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F&I Menu Selling: Don’t Fall for It!
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You just negotiated and agreed to a car deal. Congratulations! Now isn’t the time to put down your guard … As one sales process ends, another is about to begin.
You see, the F&I (finance and insurance) office is where the real money is made in a car dealership. It’s where an F&I manager will offer you all sorts of additional products to go along with your new vehicle. In today’s modern F&I office there are dozens of products you can buy, and to convince you to buy them, savvy F&I managers use what is called menu selling.
What exactly is F&I menu selling? How should you handle it? And what should you know before you step foot in an F&I office?
Don’t worry, we’ve got you covered. CarEdge is dedicated to arming you with all of the information that you need to get the best deal possible (both on the front-end, and on the back-end of your car deal).
Let’s break down exactly what an F&I menu is, discuss why it’s in use, and teach you how to handle it. The next time you walk into the car dealership, you’ll be ready.
What is F&I Menu Selling?
After you’ve negotiated your car deal, you’ll meet the F&I Manager. Sometimes you’ll meet the F&I Manager when you’re still completing your car deal with your salesperson, but nine times out of ten, you’ll meet them once you step foot in their office. You’ll exchange some pleasantries as you acclimate, then they’ll pull out the menu. That’s right, a menu. It will have four or five columns, each with different types of coverage and protection. At the bottom of each column is a display price for your projected monthly payment.
The menu can either be physical (like a menu you would see at a dinner), or digital (typically pulled up on either an iPad, or a giant screen on the F&I Managers desk).
The finance manager will go over each column, discussing the different levels of coverage available in each program, and give you the total monthly price for each package. Note that it’s the monthly price, but more on that later.
You’ll then be asked which level of protection is right for you. Nowhere on the menu is there an option to have no coverage; you’ll have to ask for that on your own.
This entire concept is known as menu selling. It’s a simplistic way to get you to buy an extended warranty, tire and wheel protection, dent and ding coverage, etc, etc. The entire concept is based on the notion that if you give people a list of options, they’ll feel compelled to pick at least one of them, and when you frame it as “this protection only increases your monthly payment by $15 per month,” it becomes increasingly difficult (as a customer) to say “no.”
Don’t fall for it. It’s fine if you want added coverage for your new car, but don’t let this psychological trick be the reason you purchase. F&I menu selling isn’t an unethical car dealer practice, but it’s certainly a tactic you’ll run into. Simply be prepared.
And, as always we do offer transparent pricing for CarEdge members on vehicle service contracts, so if you are interested in buying an “extended warranty” get a “cost plus” quote from us to price shop with. More on that here: https://caredge.com/extended-warranty/
Why Are Menus Involved?
Way back in the day it wasn’t uncommon for F&I products (like extended warranties) to get “slipped in” to a customer’s car deal, even if they weren’t disclosed. Those days are fortunately long gone (thanks to several lawsuits), and nowadays “disclosure” is a primary concern for the F&I Manager.
All F&I products need to be presented to every customer, and the customer must specifically decline the coverage being offered. If the customer declines, they’ll have to sign something that says they declined. This policy prevents finance managers from selling you something you don’t even know about, but at the same time, it opens up entirely new sales opportunities.
For a while, F&I Managers would simply tell you about the different levels of protection. Then, some revolutionaries came up with the idea of “The Menu”. It caught on like wildfire, and it’s now standard practice in car dealerships around the country. Our favorite implementation of the “menu” is the docuPAD, a giant tablet that sits on a F&I Managers desk. It looks a little silly, doesn’t it?
How Should You Handle F&I Menu Selling?
What do you do when you’re greeted with the F&I menu?
The first thing that any reputable F&I Manager will go over is your base payment, without any added coverage. They’ll also show you the APR and the term length of your loan (if you’re financing). You need to initial next to all three to indicate that you received those specific terms.
If you would like to decline all options, make that clear. Say that you’re ready to sign the disclosure and that you will not be buying any further coverage. Be firm and confident. Be prepared to walk out on the entire deal if they push you on trying to buy coverage that you don’t want. This is especially important if the F&I Manager says anything along the lines of “You know we can lower your interest rate by a point if you buy the extended warranty …” Not only is this illegal, it’s a sign that this is a dealership you shouldn’t do business with!
