Looking to trade my vehicle. The salesman says ‘If you don’t mind my asking, how much do you owe on your car?’ Turns out I do mind. Is it to his advantage to know this? Does it effect the trade in value of my car?
You need to let them know how much they will have to pay for your car. Also what you can afford in payments. If you give them that information, then they can make you an offer.
If you don’t tell them, then they could only tell you how much the new car will cost and how much the payments would be.
Note people can be in a position where they owe more money on their current car than what it is worth, then need to tack that amount onto the new car price.
Also with many loans, the initial payments are mostly interest, the amount to pay off the loan is pretty close to the full amount of the loan until it is mostly paid off.
Here is a graph of a loan. Note the red (payoff amount) does not significantly decline until near the end of the loan…
http://l.yimg.com/ea/img/-/120921/home_loan_calculator_185o1a9-185o1ao.png
If you owe less than (he feels) it’s worth, he might just offer you that much.
For example. Your car is worth $5000, he knows he can can clean it up and sell it for $6000. He’s thinking about offering you $4000. However he says ‘so how much do you owe on it?’ and you say “Umm, I think I still owe about $2000 on it?”. Bingo, most people will be thrilled when he says “Tell you what, bring me the loan paperwork and I’ll just pay it off” and they might not realize that they’re leaving a few grand on the table.
They certainly need that information at some point if you’re going to go buy from them, since they have to payoff the loan to get the title to the trade in.
But for now, they’re going to do the numbers dance and show you how much payments would be on the new car as part of their negotiations. For that, they need to know how much you owe on the car. Better just to get a rock bottom price on the new car first, then get the best price on the trade in, and run the numbers yourself. Don’t even discuss financing with them until you’ve gotten those numbers firm.
That’s less true for car loans, which are generally 4-6 years than for 20-30 year mortgages. And you’re reading the graph wrong - red is the interest, gray is the remaining principal/payoff amount.
They don’t need to know it to negotiate a trade-in value, if they want to know it early in the process it’s probably so that they can use the money to adjust their offer to be barely what you need instead of a fair evaluation of the car’s price. They will need to know it before the end of the deal unless you’re going to pay it off before trading the car in (in which case you can make things easier by going ahead and paying it off).
Personally, I will only negotiate on the price of the car, then financing in terms of interest rate and duration. Negotiating the monthly payment directly opens up way too many opportunities for creative accounting, and it’s really easy to hide a bad deal inside of a too-long loan term, balloon payment, or other trap. In the OP’s case, I would get a firm offer on the price of the car and trade-in value of the old car, and only then discuss financing and whatever payment you’re trying to roll into the new loan. (OTOH, I’ve never actually bought a new car while owing money on the trade-in).
I’ve always read that its better to make it 2 transactions & with different entities if possible. If its all one transaction, its too easy for the waters to be muddied & for you to leave money on the table.
Also, YMMV, but if you leave money on the table & get a worse deal than you could have otherwise, it might bother you.
If you are a great horse trader and you get a better deal than the dealership is comfortable with, some dealers may try to make that back every time your car comes in for any service going forward (or at least they used to way back in the day).
Separating the transactions and using the money from the sale of the trade as part of your cash down payment solves that & keeps the old car’s sale from spilling over into the new purchase making for a new clean/fresh start from your new car dealership.
No, he’s looking to see if you have any equity in your car. If you owe 10k on a 5k car, he’s not interested in wasting much of his time.
He’sgetting ready to screw you on;
- the price of the car you’re buying.
- the value of your trade-in.
- the interest you will pay.
He does this by asking “What do you want your payments to be?” Then he works it backwards and screws you.
Always make that three deals. Negotiate them independently.
This. Negotiating is all about information asymmetry. The salesman knows what your car is selling for at auction, and what the dealership is likely to slap on the window once they turn it around. That’s all information he has that you don’t, which puts you at a serious disadvantage when negotiating the trade-in value. Now on top of that, he wants to know the one thing you know that he doesn’t.
