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Course: Financial Literacy > Unit 13
Lesson 5: Dealer sales strategiesCar buying pitfalls
In the car buying process, pitfalls like "bait and switch" tactics and unnecessary add-ons can mislead people. Hidden fees and extended loan terms are other traps that can ultimately lead to a higher overall cost. Created by Sal Khan.
Video transcript
- [Instructor] What we're
gonna do in this video is think about some things
that you should think about when you are buying a car. And to help us with that, we have this fake invoice
from a car dealership for a car I guess, that I am buying. This looks like a used Honda
Odyssey that I am buying. I'm sure this is a fake vehicle identification number as well. But we're going to use this to get a sense of the different costs and
things you might wanna look for. And unfortunately, what we're looking at right over here, is a much simpler invoice than what you're likely to
see at the car dealership. When I was there a couple of months ago, after a very arduous
(laughs) and long process, my wife and I wanting to
walk out several times. And again, also said
we were gonna walk out, and that's actually how we were able to negotiate a few things; they printed out this piece of paper that had like, six copies with it and it was like, two feet long. And it was in much smaller print than what we're looking at here. But this is a simplified version just for the sake of the video. But you're gonna see similar information on whatever documents that you see when you're about to buy your car. Now, the first thing that most
people focus on is the price. And the price is usually the bulk of what you are going to have to pay. Now, one tip, and this isn't
always going to be the case, there's some very good
car dealers out there, but many of them are
just trying to maximize what you are going to pay for that car. And so there's sometimes, not always, going to be some tactics. Some would call it bait and switch, where maybe you do a web search and you do a search on the internet and you see the listings and it seems like
exactly the car you want. It seems like a great price. And then you drive over to
the dealership, you know, you drive maybe 30 miles
over to the dealership. And when you go there they say,
"oh, that car was just sold, but we have another car." But that car has some
of these other features that you might not be interested in, but it's not quite the same price. So one way to avoid that is
to get things in writing. So exchange emails with the car dealer, make sure they can give you details about the car that they're talking about. Have them in writing, put down the price that they're offering you. One mistake my wife and I made, the car we wanted was really in demand and they said they had it, they had it for the right
price, it sounded to us. We drove about an hour to
Oakland to get the car. And then when we got there they said, "Oh actually, they misquoted your price." And I was like, "well you can't do that." And they're like, "well, you
know, that guy's a new guy," et cetera, et cetera,
so get it in writing. And especially if you
need to drive an hour, the way my wife and I just did. The other thing you'll sometimes see is there might be a car
that's high in demand, but when you get there,
that car's not there. So once again, really verify things. Now, another way to think about car price beyond really validating
it, you can look online and figure out what the
manufacturer suggested retail price is, MSRP,
which it tends to be more than the invoice price. The invoice price is
at least what's stated the dealer pays for the car,
or what they have to pay to the car manufacturer, for that car. Now, the dealer will
oftentimes have some incentives to move cars off the lot. So if the car isn't in a lot of demand or if they have several
of them on the lot, they might be willing
to get close to invoice or even in certain cases,
even below invoice. But one of the really important things to think about, in this video, is that you are not done
at the price of the car. This happened to us a few months ago. We negotiated a price after us threatening to walk out several times, and you should be prepared to walk out. That's a very important
negotiating tactic, not just pretend to walk out, you should be ready to walk out. And that's why it's sometimes not good to go to the car dealership (laughs) that's an hour away from your house 'cause you really don't wanna walk out. But it's not just about the price, 'cause you negotiate the price and then all of a sudden
this big two-foot document gets printed out and you start seeing all of this other stuff that starts to add up to a lot of money. And sometimes it's even more than this. Now, it's important to know what these fees are and
what these taxes are. Things like sales tax,
registration fee, and title fee, this is not the car dealership
just making numbers up. These are things that
they have to charge by law and you really can't
negotiate these things down. But it's good to know that they are coming when you think about how much
in total you are going to pay. Now, some of these other
things you might see, and you'll sometimes
see even more than this, documentation fee, that's something that usually can be negotiated. And this right over here, is
on the high side for that. One of my favorites is
undercarriage protection. This actually came up when we were about to buy this car, where all of a sudden, and it was actually about
this amount of money, it got added to the bill, and there was a couple of other features. It's like, look, the car
that we agreed to buy when we called, had none
of this stuff on it. So we don't wanna pay for this. And once again, my wife and I had to threaten to walk
outta the dealership in order for them to waive
the undercarriage protection and just throw it into
the price of the car. So I'm not telling you to be unreasonable, the car dealerships need to
make their money as well. And there are many car dealerships
that are on the up and up and are trying to do good by you. But there are others that
are trying to make you pay as much as possible, and
you just need to be savvy. You have to be a strong negotiator. You have to know what you're looking at. And in any negotiation,
you have to be prepared to walk away. Now, the last thing I will highlight is sometimes, when they're
throwing on these various fees or they're saying, hey, why don't you want this extra feature or that extra feature? And it looks like a lot of money, it's, you know, $600, almost $500. They might say, "hey, it's not a big deal, if you finance this thing and you pay it down over five years, it's only going to end up being another $5 a month or $10 a month. Think about how much peace of mind you're gonna have for that $10 a month, knowing that your
undercarriage is protected." Resist that, you should go in, ahead of time, knowing what your budget is. Either your budget for
the total price of the car or what your monthly budget is. But not just your monthly budget, but the monthly budget, and how quickly you want to pay it down, and what your down payment is. Because if you don't come in
with that level of discipline, it's very easy to get upsold or to be convinced to
just lower the payment by having more payments further out, which we've learned in other videos, is not always the best thing to do.