Thursday, June 14, 2012

Cross Link Experiment

The Velvet Revolution is cross linked here

Thursday, September 23, 2010

Negotiating a Car Lease - Bracketing

After reading “How much should you pay for a new car?”, you should by now have identified the specific car you're interested, in its specific trim level, selected options and set a price target (TMV). 


In this article, we assume you have decided that you want to lease the car, for your own reasons, and have found a dealer.

Before we start,  if you found special lease offers while shopping, seriously give these consideration. Look at the ad, study the details, they are usually packaged with low financing rates and lease rates. Sometimes, they vehicles are also discounted. Check these out. If the price is right and the cars are not rinky dink versions of the showroom model, you may not have to do much negotiating to get a good deal.


HOT TIP: Do not lease or purchase a new car by rolling over an unfinished lease or car loan. You’re gonna get screwed. You’re going to get it on the old car, on the new car and on your brand spanking new inflated lease balance. A new car ain’t worth it. You might as well drop a bar of soap in a prison shower.


Back to the business at hand, determine how much down payment you’re going to put towards the car.  This will come from either your pocket or the value of the vehicle you’re trading in.


Determine your lease term. Do you want 1, 2 or 3 years? I do not recommend leasing a car for more than 36 months. If you want to have the car longer than that, BUY IT! It’s better to build some equity and get some of your money back in the end. 


Also, if you plan to have the car for longer than 3 years, you run into the risk of going over mileage. An extra 20 cents a mile for 15,000 miles over the life of the lease is $ 3,000. That’s in cash money due at the end of the lease!


HOT TIP: buys cars.  If you’re afraid of having to sell a car after financing or considering a trade-in, try and flip it over at Carmax. Before selling the car (or trading it in), exercise due diligence and check for its fair price. Carmax offers relatively little hassle. They won’t quote you on the phone though. You'll have to drive the car to one of their lots for inspection. As an alternative, makes selling cars to private parties relatively easy too. It will be a private sale, so realize that it will take more time and effort. Be wary, there may be some weirdos knocking on your door. Selling on Craigslist is another beast unto itself, a beast that has the potential to pay more for your car.


With the down payment and the term set, we will need the MSRP, the TMV price (national selling average price), the state sales tax rate, down payment amount, length of lease (term) and the CAR VALUE at END of LOAN (residual value). The Residual Value is available from your salesman. It will be disclosed to you on when they give you an offer. It is dependent on the term of the lease and the vehicles value. Normally, it is around 54% of the car’s value for a 36 month lease.


HOT TIP:  After determining the term and the down payment, DON'T CHANGE ANY OF THESE VARIABLES in negotiation. If you’re unable to do complex math in long hand, chances are you’ll get thrown off your game.


Plug all these numbers into the lease calculator.


As an example, let’s do an exercise using a base model 2010 Toyota Tacoma with an optioned air conditioner using an TMV table.



In filling in the numbers for the lease calculator, residual values can be had from the sales person. If its not available, for whatever reason, for the purpose of negotiations, we can go ahead and assume 54% of the TMV. 


TMV ($ 16,018) X 54% = $ 8649.72 (Car Value at End of Loan or Residual Value)


For interest rates, get a rate quote from your bank for a car loan and locate the dealer's advertised special rates from their website. If a special finance rate is unavailable for the car you want at the dealer website, find a finance rate that is and use that one. You deserve it! As of 2010, dealers are offering finance rates lower than banks. That will not always be the case.


Among the interest rates you gathered chose the lowest and use it for our computations. This may have you leasing with the bank. So be it. You may be wondering, what we have is not a lease rate/money factor. Don't worry, calculator has done well here and requires an interest rate . Their calculator converts the interest rate into a lease factor. This removes the rocket science from a lease. Money is money, and a lease and a loan should cost pretty much the same.


Note: the Final Negotiated Price entry for the calculator is negotiated price plus all dealer charges.


HOT TIP: I generally do not include dealer charges. This gives me a low base to start negotiations. I know, dealers have to pay such costs. That’s their problem. 


Back to the Tacoma example, here is the table with all the variables.


Your monthly payment on a 2010 Tacoma with $ 1000 down is $ 196.92 based on the TMV. 

Now lets start bracketing. Tweak the previously filled out lease calculator by adjusting the negotiated price. For the purpose of this exercise, lower the price by $ 500.00 to $ 15,518.00 and recalculate by clicking on the Calculate tab.

The amount add or deduct from the Negotiated Price column on the calculator it is dependent in what seems reasonable compared to the value of the vehicle. If we were negotiating for a BMW 550i with an MSRP of $ 75,000, I’d probably adjust in steps of $ 3000. Get my drift?