We’ve always shopped for cars with a pre-approved loan amount from our credit union, and that’s what we tell the dealer. We don’t tell him the amount - it’s none of his business. We know what our ceiling is.
One time when I was much younger, the salesman figured he had us over a barrel since we were there with a new baby wanting a car. He gave us a number, I said “We can’t do that” and stood up to leave. I wasn’t playing games - we really couldn’t do what he was offering. But as I was headed to the door, suddenly it all turned around. It was a valuable lesson for me - always be ready to walk. And that was pre-internet days, so I didn’t go in armed with data other than the state of my budget.
They’ll know that when I tell them, or how much the value of the trade-in is, or whatever we agree on - not based on how much I owe on it. The salesman has no reason to know that.
On the other hand, I don’t care if he knows, because I will insist on a negotiated value. If he say’s “but you only owe X on it” I’ll say “So? I want more.”
^^This, a thousand time this. whoever has the most information will win in any negotiation. The salesmen and their bosses don’t ask questions to be friendly, they are gathering information on you, your family, your finances (quite possibly sneaking a peek at your credit report if you give them your SSN), your vehicle situation - anything they can get out of you. Information is power. In order to balance the scales as much as possible you need to know the following before you ever step foot on a dealer lot:
- How much your car is worth. Look at NADA, Kelly Blue Book, local dealers and auctions. Be honest with yourself when grading your car. It is most likely in no better than “Good” condition.
- How much the vehicle your are looking at is worth and how well it’s selling. NADA and KBB have information on dealer cost, Consumer Reports has that as well as incentives and sales volumes.
- If financing, where you will get the loan, how much you are willing to borrow, and exactly how much it will cost.
I’m not advocating that you be rude to the sales staff, but give them no information at all until the deal is done - not how much you want the payments to be, how badly you need a vehicle, how much you owe on yours, how much you love their vehicle, nada except how much you are willing to pay for theirs and, if trading, how much you are willing to take for yours.
All that, together, gives you the information and leverage you need to negotiate well.
Yes, for the reasons indicated above.
Not the trade-in value of your car, but it very may well change the trade-in offer you receive. As mentioned, don’t combine the purchase and trade-in negotiations. Keep them separate. And don’t negotiate monthly payments at all. It’s the price of the new car and the price of the trade-in that matter.
If you live near a Carmax, you can take your car there and see what they will offer you on a straight-up purchase. I’m assuming you’ve already looked at Edmunds, cars.com and kellybb websites to see what they say your car is worth as a trade-in.
Why are you selling a car you still owe money on?
I work as an auto salesperson and I pride myself on transparency and honesty. The internet has introduced so much of that into the car buying process anyway, so why not embrace it, eh?
I’ve been doing this for about two and a half years and I have learned a lot about both sides of the table.
Per a poster above regarding owing 10k on a 5k car: it’s negative equity and must be accounted for in any new loan and is generally only an issue if someone has poor credit as lenders will only loan so much money against the vehicle of interest’s (the car the customer wants) ACV (actual cash value). Usually it’s around 125%. So if the negative equity plus the price of the car and all taxes and fees exceed that amount, we won’t get an approval in that scenario without money down to mitigate the negative equity to get at or under that 125% ACV.
Lenders also attach increasingly higher interest rates as a used car gets older and racks up miles, and for people with poor credit they won’t float a loan on a 10 year old car with over 100k miles on it at all without a significant down payment. It’s just the higher risk of default on the loan when a car that old develops a major mechanical issue (which is more likely due to age/wear) and then the customer walks away from the loan and the banks repos a heap that doesn’t run and isn’t immediately saleable to recoup the loss.
As far as the negotiating goes, nobody likes that part of the process but it’s somewhat unavoidable, at least to a degree.
I encourage my customers to lay all the cards on the table from the outset. Unfortunately there are still dealers out there hurting the rest of us by engaging in behaviors that give all of us a bad name and hence why everyone’s guard is up because customers are convinced that dealers are actively trying to screw them, which isn’t the case as often as they believe.
