DON'T PAY CASH AT CAR DEALERSHIPS! (Here's Why)

Hey, everybody. Welcome back to Whiteboard Finance. My name is Marko, and I'm here to help you master your money and build your wealth. In today's video, we're going to be talking about how you should never tell a car dealer that you are paying cash, especially during the sales process, and especially during the negotiation process. If you've saved up money to buy a car with cash, congratulations, that is a good thing. However, most people think that this is a positive thing, and it's a negotiating chip in their favor, when in fact, it's probably hurting them, making them pay more for the cost of the car. Dealerships in today's business model are not incentivized in any way for you to pay cash for their cars, and it actually may result in you paying more for the car. In this video, we're going to talk about how the modern car dealership business model works. We're going to talk about how to actually buy with cash from a car dealer. Finally, I'm going to talk to you about how I personally buy cars with cash and other options outside of the dealership model. Stay tuned. Okay, so let's try to better understand how a modern car dealership business model actually works and operates. New car sales account for 58% of sales at a dealership. When most people think of car dealerships, they think that they make a majority of their money on the sale or the price of the car, which couldn't be further from the truth. Although new car sales make up 58% of sales, it only accounts for 26% of gross profit. The reason for that is because pricing is transparent now. People have phones, they have apps, they have the internet. You can find out what the price of a car is in roughly five to 10 minutes if you just do some preliminary research. It's not that hard. So car dealers need to make money elsewhere. So what do they do? They make a majority of their profits from F&I, accessories, service, fees, and parts. These are the major profit centers of a dealership. So the car, think of it literally as a vehicle, no pun intended. Well, pun intended, it's the whole point of the video. The car is simply a vehicle to get you into high margin finance and insurance products. That's what F&I stands for. Those are the guys in the back that do your paperwork. So F&I is simply where they sell you gap insurance, wheel insurance, extended warranties, protection packages, et cetera, et cetera. And the funny thing is is that 55% of these extended warranties, according to extensive research, shows that these extended warranties are never used. So you're paying for a product that you end up not utilizing. So if I was a casino and I had a 5% house edge right here at 55%, I would be salivating at those numbers. So the next slide, now that you understand how the business model works and where they make their money from, is going to actually teach you how to go through the sales process and how to actually buy a car with cash. Okay, so this is the part that you've all been waiting for. So how to buy a car with cash from a dealership. So there's only four factors that go into a car deal. You have the price of the car that you're interested in. You have your trade in. If you're going to trade in a car, if you're not, then you can get rid of that factor. You have a down payment. So this is the money that you're putting down. In this case, if you're a cash buyer, that is 100% down. If you're putting down less, you're going to get some payments thrown at you. Okay? This is pretty much what every car sale boils down to, these four factors. So let me take you through a very quick example of a sales process. We've all been through it. Mr. and Mrs. Carbuyer, you come to the dealership, you're greeted by a salesman. Hey, I'm Marco with No Lube Chevrolet, where we service you with no lube. How can I help you today? I qualify you, I put you on a car, you go on a test drive, you come back from the test drive. Hey, Mr. and Mrs. Carbuyer, how'd you like that new car smell? Would you like some coffee or tea? We'll take you inside, look at some numbers. How does that sound? And we go through the sales process, and this is where the negotiation starts. Most people that are cash buyers shoot themselves in the foot at this step right here. Do not tell them you're paying cash. This is where you kill all of your negotiation power, and I'll explain why. So dealerships are incentivized. Remember, the new business model, where does 74% of their revenue come from outside of the sale of the car? It's from F&I and other things, service packages, accessories, et cetera, et cetera. The way that dealerships make money is by literally becoming the bank. So they can either be their own lender, or they can shop out your profile and your credit score to all the different lenders in their network, and they can probably get you a pretty good score. However, this is where they make money, and this is where you have more room, and number one, to negotiate on price. You lead them to believe that you are financing with them, okay? Just pretend that you're not a cash buyer. You're putting down 10, 15%. I don't know. Make up a number. So once you do that, the dealership knows that they're either going to make a flat, which is basically a commission. So when Mr. and Mrs. Car Buyer end up taking a loan with dealerships Bank X, Bank X is going to pay the dealership a flat fee or a commission. Or the other way that dealerships make money through financing is through loans, is through financial reserve. So basically all this is, is that you qualify for a buy rate. Say you're an 800 credit score. The loan is going to be 4%, right? That's the buy rate. The dealership will bake in numbers. They'll bake in two extra percent called the sell rate, and that's where they make the arbitrage. That's where they make the 2% spread. So for a quick math, if you took out a $20,000 loan, financed at 60 months at 4%, and they get it to you at 6, that 2% difference is worth $1,033 over the course of that loan in spread. So now you can see where the dealership would be more willing to go to negotiate on price is because they're making money here on the payments. Make sense? So now you're probably asking yourself, well, Marco, you know, I don't want a loan. What does all this lead to? I thought the point of this was to buy the car with cash. Yes. So when you go into the back office and F and I, okay, where they sell you the gap insurance, the wheel insurance, all that good stuff, that's actually where you find the sheet and you basically break down every single one of the costs. Okay. And we'll get into that right here. Okay. So this is where the rubber meets the road in the video. This is what you're going to do in the back office. So you are taking out a loan from either the dealer themselves, someone part of their network or actually the manufacturer's financing arm. So