Of course, you might actually want some of the options on the menu, and this is where it gets tricky. You’ll need to understand the full price of the products, not just their impact on your monthly payment.
The way that they convey the price is in terms of how it will impact your monthly payment. They’ll say that you’re going to pay nothing today, it’s all bundled into the payment, and it’ll only increase by X amount. Those are all sales tactics.
Here’s what you do: ask for the total cost of the product you’re interested in. Don’t accept the standard “it’s only $15 per month” answer. You need a full dollar amount. Most F&I Managers won’t have an issue providing you the total figure, it may simply take some poking and prodding. Once you get the price, know that you can cross shop at other dealerships, online companies, and even here at CarEdge. Whatever you do, don’t fall prey to the idea that you can’t negotiate on F&I products. Just like your car deal, the products in the F&I office are negotiable.
Payment Buyers Beware
F&I menu selling prays on payment buyers. A payment buyer is a term for anyone who buys their car based on their monthly payment. There’s nothing wrong with this, and it’s a perfectly reasonable way to think about car buying.
However, the issue with F&I menu selling is that it takes advantage of payment buyers by squeezing options into the monthly payment, then downplaying their cost.
The best way to protect yourself against F&I menu selling is to focus on the out-the-door (OTD) price. The OTD price is the total figure that includes everything you’ll be paying for, including extended warranties and other options. It’s really the best way to know how much you’re actually paying for a car. You will have negotiated the OTD price with your salesperson, and now you’ll do it again with the F&I Manager.
Conceptualizing your car buying experience as a single number, instead of a series of monthly payments, helps you understand the impact of menu selling. Sure, $15 per month seems reasonable. Stretched over a long enough term, that can be $2,000 added to the price of your car.
Everything In the F&I Office Is Negotiable
Here’s a general rule of thumb: if there’s a tax applied to it, you can negotiate it. Everything else cannot be negotiated. Guess what’s taxed? Every option on the menu, and every other service the F&I office presents you with.
If you do want something that’s being offered, get them to go lower on price. Finance Managers have a complex commission structures, but in the simplest terms, most are rewarded for moving a volume of products, even if they aren’t the most profitable. This means the F&I Manager is motivated to move their products so that they get paid more.
You can use this to your advantage by asking for a discount. Say that the payment option on the menu is too much, but you’re interested in the coverage. Be clear that you don’t want to extend your payment term, but you want a lower monthly payment.
You might be surprised by how flexible finance managers can be. The key is to use the same trick for declining coverage overall, projecting confidence and staying firm.
You Will Be Seeing the Menu
F&I menu selling is so prevalent that we can almost guarantee you’ll be seeing it the next time you buy a car. Ever since its creation, it’s been a massive profit generator for car dealerships. By packaging everything into options and just tacking it onto your monthly payment, more and more car buyers are susceptible to saying “yes,” when in reality they aren’t 100% sure what they’ve bought.
Menu selling isn’t “good or bad,” it’s simply a function of buying a car. Our hope is that when you experience it you’ll be more informed and confident as a result of taking the time to read this page.
The 4-Square: Don’t Get !@#$%& When Buying a Car
Misdirection is the secret to every magic trick ever created. It’s also the secret to the smoothest tricks performed by car salespeople. One classic old-school dealer close is called the 4-square close. It’s a specific type of close that’s been used for decades and is still employed by salespeople in car dealerships around the country.
Here at CarEdge, our mission is to provide you with the quality education and information that you need to secure a reliable car at a fair price. Today, we’re going to dissect this old-school dealer close and show you how to make it work in your favor.
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If you prefer to watch instead of read, simply click on the video above.
What Is The 4-Square Close?
Imagine you’re at the dealership to buy a new car, and the car salesperson comes back from the sales manager’s office to the cubicle she left you in. She’s holding a folded piece of paper and has a smile on her face. She says something about how the sales manager must be in a good mood, and she unfolds the paper as if it holds the secret to happiness.