After adjustment, the monthly on that Tacoma is now $ 181.25. Repeat this process moving above and below the TMV. Bracket the negotiated price by intervals of $ 500, our assumption. The compute to an upper limit no higher than the MSRP. Set the lower limit somewhere below the INVOICE price. Print out each one of these pages, we will need them later. Make as many computations as needed to cover the range in which you think the price can be negotiated. Assumptions over the TMV are made to factor in unanticipated options already included in the car that’s in the lot.

After the exercise, we get a table of various negotiated prices and their corresponding monthly payment.  

$ 17130 - $ 231.79 monthly
$ 16518 – $ 212.60 monthly
$ 16018 – $ 196.92 monthly
$ 15518 – $ 181.25 monthly
$ 15018 – $ 165.57 monthly

Do you see what we are doing?  With all variables (term, rates) constant, except the negotiated price, we now have built ourselves a map to negotiate your monthly lease payment. Let’s go to the dealer!

Sitting down in front of the salesman, before you start negotiating, get everything straight. Which car are we dealing with here? Tell the salesman the term you have in mind and the amount of your down payment. With that done, WAIT! Do not blurt out your offer. Ask the dealer for his price, and the monthly payment. They’ll give it to you. They do not expect you to know what you’re doing on a lease.

Study the offer. How much is the dealer selling you the car? Let's say the offer is $ 250.00 a month with $ 1000 down. That’s not right. We know this from our table.

From my own experience, I was negotiating for a $ 27,400 car, for 36 months, with $ 2000 down and a 1.9% special financing rate (converted to lease factor). The first offer on the table was $ 435 a month. That prices the car over $ 28,000! No, no, no, I told the sales guy NO WAY. You’ll get the standard reply, “what do you want?”. They are prepared to deal. These are professionals. I took that car home for $ 345 including sales tax. That’s $ 314 a month ex-tax. Total savings of $ 1080 a year or $ 3240 over the life of the lease.

HOT TIP: Always negotiate including tax! That’s how are our negotiating table is computed and that’s how we'll roll.

Let us  proceed. Back to the Tacoma, we know the national average selling price and that is what we are shooting for. But for starters, shoot LOW. The base model Tacoma is not a high margin vehicle. It’s a business model. Invoice, according to is about $ 16,000 just around TMV. Offer the salesman the monthly payment for $ 15,000 ($ 165/month) and let him chew on it. See how he reacts. Work your way from there. Work at getting the car under or just at TMV. If he objects and you hit a wall in negotiations, pull out your printed page with the monthly payment that is closest to your current stand-off price. This will show him you know where you are and that you know what you should be paying. Don’t worry, you’ll get it. If not at this particular dealer, at another one. The TMV is a true price. The Tacoma is being sold somewhere at this price. Its a THE NATIONAL AVERAGE, that means the car is selling somewhere LOWER.  We know the fair price and its now a matter of how much below it can you negotiate.

Don’t let the sales guy confuse you with lease rates and money factors. He'll throw every trick in the book at you. Pay no heed. We have included all the factors in our computations using available interest rates. We're good. All assumptions are set. All you need to negotiate is the monthly payment.

WARNING! Do not change length of the lease (term) or the down payment during negotiations. These will change your cost and throw you off your game. You can’t get what you want when you don’t know what you want. These numbers should be set in stone before you walk into the showroom.

Continue negotiations until you hit common ground. Things should go fast once you’ve pulled out you spread sheet and showed it.  If the vehicle comes with unanticipated options, ask how much the options are (if you want them) and just note the TMV from your roll of printed spreadsheets to factor them into your monthly payment.

Don’t be afraid to walk away. Most times, that is the only way to get the best possible deal. Their best offer has no expiration. It will be available to you tomorrow. If you have to, hold your ground and go home. You have nothing to lose. It’s only a question of how much is your time worth. With your TMV tables, you know how much playing the game is costing you. Be bold and make a decision.

In ending, you may have noted that we did not discuss ANNUAL MILES. Although this plays into the dealer computation, this in unimportant to us except for the fact that we should be negotiating a lease that has ANNUAL MILES within your historical average. Once that is clear to the dealer, don’t worry about. Just use the TMV Values as a guide and adjust a little bit if the dealer wants more money for 15,000 miles a year over 12,000.

Wednesday, September 22, 2010

How much should you pay for a new car?