Knowing a payoff is important for me because I need to know how much equity you do or do not have because it absolutely influences any numbers we may work on together in an effort to sell you a car.
The car business is about the here and now. The best deal you are going to get will be once you find the car you want that suits your needs, then sit down with a salesperson you like and trust and be ready to buy right then. The dealer will not want to let you go without selling you something and may make you a ludicrous offer good for that day only, right now. Hint: this happens more frequently on new cars at the end of a month as sales managers are scrambling to make bonus tiers based around unit counts.
There are times of the year when certain incentive programs will often get pretty generous so look for those, especially when you are looking at a new car. I sell GMC and Buick vehicles, for instance right now we have 15% off MSRP on selected SLT and Denali trucks. This is in addition to the national rebate, so it’s stackable and it’s a really good deal for both customer and the dealer. You get 8-9k off the vehicle, and we get all that money back from GM. Not all programs give us ALL the money back, most are only SOME of the money. The dealers are permitted like four VIN’s to attach that savings to and then they get a “reload” from GM after a certain date in the month of May after one of them is sold so they can tag another truck with the same discount.
People think we have some insane amount of markup on new cars. It’s simply not true. I only get paid on front end gross so it’s incumbent upon me not to “give away the house”. This is why I like the 15% programs so much because it essentially removes negotiation and everyone saves and makes money on the deal. Of course there are always customers that ask for way, WAY too much money off, or way more than their trade is worth (often, it’s BOTH). I ask people how they come up with such numbers and they usually say that that’s what they think it’s worth. Which is NOT what it’s worth.
If you want the most money for your trade, sell it yourself. This is what we would try to sell it for, it’s called retail. Dealers cannot give you retail because then they can’t make money reselling the car. At the end of the day it’s a business just like any other and survives on profit. Only in this business does the word “profit” get portrayed as dirty. You don’t begrudge the grocery store chains, banks, utility coimpanies, etc, etc their profits, so why us? Well, maybe you do begrudge them that but you pay for those things anyway, same with a car.
Dealers are also compelled by law to do safety inspections on used cars they intend to resell. Pieces of shit cars are sent straight to the auctions as they are worth less money than it would cost to make them saleable. Everyone in the building except the office girls works on some form of commission folks, including the service department.
Here’s an example: I take in a car in trade for $5000, and that’s an average trade value on NADA based on what cars like it in similar condition/mileage are going for at the auctions. Auctions drive trade values and NADA’s website is your best resource for ascertaining your trade’s value as they are based around auction/true book values and not direct consumer input like KBB. Don’t use KBB, it can be wildly inaccurate and people ALWAYS think their car is in better condition than it really is.
Back to the scenario: our 5k car. Average markup on this car is usually around 4k, so let’s just use that and say we’re putting the car on the lot for $9000, which is NADA average retail for this vehicle. Service charges us $500 just to look at the car and tell us what it neeeds. So we own the car now for $5500. It needs tires ($600), brake pads ($300) an alignment ($100), oil change ($50), a new windshield as it’s cracked ($200) and the check engine light is on (diagnostic fee for that is $80).
Anything safety related we are legally bound to repair before the vehicle can be sold or we can be sued. So let’s add that up: that’s now $6830 we own the car for. Turns out the check engine light is for an O2 sensor which doesn’t necessarily impact the safe operation of the vehicle so the used car manager opts not to fix it. Hey, it’s an under 10k car, right? It’s going to have some years and miles on it. Expecting perfection in this price range is a fool’s errand for the most part.
So as you can see, the gap between retail and trade values aren’t solely profit motivated. If we discover our car needs a new engine, then we cut our losses and send it to the auction as is.
And chances are we won’t sell the car for $9000 anyway. Even if we do, we’ve made $2270 selling the car, and I get paid 25% of that front end profit. So I made just over $500 selling you the car. Sounds like a lot until you factor in my side of things. If I could actually make $500 per car I’d probably take it if I could guarantee my units would be 20 a month, but that’s pretty rarified air at a Buick store. That’s 10k a month, sounds like a fortune! But hold on there, sparky. I have to live throughout the month and get paid my commission check only once a month, the tenth of the following month. So I get paid a “draw” which I have to pay back every month. This amount is often negotiable (natch), mine is $600/week.