What she shows you are four squares drawn on the paper. You’re about to experience the 4-square — a tried-and-true old school dealer close. Above the four squares you’ll see your name, the vehicle you’re interested in purchasing, and its MSRP. Below are four squares that are the foundation of this close. Those squares are:
- Sale price
- Amount offered for trade-in
- Cash down amount
- Payment ranges
She’ll break down each square, saying they’re giving you a great sale by reducing the MSRP. She’ll move on to the trade-in square and say you’re getting a great deal there, too. Then she goes over to the cash down, and say you “only” have to pay that amount. Finally, she then goes over to the payment ranges, there’s typically three of them, and she’ll tell you what they are.
After that, she closes: “Which payment range works best for you?” That’s the conclusion of this old school dealer close. She’s hoping that you simply pick a payment range and you proceed to the next step in the car buying process.
However, you’re probably not going to be happy with every number she presents to you (at least you shouldn’t be!) You’re going to go through the squares, one by one, and say you want better figures (a lower selling price, more for your trade, etc). She might discount the car a little more or up the trade-in value, but the two squares that she really manipulates are the cash down amount and payment ranges. She’ll say something like “it’s just math” as she changes numbers around to suit your requests.
The car salesperson might decrease what you put down, then increase your payment amount, then stretch the payment term. As you negotiate, she’ll keep moving numbers around (probably after multiple trips to the “manager’s office” to get approval) until you are satisfied with your payment amount, the term, and the money down. When that happens, she has successfully closed, and you move on to the next phase.
This entire process is misdirection. The car salesperson is focusing on cash down and payment terms while neglecting the other two boxes, trade-in value and sale price.
It’s a smooth old school dealer close. Unaware buyers fall for it time and time again, which is why it’s still in use. We’d love to see this old school dealer close fade away into obscurity, but that will take a well-educated public.
What can you do to counter this close? Can you avoid it altogether, or perhaps even put it to work for you?
Change the 4-Square Close to Work for You
Most car buyers are only interested in how much they are going to pay every month and how much they are going to have to put down. It makes sense since those are the numbers that have a direct impact on their bank account. You hear us talk about it all the time, we shouldn’t be payment shoppers, but naturally, most of us are. It’s okay, you simply need to be informed when you make your buying decisions.
However, focusing on those numbers writes a blank check for dealerships, as they can massage these two numbers to boost their profits. It’s why they use the 4-square close to keep you focused on money down and the payment amount.
Here’s what you do instead: you keep changing the focus to the other two boxes. You keep saying you want more off of MSRP, and you want more for your trade-in. Stand firm in your choice and say that you know they can do better.
Or, we can even take it further.
Take the pen from the car salesperson and add a new box, and label it OTD. That stands for out-the-door, and that’s the real figure you focus on. How much is that car going to cost you, total, to drive off the lot?
You want a grand total that factors in every expense (taxes, title, tags, fees, etc.) and is the absolute final number. You tell them they can keep reducing the sale price and boosting the trade-in value until you both agree on an OTD amount. These will be tough negotiations, but you’ll need to remain firm to secure the OTD price you’re after.
Once you have an agreeable OTD amount, then you can talk about the other boxes. You can discuss how much you need to put down and your monthly payment amount.
It’s vital to understand that these figures are secondary. Many people who focus solely on their monthly payments don’t even know how much the car ends up costing them. You don’t want to be in that situation; you want to walk away knowing you got a fair deal.
You should also make it clear that you want a specific monthly payment, and you only want to put a certain amount of money down. Don’t let them still manipulate these numbers, because they’ll try. Once you’ve agreed on an OTD price, you make sure they match what you want to put down and the payment terms you’re after, especially when you get back into the F&I office.
We’ll be honest; it will be difficult to enact the above plan. Car salespeople are trained to keep the focus on the two squares that make them money. Shifting focus back to the sale price and the trade-in value will be a challenge. Getting them to agree on an OTD amount will be even more difficult. You’ll have to employ every negotiation tactic in your toolbelt, but it’ll be worth it. You’ll avoid getting taken advantage of at the dealership, and like we always say, you can (and should) treat your trade-in as a separate transaction, that way you can focus on getting a fair OTD instead of getting confused between the sale of your vehicle and the purchase of a new one.
Walk Away at Any Time
Something you must remember is that you are always in control when buying a car. If the salesperson and sales manager won’t work with you on an OTD amount, or you don’t like what they offer you, walk away. You can say something like, “these figures don’t work for me,” and excuse yourself. Anything other than a firm and confident “no” will open the door for overcoming more objections. That’s what they’re trained to do, and you can bet they’ll do it.
