Research we’ve done at Lifecheq shows that South Africans end up paying between R1 000 and R1 500 per month more than they should to drive the car they want. By the time they’ve finished paying off the car, which is typically over a five-year period, that’s between R60 000 and R90 000, or R75 000 on average.
Just think for a moment what you could have invested that money in? Some great options on your new vehicle? Deposit on a townhouse in Sandton? A family holiday overseas?
You’re probably thinking: why would anyone in their right minds just happily hand over that kind of money to the dealer and the bank? You and most people like you are way too smart for that. And indeed, you are. You’ve work extremely hard for that kind of money and there are many things you would rather spend it on.
There are quite a few reasons we discovered from our research as to why people end up overpaying for the car they want to buy. The issue here is that it’s not exactly a fair match. It’s not about how smart you are, but about how uneven the playing field is. The many qualified people in our survey – doctors, lawyers, even some with Masters’ degree in Finance – didn’t spend hours and hours on research beforehand. But seriously, who does that?
This article is about how you can save money when buying your next set of wheels, and we’ve developed this into an extremely easy process that will help you avoid the common mistakes we discuss below.
A successful car salesperson sells at least 3 cars a month. In a year they close between 30 and 40 sales. An experienced car salesperson has done this over 400 times. The dealer makes money both on the profit in the car they sell as well as in the loan interest you pay plus any extras you buy. Alas, you have a day job and I’m guessing you don’t aspire to be a professional car buyer, whereas the dealer is a professional car salesperson. And buying a car is something where expertise helps, a lot. As the buyer, you’ll just have a vague feeling that maybe that delicious free latte and wifi they offered you in the dealership lounge wasn’t so free after all.
Please don’t misunderstand, dealers are usually great people – they know a lot about cars, they’re friendly and will even give you a free latte. But they’re not so nice as to say no to extra money if they have a chance to earn it fair and square. There are a quite a few reasons we discovered from our research as to why people end up overpaying for the car they want to buy, but the three main ones: not researching the trade-in value for their current car (up to R15 000), not getting pre-approved for finance (up to 25 000), and focusing on negotiating on the monthly instalment instead of both sticker price and instalment separately (up to R30 000).
Just take this last category as an example:
Say you can only afford R5 000 per month, but the monthly quote comes back at R5 500. Momentarily suppressing your lust for the gorgeous vehicle you’ve been dreaming about, you pull out your best negotiating face and stare down the finance and insurance specialist at the dealer as you push the ridiculous offer back towards him with a firm “No! That’s just too much!”. Quietly impressed with yourself, you sit back and wait for him to re-run the numbers. Seemingly reluctantly, your friendly dealer puts a hand on your shoulder and promises you he knows a secret way to get the payment down. The slight fear you had of not being able to drive your new black BMW 320i starts to fade and you get that warm feeling of hope again. Phew, that was close! He says he’ll add a R50 000 “residual value” to the loan. In English, that means you pay R5 000 a month and have R50 000 to pay in five years’ time. Genius!! Ok, wait, you’re a bit worried about where the money will come from in five years’ time, but whatever – you’ll figure it out! More importantly, you can now take the car home with you today!
Melodrama aside, what you may not realize is that you’re still paying the same amount. You may have thought you were negotiating with the dealer, but you’re actually negotiating with your future self, that poor soul who will have to come up with the money in five years’ time. The interest-rate and residual value are something the bank (for whom the dealer is acting as an agent) can give you a discount on, but it’s quite complicated to see what’s really going on there unless you have a financial calculator with you.
When you start negotiating on the monthly installment, without pinning down either the sticker price or interest-rate, it’s like trying to negotiate lobola in number of cows without having agreed the price of a cow – you’ll get nowhere.
Also bear in mind that when it comes to the loan, the dealer’s finance person works for the bank, not for you. The bank pays him more if he sells you a loan with a higher interest-rate. So even though it seems convenient to ask the dealer to apply for the loan for you, you’re not really going to get the best deal. It’s always best to get pre-approved.
Now let’s say you were planning on buying a R350 000 BMW 3 series. Instead of a 10% “reduction” on the monthly installment from R5 500 to R5 000 (which was really an illusion), if you had negotiated a 5% reduction on the sticker price, with a pre-approved loan, you would have saved yourself a whopping R30 000 in real cash at the end of five years. That’s enough to reward yourself with a Sony 65-inch 3D TV.
This is just one of a many tricks dealers learn in dealer school. Of course, there are many car buying guides on the internet that you can read and try to figure out how you navigate all of this, but the simple way to save money when buying a car is to sign up for LifeCheq.
We’ve developed all the tips and tricks here into a simple, convenient process to level the playing field for you and make sure you do save as much as possible the next time you buy a car. All you need to do is pick the car you like and we’ll do the rest.