So my draw is $2400, so now my check is $7600. But Mrs Wilson had brought back her car and loudly complained something was wrong with the front tires, turned out they were bad and we replaced them. This gets charged back to the deal (a chargeback) that I have already been paid on so I have to pay back 25% of that replacement. Chargebacks really suck for us and they happen a lot.
Anyway, lets’ stick with $7600. The government in it’s infinite wisdom taxes my commission checks like they are supplemental income or a bonus. It’s about 46%. Usury!
So then what really hits my account is like $3900. Not bad, right? That with my draw means I made $6400 that month. Sounds like a lot until you realize that sadly, I don’t make $500/car (many car deals are “minis” where I make just $100, and invariably I have to spend 8 hours grinding it out with customers on those deals) and I have only sold 20 or more cars in a month three times in two years. I average about 12-15 cars a month at about $350/car. 15x350= $5250-$2400 draw=$2850 commission check, less 46% taxes= $1539 deposited into my account, or $3939 total earnings for the month.
So as you can see, there’s a reason we don’t want to waste time. Car buying takes a lot of time anyway, so adding to this just makes everyone involved cranky and hungry. If I spend six hours with you and you are being unrealistic (at the end of the day there are so many people out there that can’t understand simple math) and I don’t sell you a car, that’s one more day I don’t earn anything. If I have a bad month my draw rolls over into the next month if I can’t cover it.
I’ll stop here, it’s time to cook dinner for my children. You know car salespeople are people too, right?
Any questions feel free. I’ll be fully transparent if you will.
Very good advice. Better yet, simply don’t care what they know about you. If they know how much you owe on your vehicle, and they try to use that to convince you, simply don’t be convinced. Get what you want, not what they think you want. Say no if it’s not good enough.
Do you lay all your cards on the table from the outset? All the manufacturer incentives, the fact that it’s near the end of the month and your manager is only 2 cars away from a bonus, so it’s a good time to try to squeeze another few dollars out of him, etc? If not, do you still consider that honest and transparent?
Thank you for your post. I’m sure you can add to this discussion. But, surely you understand that making your job easier and more lucrative is of little concern to a shopper looking to maximize the price he gets for his trade-in and minimize the price he pays for a new car. Understanding the “system” may very well simplify and shorten the process, but it seems to me the blame lies squarely with dealers, who are the ones who dream up complicated sales tactics and compensation systems.
A proper negotiation should be completed in 10 or 15 minutes, not hours. I understand that a dealer wants to maximize profit, but I won’t stand for games and drawn-out processes.
Excellent comment!
My rule of thumb is that if someone feels the need to inform you of how open and honest they are, you should check your pocket to make sure your wallet is still there.
This is terrible advice for the customer. What is owed on the trade in is absolutely immaterial to ANY deal. When you buy a house, do you ask the seller “How much do you owe on it”? In fact, I can’t think of ANY other transaction where the buyer expects to know the seller’s pay off on the item. Car dealers have tried to condition the public to give that information as a matter of course because it is a huge boon to them. It does nothing for the consumer.
The same goes for the question “how much is your current car payment”? My current payment (which is actually zero) has nothing to do with what my trade-in is worth, or how much I will pay for a new vehicle. Nothing whatsoever.
This is really bad advice. What you NEED to do is know the fair market trade-in value of your car and how much you owe so that you have a good understanding of the amount you can apply to a new car. The trade in value is easily obtained on the internet.
AFTER the dealer gives you a trade-in price you can inform him how much of that trade in will go towards a purchase. Carry a calculator with you if you don’t like to do the math in your head.
I have NEVER discussed what I can afford with any car dealer. If they even try to use “afford” or any derivative of the word I stop them and say,“You and I will never discuss what I can afford. We WILL discuss what I’m willing to pay.”