If they keep pushing, make it clear that the numbers aren’t what you have in mind, so you’re going to leave and find another dealership. You should always have the mindset that you have nothing to lose by walking away. This is why we always say the best time to buy a car is when you don’t need to, since it allows you the comfort of knowing you can walk away.
You might discover that the dealership is actually more willing to work with you if you’re about to leave. Or they won’t, and you’ll leave and move on to the next dealership. Either way, you need to stand up for yourself and don’t let dealers take advantage of you with this classic old-school dealer close.
The 3 “M” Close: Don’t Fall for It When You’re Buying a Car!
Over the years I’ve heard (or used) every old-school dealer close in the book. “Closes” range from the salesperson putting “soft” pressure on you while acting as your “friend” to more advanced tactics like the 4 square. There is a certain art to it (as there is in all sales), but it’s not the type of art most people like (especially not when they’re at a car dealership).
Our job at CarEdge is to help you be a more informed and educated car buyer. Today we’ll cover one of the more common “close” tactics called the 3 “m” close. Although it is a bit old-school a lot of dealerships still employ it, and unfortunately new people to the industry are learning it.
The 3 “m” close attempts to overcome the common objections that someone might have when they’re close to signing the dotted line, but aren’t quite ready. Today, I’ll walk you through exactly what’s going on with this close, how to spot it, and what to do about it. As always, if you don’t feel like reading, simply click play on the video above.
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You need to be ready to walk into the dealership with confidence, and my hope is this article will help. Let’s dive in.
The First “M”: Is it the Machine?
The three “M” close comes into play when a salesperson hears a customer’s first objection, which is often “I need to think about it.” At that point, salespeople are trained to go into a maneuver like the 3 “M” close. You’ll hear something like, “Do we have the right machine picked out for you?”
When you hear this (or some variant of it), recognize what the salesperson is doing, they’re beginning to get into the 3 “M” close, and you just heard the first “M”; is it a problem with the “machine.” You could bet money that the following two M’s are next. This is a dealer favorite old-school close.
The goal of this M is simply to get to you to say that you like the car that’s been picked out and that it’s the right car for you. After all, if you like the car, then there’s some other issue that needs to be addressed. That’s the essence of this old-school dealer close: break down the three common barriers and seal the deal.
If you say it’s not the right car, then they’ll start showing you other vehicle options. If it’s an issue with the machine, your salesperson will act fast to find another vehicle on their lot that meets your needs, wants, and desires.
The Second “M”: Is it Me?
A decent salesperson will set up this M by saying something like, “Nobody wants to do business with someone that they don’t like, so am I the problem?”
It’s human nature not to want to hurt someone else’s feelings, so it’s almost a guarantee that you’ll say something along the lines of “No, of course you’re not the problem.” People usually want to avoid conflict, so it’s highly unlikely you’re going to say you don’t like your salesperson, even if you can’t stand them.
The car salesperson might even rope in other people that you’ve met from the dealership and say that everyone here would do anything to make sure you got in the right car. Everything said at this step is meant to set themselves up as your best friend who’s just trying to help you get into the right car.
Once they verify that they aren’t the problem, they’ll move on to what probably is the actual problem: the money.
The Third “M”: Is it the Money?
The final M is typically where the actual objection is taking place. You might like the car, you might like the salesperson, but if the numbers don’t add up, you’ll have an objection to signing your vehicle purchase agreement.
At this stage, everyone is on the same page, and the salesperson knows that the money is the issue. Don’t be surprised when they still ask if it is, it’s all part of how they were trained. Once you confirm that the money is the problem, they’ll break down how it’s a good deal or possibly waive some fee that should’ve already been waived.
One tactic that we saw when this topic was brought up on our YouTube channel was pushing to let the customer take the car on an “extended test drive.” This is a bit of a gray area, but can be legitimate. Some dealerships do actually let you bring the car back if you don’t like it after a few days, but you absolutely need to have it in writing. If you don’t get it in writing, then you’re just buying the car. Of course, if you get in a car accident during your extended test drive, you’re the one on the hook, so at the end of the day, I’m not a big fan or proponent of taking a dealer up on this offer.
