Cost should be the most straightforward part of buying a car.
Condition, history, performance, features, availability, warranties, and other parts of the process are genuinely complex, but price should be simple. Here’s the car, here’s what you’ll pay for it.
But, of course, that isn’t how it works. Instead, the price of a car is a mixture of a number of components, the most important of which are the up-front cost of the car itself, the trade-in value of your current vehicle, the conditions on your loan (if you’re financing), and dealership fees. Dealerships use a wide range of tactics to manipulate all four of those components of vehicle price, and if you’re not careful, they’ll drive up the actual cost of your car by thousands of dollars before you make it out the door.
This is a guide to the most important tactics to be aware of. Together, they make up the second big piece of the House Edge. These tactics all fulfill the same basic function, which is to make it as difficult as possible for the buyer to keep track of (and control) the price they’re actually paying. The result is an increase in the cost of ownership in exchange for what seemed to be a great deal at the time.
1. The Bait and Switch
This tactic relies on the gap between a price given in advance and the price that’s actually charged when you get to the dealership. Dealers have no legal obligation to honor prices listed online, or even to ensure that the listings are accurate. That lets them post a car at a fantastic price—which cars.com or another site will helpfully label as a “Great Deal!”—and then tell you, when you come to see it, “Actually, that car’s no longer available.” Or, “We actually just did some additional work on it, so the price has gone up,” or, “Oh, no, that one isn’t done being reconditioned, but we do have this one that’s just a little more expensive…”
You get the idea. The bait and switch is a simple, common trick, and the way to avoid it is patience. If the car you saw online or got a price for over the phone suddenly costs more in person, just move on. Find another car at another dealership.
2. Undisclosed (or Hidden) Fees
Dealerships are free to add any fees they like onto the price for your vehicle. A few of those fees—like the cost of registering your car with the state’s DMV or RMV—are perfectly normal, but many are arbitrary price-hikes that can reach into the thousands of dollars.
They’re typically disclosed only once you’ve almost finalized the sale, so that you feel heavily invested. You found the right car, you can afford it (you thought), you’re about to sign the documents…and the dealer suddenly starts talking about origination fees, documentation fees, rust-proofing fees, regional advertising fees, and on and on.
Often, the fees being referred to are real costs the dealership has to cover, but at an honest dealership those costs are just folded into the list price given up-front. At a dishonest dealership, they’re taken out, not disclosed, and then suddenly tacked on when the buyer is already 95% of the way through the purchasing process.
3. Fine Print and Fake Deals
The third big tactic dealerships use is to make an unrealistically good offer—“The deal of a lifetime!”—and hide financing, deposit, or purchase requirements in the fine print.
Here’s how it typically works. The dealership advertises a fantastic deal: a decent car, in good condition, at a price hundreds or thousands of dollars below the market average. When the eager customers start to arrive, that’s when they learn that the deal is only available to specific people, or under specific conditions. Here are some examples:
- The price includes a $4k trade credit;
- Customer must use dealer financing, with worse interest rates than those offered by independent loan providers;
- The deal is only available with a down payment of a certain size;
- Or it is only available if the customer also buys an expensive service contract, warranty, or gap insurance policy from the same dealership;
- Or this is a special deal only available to veterans.
Sometimes, the conditions are so restrictive they’re essentially impossible to fulfill. And that’s fine, from the dealership’s perspective, because their real goal was just to get you in the door. Once you’re there, a confident, friendly salesperson will start offering other deals, mentioning other great vehicles they happen to have on the lot, and generally doing everything they can to lead you into a poorly thought-out purchase.
4. Manipulating Trade-In Values
The last big part of the price of your car is how much the dealership offers for the trade-in of your previous vehicle. Naturally, they usually treat this as another chance to raise the effective price of your new car. The most common tactic is just to significantly under-value your trade-in, giving you hundreds or thousands of dollars less than they should and hoping you don’t call other dealerships for comparison.
Once they’ve raised the price on you, they can then offer a nice, hefty “discount” on the price of the new vehicle to get you to buy it. Only, because your trade-in is so under-valued, the discount isn’t really a discount at all—it’s just a little bit closer to a fair deal. You end up paying too much while thinking the car was a steal, and the dealer gets a cheap used car they can add to their inventory.
So, what is the point?
Taken together, deceptive pricing tactics give dealers a huge advantage over consumers. They ensure that, just as you don’t have accurate information about a vehicle’s condition, you can’t possibly get an accurate sense of how much the car will cost before you’ve gone through much of the purchasing process. At that point, social pressure and and a pushy, clever salesperson can often persuade you to make a purchase you regret. That’s the House Edge at work.