How much should you pay? There is only one price that people pay for new cars. That is the market price. That is the price at which buyers and sellers trade the item in an open marketplace. It moves every second, after every transaction and on every car. The best deal you can get, is the best deal you can negotiate at any one particular time. The car you are trying to buy can be priced higher or lower depending on what time you entered the dealership, on which particular dealer you walked into, which salesman you spoke to and what your credit score is. The best you can do for yourself is to be prepared to shop, negotiate and make a decision.

Car prices vary by area due to a multitude of reasons. Local demand, the strength of a dealer’s motivation to move a particular car, the time of year, current promotions and rebates, reasons are multitude and, gladly, irrelevant. We will talk about timing a car purchase in a latter article. There is no need to psychoanalyze the salesman or go through the dealer’s financials. We don’t care why they do what they do. All we care about at this point is how to buy a car for a fair price, and not get ripped off.

Moving forward, start shopping on the internet and short list specific model cars in their various trim levels. Get a list going of at least 3 that you will be shopping for. Three is not a magic number. I suggest more if you care to, or you could shop for just one model if you have your heart set on a specific car. I strongly suggest that you consider a few cars if  final price is a strong factor in the purchase decision. Trim the list of cars that are over your price limit, that do not offer options that you desire, have bad reviews or just plain fugly.

Here are useful review sites that I personally use in evaluating a car, when one is available.

I also recommend doing a Google search for a “best car” list. Narrow down the search to the specific type of vehicle that you are interested in. A Google search will give you the most recent “best” list and will provide you with a good range of choices. Samples of search terms are "best compact sedans", "best mini-van", "best station wagons", "best car under 25,000", "best luxury car", "most practical luxury sedan". You could also try searching for cars by activity. The search terms are endless. Search for what suits you the best. Chances are, somebody's made a list.

Video reviews of specific car models are also available at varying from amateur user generated reviews to professional content providers like Inside LineMotor Trend and If you're trying to decide between two cars that are in the same class, side by side comparisons are also quite helpful. Try and do a search for those too. Here is an example:

2010 Mustang and Camaro Comparison

Car manufacturer website are generally accurate when it comes to prices. Pay close attention to trim levels and options when obtaining prices.  The following list is provided to ease your shopping efforts.

While at the manufacturers` websites, make sure you take a look and note down the special finance rates, discounts, rebates, lease offers, no down, and other freebies available on each model in consideration. You will not automatically be offered these at the dealer.

Never, never let a dealer include a rebate in the computation of your negotiated price. Negotiate your price and make sure that the dealer knows you expect your rebate check in the mail, from the manufacturer. A dealer has nothing to do with a cash rebate. It's no skin off their back. What they can do is to claim the rebate for themselves. This deserves to be said again, make sure you get the rebate in the mail. It is not supposed to be computed into your negotiated price. Knowledge is not only power, its money in the bank.

Actual selling prices swing wildly due to trim levels and options. I recently shopped for a VW Sportwagen 2.5 SE that has an MSRP of around $ 21,500. The cars on the lot were listed for $ 27,500! The same thing happened with Subaru. I was considering a Forester as an alternative, but the $ 21,000 MSRP was only available for $ 27,000 fully loaded at my local dealer. I had to change gears, pun intended.

A $ 3000 dollar difference on top off a $ 25,000 car can change your mind about which car you really want, or can afford. But if you have your heart set on that red VW GTI 2 door with the 18 inch wheels and the dual exhaust, don’t waste your time, just shop the VW dealers. Focus your efforts!

Now that you have your short list, I am assuming that you have the prices on the various trim levels listed on a spreadsheet or at least a piece of paper. At this point let us move forward with establishing a fair market price and our base for negotiation. 

Our method is one of triangulation. As previously discussed, find the advertised price on the net for the car on the manufacturer’s web site? That is your first benchmark. I have shopped for cars to lease and have been offered “deals” wherein, if you compute the monthly payment, the car is actually being sold to me HIGHER than the MSRP, options included. That is just plain wrong. YOU SHOULD DO NO WORSE THAN THE MSRP! Thou shalt not break this rule.

The second benchmark is the invoice price. I find that is a good and trust worthy source for this information. While your there, check out the trade-in or private party selling price for the car you may trading in or selling out right. You might get a good deal on a new car, but the dealer could be ripping you off on your used one. It's good to know how much cash will be generated from your current car, whether it be for a down payment or a night on the town. 

The last benchmark is the national average selling price. At this point, the most useful resource I have found on this subject is Their TMV (True Market Value), also known as “What Others Are Paying” estimate have been spot on for me. This info is not readily apparent on the site. Find the info by selecting the vehicle of interest, selecting the trim level, identify the options you want and CLICK on the "TMV Pricing Report" option. You should find yourself at a table chart with the invoice price, the MSRP and ,VOILA!, the TMV.