Another option is that they switch to another closing tactic that’s more specific to the money issue. The purpose of this old-school dealer close is to have you admit where the problem is so that they apply more pressure in that specific place. If it were a game of chess, the 3 “M” close is getting you to move your pawns out of the way so they can strike where it matters.
Whatever their next step is, you can be sure it’ll involve overcoming your objection about the price. They might pull up vAuto and show you that they’ve got the best price around. They might also break down the financial figures one more time to show that the financing agreement being offered is incredible.
Either way, you don’t want to buy that car. So, what can you do against this close?
Feel Comfortable Saying “I’m Not Ready”
One of the things customers say that leads into the 3 “M” close is the classic, “I need to think about it.” Dealers hear that countless times in their careers and the 3 “M” close is used to overcome this objection. Car salespeople are well aware that “I need to think about it” is often an attempt to get out of the dealership, and salespeople are wired to think “How can I close this deal now?”
Unfortunately, your attempt to leave is their attempt to close you. Their job is to help convince you to sign the paperwork today, not tomorrow, not next week, not in a month. That’s where the 3 “M” close comes in. In theory, every objection is dismantled, and you’ll drive away in your new car.
Here’s what you do. Memorize this line because it’s your way to avoid the entire close: “I’m not ready to make that decision.” Short, simple, and conveys all the information they need.
It’s a similar concept to “I need to think about it,” but it leaves less room for pushy sales tactics. If the car salesperson keeps pushing, repeat it. You can always get up and walk away. It’s better to face a temporary awkward situation than sign up for a car payment that’s just a bit too high, and trust me, it won’t be the first time in that salesperson’s career they’ve heard “no!”
Don’t Fall for the 3 “M” Close! Say No!
Your absolute best weapon against this close is saying “no” at any point. You’re always free to say “no” and walk out of the dealership. Every car salesperson has heard no before, and they’ll hear it again. Don’t be afraid to make them hear it one more time if you’re not ready to sign the dotted line.
We firmly believe that arming you with information is the best way to prepare for the sales tactics that car dealerships employ. Not every dealership is going to roll out this old-school dealer close, but many will. Now that you’re ready for it, you should also be ready to say “no” and walk out.
Craziest Dealership Stories
It’s no surprise that working in the auto industry since the 70’s has yielded dozens of crazy stories. Zach asked me to gather together some of my craziest dealership stories in one place. You’ll hear some good ones, some bad ones, and they’re all a sneak peek into the life of working at a dealership.
Without further ado, let’s dive in.
Craziest Dealership Stories: The Robbery
Back in the late ’70s, we had a customer come to the Nissan dealership and go through the motions of buying a new car. When it came time to do a test drive, we took a photocopy of his ID, and he and the salesperson headed out. During the drive, the customer asked to make a stop at a 7/11 to pick something up.
It turns out what he wanted to “pick up” was all the cash out of the 7/11 cash registers. He planned to use our car as the getaway car for his robbery. The salesperson was an unwitting accomplice (don’t worry, the salesperson wasn’t charged), and the robber was arrested.
Back at the dealership, when the test drive had dragged on for longer than normal, we called the cops, and they were able to track down the robber and his unsuspecting accomplice. This is one of the many reasons why we take photocopies of driver’s licenses before test drives. In my 43 years of being in the car business, this experience might hold the top spot as one of the craziest dealership experiences I’ve ever had.
Craziest Dealership Stories: The Kidnapper
Much like the story above, I remember when I worked as a sales manager at singlepoint Pontiac dealership (yes those existed at one time), and a customer was going through the motions of looking to purchase a car. When it came time to test drive the car, he and the female sales associate disappeared. After being gone for 7 or 8 hours, there was cause for concern.
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Again, back at the dealership we called the cops (you’d be surprised how many 911 calls I had to make during the early days of my career), and fortunately the prospective customer (and kidnapper) came back with the car and our sales associate. When he arrived, the police were waiting, and he was charged with kidnapping. Thankfully, having a photocopy of the driver’s license helped the police bring a quick resolution to the kidnapping.
Craziest Dealership Stories: The Accident
At our old Mini dealership, we carefully picked all of our test drive routes based on showing off how well the Minis handled. Many people buy Minis because of how fun they are to drive, so our job as a sales team was to expose prospective customers to that experience anytime they got behind the wheel. I was a sales manager at the dealership back in the early 2010’s, and I still remember the day I had to rush from my office to a backroad only a mile from the dealership to once again call 911.
