Car Negotiation Tips: Ignore “The Four Square”
Everyone wants a great, low price on their next vehicle. Don't fall into the trap of thinking the best offer you get is the best you can find. Every sale price should be negotiated, unless you enjoy paying more money than you have to. One of the tricks car salespeople often use during car negotiation is called the four square, like the playground game. It's a sort of diagram that looks like this:
As you can see, there are four basic elements in the four square. Purchase price is the price you'll pay to take the car home. The value of your trade-in (if you have one) will go in the trade-in box. Your down payment, whatever you can afford, goes in the down payment box. Subtract the trade-in value and the down payment from the purchase price and divide by the months in your loan term to get the monthly payments, roughly.
Now let's talk about how this visualization, the four square, can be detrimental during car negotiation. What your salesperson might do first is ask you how much you have in your monthly budget for payments. Or, if you have a vehicle in mind already, the salesperson may quote your monthly payments using a standard down payment and ask if you have more money to put down, which would bring the monthly payments down.
Start with the Purchase Price
The problem is that starting with monthly payments gives the dealer an opportunity to appease you before you get a chance to think about the math involved. You should always start with the purchase price. Don't let it simply show up on the four square. You should negotiate it. You can look up a fair market price using any of several websites, such as kbb.com. Or, you can estimate the vehicle's dealer cost and make an offer close to it. It's usually about as low as you can go. Here's the formula, where the invoice price is the price the dealer paid for the car, destination fees are any fees charged to get the car ready for sale, and holdback is a payment from the manufacturer to the dealership for making a sale.
dealer cost = invoice price + destination fees - holdback
These are obscure numbers but you can usually find them with a quick Google search. Just include the make, or the auto brand, in your search. For example, if you're looking for Honda's holdback, search "Honda holdback."
Decide what to offer and negotiate until you come to an agreement. Remember, you can always say "no thanks" and walk out of the dealership. If the first dealership doesn't work out, try another one.
Everything Else Falls into Place
Now that your purchase price has been decided, via proper car negoation, the rest is simple. You certainly can negotiate the trade-in value. Make sure your vehicle is clean and use kbb.com or another site to estimate its value, so that you know you're getting a fair deal. As for the down payment, it's up to you. A larger one will decrease monthly payments, but a smaller one could leave you some leftover cash to invest or save for a rainy day.
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