It was great to see that Wednesday’s Right Side stirred up quite a few comments. If you didn’t have a chance to read it, you can do so here.
OK, so perhaps I was expecting a heated debate about the average Brit’s newfound propensity for debt, and perhaps a mention of how the car finance industry is extending the national debt fever. But as it happened, the conversation turned to how one should best purchase a car.
And never let it be said that I’m not swayed by you, the reader…
So, you want to know the most cost-effective way to buy a car? Heck – even get free motoring?
As it happens, I have some useful insider knowledge on the subject. You may be very surprised by what you read…
The three-year-old car myth
A couple of years ago, I met a chap called Paul when he came to me with a business plan. I’m always more than happy to listen to a new business plan.
Paul was (and still is) at the cutting edge of the car sales industry. It wasn’t exactly cutting edge – it involved selling cars online, but it gave me a completely new outlook on buying cars. I mean, before I met Paul, I was always of the mind that you should buy a three-year-old car. In fact, judging by the comments to Wednesday’s piece, many Right Siders are of the same persuasion…
A whole glut of cars come off lease arrangements at the three-year stage – and that makes for plentiful of supply at knock-down prices. And for me, one of the greatest benefits has always been that I didn’t have to deal with some smarmy car salesman.
I bought my motors second-hand either privately or at auction. The logic is that after three years, the car has already suffered its steepest decline in depreciation. You can sell it a few years later without a catastrophic hit to its capital value.
But then I met Paul. He told me that he’s “never lost money on a car” – and he’s always bought new! But hey… what about all that depreciation you’re supposed to suffer on a new car?
Let me explain…
You are the dealer’s sales target
We all know that the moment you drive a new car off the forecourt, its resale value comes off by some 20% to 30%. Now, effectively, that’s the dealer’s margin. The dealership has a lot of overheads to contend with – and of course, he needs to make his crust.
If you bought a car, drove it round the block and tried to sell it back to a dealer, he’d probably offer you around 20% to 30% less than you paid. In fact, those margins aren’t actually the most rapacious on the high street.
But the point is, you don’t want to pay this commission… or depreciation – call it what you like.
Now, first off, you can haggle for a better price. And if you accept some fancy ‘extras’ on the car, or maybe a finance package that ends up earning the dealer a big commission, then maybe you’ll get a decent discount. Undoubtedly many punters come away from a dealer thinking they’ve got a fantastic bargain.
The second trick most punters know about is to buy ‘pre-registered’ – that’s where the dealer has effectively bought a car on his own book in order to meet his sales target. These cars are discounted and marketed as ‘new, but not first owner’.
But even then, a dealer is never going to hand away his full commission. That would cannibalise his own market. If you’ve walked into his showroom, he wants to make a commission out of you. He’s not going to let you out the door with a sale that nets him no money.
But here’s the thing. The dealers can and do sell cars at next to no profit. But not on their own turf…
How to get one up on the pros
It’s true that the dealers often have stock they need to shift. But for the reasons I’ve just mentioned, he’s not going to dump it on his own doorstep. Instead, he dumps it on someone else’s doorstep.
This is where internet sales come in. Today, there are a handful of internet brokers that help dealers dump excess stock. The dealers can’t sell the stuff direct and they don’t want to sell it to local traders either – again, that would upset their established market.
The web brokers offer anonymity and a way of releasing the vehicles onto someone else’s turf. Having talked to Paul, it turns out that the biggest problem these brokers face is to ensure professional traders don’t buy from them. They use all sorts of vetting techniques to make sure that these cars go to genuine private punters. At last a genuine deal where the private punter can get one up on the pros!
And the discounts can be significant, often running to 30%. In fact, during the 2008 crisis, discounts of 40% were easy to get. The dealerships were desperate to turnover some cars and online brokers were the best way of dumping them.
Buying at these sorts of discounts mean that you can buy new, often at better prices than the dealership’s second-hand rates!
Simple steps to find that bargain
I must confess, I was quite surprised to learn how the industry works. And yes, I know that many of you will feel uncomfortable spending such a large amount of money online. But don’t fear. In reality, you’re dealing with the dealership – that’s who you pay, and more often than not, they’ll be the ones that deliver the car to your door.
So how do you find these brokers? Just type in some search terms like “buy discount new car UK broker” into your favourite search engine. I don’t want to mention names, but there are three decent, big brokers. All you have to do is phone them up and ask them about their best deals. Play one off against the other, and you’ll almost certainly find a bargain.
As Paul says, there’s actually no need to lose money on buying a car. But don’t tell everyone!
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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