A customer out on a test drive drove right into a tree. The car rolled and was totaled, and both the customer and the salesperson were rushed to the hospital. Fortunately, everyone survived, and miraculously the salesperson only missed a few days of work.
I remember the salesperson telling me that their last words right before the accident were, “You might wanna slow down here.” If only the customer had listened. I always hated it when prospective customers drove too aggressively on test drives. I didn’t like having my life put in jeopardy. This experience was a good example of why you need to be careful when test driving a new car.
Craziest Dealership Stories: The Theft
Two mistakes were made in this next story: the salesperson said “yes,” and they didn’t take a photocopy of the customer’s ID.
This story took place at a Jaguar dealership, which is a car brand known for high-value cars. A customer came in one day and wanted to test drive a vehicle. He brought in a high-value vehicle to trade in. He said he wanted to take it home to show his wife, and he wanted to go alone.
This part is where our mistake happened. The salesperson agreed to it without even taking a copy of their license.
We never saw the customer again. It turns out the trade in vehicle was also stolen, and the Jaguar that was test-driven to “show his wife” was the next stolen vehicle.
Since there was no photocopy, there was nothing to give to the cops once the salesperson (and sales manager) realized what had happened.
Fortunately that experience didn’t happen to me, but the lesson was still learned: always get a copy of the ID every time.
Craziest Dealership Stories: The Cloud
This one didn’t happen at one of our dealerships, but it was a nearby dealership. There was a Mercedes-Benz dealership directly across from us when I worked at Acura North Scottsdale in Scottsdale, Arizona. All of the dealerships in the complex shared the same (or at least similar) test drive routes.
I still remember the day we saw a big smoke cloud on the not-too-distant horizon. It turns out; one of the driver’s test driving a new Mercedes-Benz AMG vehicle didn’t quite realize that the road had a sharp left coming up and kept driving straight directly into a storm drainage ditch. The car was totaled, but fortunately, nobody was injured.
Craziest Dealership Stories: The Ballpark
How about a change of pace? Let’s talk about a positive experience from our time in the auto industry.
Back at the Mini dealership, we had an arrangement with a minor league baseball team (the York Revolution in York, PA) to showcase our cars. For about four years, we would caravan 50 or 60 Minis up to the stadium from Maryland every year. I negotiated with the Revolution that our caravan would drive around the field, and as a group we would enter from center field and drive around the warning track.
The crowd loved it, the sales staff loved it, the customers loved it.
It was one of the things we did that brought our staff and our customers together. It helped show them that we were people just like them, not con artists out to raid their bank accounts.
One thing that we loved about this experience was seeing people from all walks of life come together over one mutual interest: their love of their Mini.
Craziest Dealership Stories: The Good Ones
Let’s finish up our craziest dealership stories with a few short positive stories.
Every year during Christmas at our Acura dealership, we would set up tables and all the necessary supplies to wrap gifts. We would invite sales staff, customers, and everyone’s families to come wrap presents for Toys for Tots. It was an excellent experience for us all, and it felt good to give back to the community.
When we were in Phoenix, we had regular BBQs for our customers. In reality, it ended up being for all the salespeople and their customers in the entire auto complex. We enjoyed providing a full spread of meats and sides for our fellow salespeople.
My last story is one of my favorites. One time, our dealership was selected as one of the top 30 best places to work in Phoenix. As they counted down and gave out awards to 30 small businesses around the Phoenix metro area, we wondered why they hadn’t gotten to us yet. As it turns out, they were saving us for last. We secured the number one spot as the best small business to work at in Phoenix, and the day of the announcement I was the one at the event representing Acura of North Scottsdale. I still remember getting up on stage to accept our award and not having a clue what to say. I was dumbfounded and proud at the same time!
The Ups and Downs of a Career in Auto Sales
Working in the auto industry for four decades has yielded plenty of stories. Much like any career, there are some excellent stories, some bad stories, and plenty that fell in between. I’m grateful for my time in the industry, especially now that I am able to help thousands of people from the other side of the desk.