There are a few other sites on the internet that offer a national average selling price (based on actual transactions) for new cars. Edmunds is just one of them. You can use any one which you trust. National average selling prices are not static. They move with the market. We cannot be certain how often fair market value prices are updated by Edmunds, so just make sure that you update your TMV price just before you negotiate.

At the end of this exercise, we have three prices for each one of our cars, the Invoice, the MSRP, and the TMV (or actual national average selling price). What now?

Put the greatest weight on the TMV price. You shouldnt be paying  more than what others are paying for. Make an initial offer under the TMV. Negotiate towards the TMV. You can hold your line anywhere above or below the TMV, but knowing the national average selling price gives you confidence that the price is achievable, that the price is fair to you and you’re dealer and you have the potential of driving the car out of the lot.

What do you do with the Invoice Price? Like I said, the prices we collected are benchmarks. Knowing the invoice sets you’re LOWER END in triangulating a purchase price. Its relation to the TMV tells you how well the car is selling. If the TMV is closer to the INVOICE and really far from the MSRP, chances are a really low bid might be considered. The invoice price is not dealer cost. Dealer cost has no bearing on the selling price. If the car is selling like hot cakes, forget getting a discount. Cost does not dictate selling price. Average price is where it’s at.

HOT TIP: Here's a little trick. When at the dealer, ask the sales guy about the specific car you want. Ask the about color availability. While he thumbs through his list, or computer, tell him you want to see the list so you can make a good choice. Whichever cars they have a whole lot of one the list, they are well motivated to move and likely highly negotiable. If you see only one Prius on the lot, there will be little room for negotiation. 

There are times when you can buy a car below invoice price, such as when a rebate is available and car demand is low. The dealer gets incentives from the manufacturer, further lowering his price. You may never actually get to know what a dealer’s cost is. Computing for actual dealer cost is not part of our exercise but there are great resources for doing so on the internet, one of which is If you have the time and the patience, go for it.

DO NOT PAY MORE THAN THE MSRP (options included). The MSRP is an important benchmark when you are financing or leasing a car. There will be times when you will be paying MSRP such as with newly released cars, or ones in high demand (Prius?). Take the time to compute your monthly payment backward and find out how much you are really paying for the car. You may discover that you are actually paying more than the MSRP or a stooopeeedly high interest rate. That is NO BUENO. Dealers will play with money factors, interest rates and financing terms (48 months to 60) to get you to pay more, using the monthly payment as a diversion. Do the math!

You don’t have to be a math wiz to figure out how much you’re actually paying for a car. Just plug in the variables for that lease or financing quote into an online lease or finance calculator (links below) and confirm that it pans out.

To compute your cost of financing you will need your agreed or estimated price for the car, the interest rate, length of financing (term in months) and sales tax.You can get a general feeling of what interests rates are by calling a couple of dealers and asking for their rates, calling your bank (it's best to get a quote from a bank if you have bad credit) or getting a feel for the average finance rates from a few different car manufacturers websites. If Toyota is offering 1.9%, chances are, a few other are too. If you have reasonably good credit, you should get the published finance rates, nothing more, better if less.

Auto Finance Calculator

To compute you cost for a lease, you will need your MSRP, final or estimated or negotiated price, the state sales tax rate, down payment amount, length of lease and the CAR VALUE at END of LOAN (residual value). Residual Value is available from your salesman. It is dependent on the term of the lease. Normally, it is around 50% of the car’s value for a 36 month lease. When plugging in the interest rate in the calculator below, use the published interest rate of the car manufacturer. has done well with this. Their calculator converts the interest rate into a lease factor.  These two rates are not always the same, but should be very close. If they are not, they are screwing either the lessees or the buyers. Don't be on the wrong team on this one.

Auto Lease calculator

And there you go. You now have a basis on where to start your negotiations. The biggest strengths in negotiating is to know what your paying and a capability to walk away from a bad deal. Knowing the national average price allows you to put forward a workable bid. The last two cars I bought, I had to walk away from the dealer. I still got both cars. The first one, the salesman ran into the parking lot as I was driving away, I got handed the keys. The last one, I had to go back home, adjusted my bid for an option that I had not calculated, and renegotiated on the phone. Walked in the dealership the same day, signed our pre-agreed price and brought it home.

I will be writing about how to use reverse calculation and car price spreadsheets in negotiating for a car loan and lease in later articles. Comments are welcome.

Good luck on your new car!

Part 2 Negotiating a Lease is here