like Lexus financial, GM financial, et cetera, et cetera. The reason you were doing this as mentioned earlier in the video is because you're going to beat them up on price. Once you finish the sales negotiation on the floor with the salesman, you're going to be in the back office and they're going to present to you your final numbers. Okay. So typically what this looks like is, is you're going to see retail price. This car was $32,997. Well, you got us down to the sales price, which is now 30. They're going to break out your local taxes. In this case, I just assume 10% that's high, but just assume that, uh, for easy numbers. Then you have like doc fee, fee one, a government fee fee to, you know, some BS fees that they make up, which I'll explain to you in a second here, what to do. Um, you have gap, which they're going to build into this gap insurance and then accessories and, uh, service packages, things like that. I just ran out of room on the whiteboard. So you're going to come to a total number of whatever that is, you know, five figures minus your down payment. And that's going to be the amount financed. Now this is where you actually want to still continue the negotiation process and don't be afraid to walk away if they don't meet this. Okay. This is going to save you money. So pay attention. So since you're taking out the loan, first and foremost, you need to understand if this loan has a early prepayment penalty. If it does, then what I'm explaining is not going to work. It's not worth the effort if it doesn't, which most loans shouldn't have an early prepayment penalty. Um, then you just save yourself a bunch of money and you can send me a commission check in the mail if you want to. Just kidding. Not really. All right. So what happens is, is once they break all this down, you're going to say, Oh, a doc fee, 500 bucks. Uh, no thanks. I'm crossing that out. Government BS fee. No thanks. I'm crossing that out. Gap. I don't need it. I'm just saying for this example, if you want gap, use it, whatever. I don't care. Uh, accessories. I don't need it unless you want it. Then you have them redo the price. They're going to say, Oh, this doc fee that state mandated. If I charge you X, I have to charge everyone else X. Otherwise I'll lose my license. Blah, blah, blah, blah, blah. Well, guess what? Uh, for all the big brain people in the comments that are, that are going to leave a negative comment, this is just a negotiation chip. Okay? You don't have to knock this out. All you do is you take this 500 and you take it off the price of the car. You say, okay, I'll pay the $500 fee if you charge me 29 five for the car. Does that make sense? So you're just buying yourself more negotiation power. And if they say, no, I can't do that. You know what you say? Thanks Mr. F and I have a great day. And you walk away with a smile on your face and you drive off into the sunset. I'm just kidding. But anyway, you're buying yourself more negotiation power. So you're still going to end up paying for the sales price of the car. You're still going to pay the same tax that you would have paid. You may buy yourself some negotiation power with these BS fees. You're not going to pay this stuff. You have them redo the total. You put down whatever you said you're going to put down. And this is the point of the video. You get your payoff amount from the lender. Let's call it 30 days later or 45 days later. You say, Hey, what's my payoff amount? It should simply just be these numbers, sales price tax, whatever the amount you financed minus your down payment. And you send them a check cash. You just paid cash for the car while still getting all the benefits of the sales price negotiation. Does this make sense? Okay. So now that I saved you a bunch of money, this is how I've been buying cars my entire life. My parents are immigrants. We don't buy new cars. I've never bought a new car, probably never will. I don't lease cars. I own a business. Maybe leasing makes sense to save me some money as a write-off. I don't care. I don't even play those games. I buy cars with cash from private parties. Okay. What's a private party? It's a human being just like me and you. Are there shady people that exist? Yes. Are there good people that exist? Yes. Are there rich people who maintain the crap out of the car, made it pristine and service that at every single service interval, took the depreciation hit, the maintenance hit, and now they're selling it to you for cheap with no fees that a dealer would charge you? Yes. Those people exist too. And that's how I buy cars. I buy cars off of forums. I buy cars off of Craigslist. I buy cars off of private parties who have taken well, uh, who have well maintained the car and have all the service documents and everything. And I'm also mechanically inclined. So that helps too. So is my dad. So my point is I've broke even or made money on most of the cars that I've owned. I've only lost money on a couple of cars that I've owned. I buy cars that have high demand, low supply, typically enthusiast cars. I drive them for a little bit, sell them, make money or break even. Okay. This is why I've never had a car payment my entire life. So let me elaborate on these two very quickly because I know people in the comments are, Oh, I don't have a mechanic. I'm not mechanically savvy. I'm going to get taken advantage of. Just use some common sense, dude. If you're pulling up to a beautiful residential development and the guy lives in a $500,000 house or a McMansion or whatever you want to call it, he probably took good care of the car. Okay. And you check it out and inspect it. Just use common sense. So what I do is I go to forums. If I'm looking at a Volkswagen Touareg, which is not made anymore, I'll go to Volkswagen Touareg forums. If I'm looking at a Porsche Cayenne diesel six speed manual, which they're not making anymore, I'm going to go to a Porsche forums, Renlist. I may go to Craigslist. I may set up an automatic search. So when certain words meet my criteria, I get emailed and you can see if the car's in good shape or not. So this part of the video probably resonates with maybe 5% of the people watching the video, but this is the best way to buy a car. You avoid all the dealership fees. You avoid all the sleazy salesmen. You avoid all the headache of going through the dealership process. You're simply dealing with another human being. If you have a good judge of character, you know what to look for. And you did your research. Buying cars from private parties is the best way to get value, period. If you don't agree, comment down below. If you do agree, comment down below whether you do or don't. I mean, it's just my opinion and I've had success doing it for many years. Thank you so much. And if you want to watch my how car dealerships video rip you off, check this out right here. Have a prosperous day, everybody.