare key and the car manual. They replied, “We normally give you a spare and the manual but since we lost so much money on the deal we can’t guarantee it.”
- Know the monthly payment you can afford BEFORE you begin looking at cars.
- Don’t rely on the 36% debt-to-income rule.
- The salesman will put you in a new car. Be strong and stick to your budget.
- Use QuickenLoans apps to do quick calculations for loan payments.
- Don’t back down. They aren’t going to shoot you if you disagree with them. Stand up and be firm on your research.
- It helps your point if you yell “bullsh*t” in the dealership 😉