Monday, April 20, 2020
Buying a Car During a Pandemic... Best of Times; Worst of Times
Why is today the “best of times” to buy a car? Auto manufacturers are fearful for their very existence. When the Covid-19 threat is behind us, many auto manufacturers won’t have survived. Ford’s bond rating was recently downgrade to “Junk” and all the major auto manufacturers have had their bond rating (cost to borrow money) downgraded. Ford, GM, Chrysler, and Nissan are likely candidates for bankruptcy.
The “auto-selling pie” has suddenly been radically reduced in size, and too many auto manufacturers are competing for a big enough slice of the smaller pie to survive. There’s simply not enough pie to go around. Survival is our most powerful instinct, and it motivates us to do things we would never otherwise do.
Auto manufacturers are offering huge discounts and financing terms that were unheard of before this pandemic. If you don’t remember anything else from this article, remember this: MAUFACTURER DISCOUNTS, REBATES, ZERO PERCENT FINANCING, NO PAYMENTS FOR SEVERAL MONTHS, AND LOWER LEASE PAYMENTS ARE TRUE, but CAR DEALERS ADS ARE MOSTLY UNTRUE.
Most car dealers have very large overhead expenses. The manufacturers require that they invest millions of dollars in large facilities for selling new and used cars, parts, service, and sometimes collision repair. The dealer can control some expenses like advertising, and he can reduce personnel expenses by layoffs. However, he still must pay his rent or mortgage payments, utilities, and the interest to finance the cars in his inventory. (almost all dealers borrow millions of dollars for this). This means that every car dealer has a certain level of sales and service that he must sell in order to break even and hopefully make a profit. A car dealer may average selling monthly 100 new vehicles, 75 used, and servicing 500 cars. This dealer was probably making a nice profit, maybe $100,000 per month. During the Coronavirus, dealer sales are off anywhere from 40% to 70%. This almost certainly causes him to lose a substantial amount of money monthly, because he’s selling cars and service below his breakeven point, about 75 new, 50 used and 350 service vehicles. After the car dealer has slashed the expenses that he can, he has only one choice to SURVIVE. He must raise the prices of the fewer cars he sells.
If you’re a regular reader of my articles, you know that car dealers sell each car at different prices to every buyer. A Ford dealer will typically sell an identically equipped F150 truck (same MSRP) at different prices to every buyer during a given month. The profits on this truck can range from $100 to $5,000 or even higher. Dealers can do this by their “smoke and mirrors” unfair and deceptive sales practices. They’ll undervalue your trade-in allowance, charge you a high interest rate, make you believe they’re giving you a large discount by falsifying the MSRP, or add hidden fees and dealer installed accessories that you don’t realize you’re paying for.
The very real and generous discounts being offered by auto manufacturers make it easier for car dealers to raise their price to you. When you negotiate to buy their car, they’ll try to make you focus on the special deals offered by the manufacturer, like “no payments for 6 months and zero percent for 72 months”. Remember, this is a discount being absorbed by the manufacturer, not the dealer*. When you buy your next new car, you automatically get the manufacturers’ discounts, but you still must FIGHT for the dealer’s discounts. In fact, you’ll have to fight harder than ever because that dealer must average a higher profit per car than before the Coronavirus pandemic to SURVIVE. You’re buying one car and that same car will be sold to several other buyers during the month. You want to be the shrewd buyer that paid this dealer $100 profit, not the ones that paid $2,000 to $10,000!
You do this by remembering or rereading my articles on using competition to get the lowest price. Shop at least 3 car dealerships online after having chosen the exact year-make-model car you will buy. Shop your trade-in value separately and your financing separately. Beware hidden fees and dealer installed accessories and never commit to buy unless you have a bonified out-the-door -price. The definition of an out-the-door price is the amount of money you write out a check for, hand to the car salesman, and drive your new car home.
With the Coronavirus pandemic it’s mandatory that you do your car shopping and buying online. You should be able to do this without ever having to visit the dealership or interact with a salesman. The dealer should consummate the purchase and financing online and deliver your car to home.
Good luck and I pray for the safety of you and your family.
*Although special offers that are coming directly from the manufacturer are legitimate, you must also be careful to read the fine print. For example, Ford is offering "no payments for six months." Three of the months are deferred payments for which you will still be charged interest. The other three months are being "paid for" by Ford, but your rebate is less... you are actually paying more for the car!