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by Santaanacanyon on August 24th, 2003

Santaanacanyon

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Why should I never negotiate a car's price according to the monthly payment?

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  • by Child Of The 60s on July 28th, 2005

    Child Of The 60s

    The reason you hear that advice is that negotiating a price is a one topic conversation: "How much?" It's very easy to keep track of where you stand. Once you've negotiated a car's price, the monthly payments will be determined by a number of factors, but the amount you're borrowing is only determined by the price, plus tax and license, minus your down payment.

    Payments however, are not just determined by the amount you're borrowing; but the term of the loan and the interest rate you're getting. When negotiating with a dealer, they prefer to negotiate with payments because #1, as I mentioned, the variables involved in determining a payment and keeping the actual price out of the conversation gives him an advantage regarding holding a higher profit. Every $20 per month you give represents approximately $1000 when buying a car on a 60 month purchase (if your credit is good... that's about a 7% interest rate). It's easier to say yes to $20 than to $1,000; and if they have some 2.9% factory rate, $20 per month will represent closer to $1400.

    Doing the math backwards, if you have a budget of say, $200/month, and have $2,000 down, that gives you about $12,000 including tax and license to spend for a car- if buying on a 60 month loan at about 7% interest. The car, plus T & L, = $12,000... minus your $2,000 leaves you $10,000... $10 times $20 = $200. You could negotiate the price to $12,000 incl. T&L and end up with $2,000 down and 60x $200. However, if you negotiate with $200/month with $2,000 down, the price of the car could change for a couple of reasons: If they have a cheap special interest rate from the factory, that payment will borrow more money. They could bump the term of the loan up to 72 or even 84 months, or switch you into a lease, where you are only financing half the car.

    No matter what, one thing remains constant- Mathematics. No matter how slick a dealer you've got in front of you, they can make 2+2 come out to anything but 4. Do your math before you shop. I spent 24 years in the car business- half of that as a Finance Manager. I hope that this explanation is clear enough to help you.

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