Should I Pay Cash For a Car in 2025? Here’s What the Experts Say
Here at CarEdge, we get a lot of emails from car buyers like you looking for advice on how to get the best car deal possible. The question “should I pay cash for a car?” Comes into our inbox daily. If you’ve managed to save up enough cash to buy a car, kudos to you. Now, it’s time to be strategic about how you use it to get the best car deal possible.
Most people assume that telling a car dealer that you’re paying in cash is a negotiating tactic and will get you a better price. Here’s the truth: it doesn’t. Saying that you’re paying with cash kills your negotiating power.
If you’re wondering, “should I pay cash for a car?” The answer is complicated. Yes, pay the full amount as soon as possible. But don’t walk in with a briefcase of cash and slam it on the salesperson’s desk.
To understand how to answer this question, we need to begin by looking at how dealerships make their money.
How Car Dealerships Make Their Money
Car dealerships make about a quarter of their profit off car sales, yet vehicle sales make up about half of their revenue. That’s because of the slim front-end margins on most car deals (especially for new cars, used cars are a bit of a different story.)
You’ve heard me say it before, and you’ll hear me say it again—selling cars is merely a means to sell other products like finance options, insurance products, service, and parts.
Car dealerships make most of their money in the service department, but when it comes to vehicle sales, dealerships make their money in the Finance and Insurance (F&I) office. The F&I office is referred to as the “back-end” of a car deal. The “front-end” is what you spend time negotiating with the salesperson. The irony is that dealers are incentivized to sell as many cars as possible (frequently at a loss) simply to make money on the back-end (and from manufacturer incentives).
If you’ve ever bought a car before, you’ve heard a salesperson ask you “do you plan to finance the vehicle?” This is because if they know you plan to finance (and especially if you intend to finance through the dealership) they know the dealership can make money on the back-end of the car deal. Every car dealership out there will ask you to fill out a credit application so they can secure financing options for you. When they do this, they bake profit into the numbers. This practice is a significant source of profit for a car dealership.
So, if you walk in and say you’re paying with cash, you’re telling the salesperson that you’re going to eliminate the dealership’s primary source of profit.
What do you do? You take out a loan.
Take Out A Loan Instead
Let’s say you have all this cash, and you want to buy your car at the best possible price. It should be as simple as buying a meal at a restaurant, right? Unfortunately, that’s not the case.
You’ll pay far more for your car if you ask to pay for it all upfront with cash. That’s because the dealership will not be willing to negotiate as much on the front-end of the car deal since you will not become a sales opportunity for the back-end of the deal (aka in the F&I office).
So what should you do? Take out a loan through the dealership and pay it off immediately (or refinance it). Doing this will get you a much lower price than paying with cash at the dealership.
Like we discuss in depth in Deal School, you want to negotiate the out the door price of the vehicle with the salesperson. By informing them of your interest in financing your purchase through the dealership, you’ll find that the salesperson will be more likely to negotiate on the front-end of the deal.
One rule of thumb is that if it’s taxable, it’s negotiable. If a fee is not taxed, you can’t negotiate it down or away. It’s important to know exactly what you can negotiate.
Here’s the essential part of the entire process: make sure the loan does not have a prepayment penalty. If it does, walk away or ask for a different lending option. Fortunately, most loans do not have a prepayment penalty. Typically only exclusive financing options from captive lenders (the manufacturer’s lending institution) have these clauses.
It’s advisable not to tell the dealer that you plan to pay off or refinance the loan immediately. Dealerships incur “chargebacks” when this happens, so let this strategy be our little secret, and not something you blurt out to the F&I manager.
When you’re in the F&I office, decide if you want any of the ancillary products like an extended warranty, and then go through with the rest of the paperwork with the F&I manager. Once you’re happy with all the numbers, pay your down payment, sign the paperwork, and drive away.
Pay Off Your New Loan
You’ve got a brand-new car and a brand-new loan. It typically takes a lender about a week to put a new loan on the books once they receive it from the dealership. Wait about two weeks, then call your lender and ask for the payoff amount. They’ll tell you exactly how much you have to pay to end your loan. Send them a check or wire transfer, and you’re done.
If you don’t have enough cash to pay off your loan immediately, look to refinance the existing loan. However, if you took advantage of a rare zero-APR financing incentive, don’t expect to find anything better out there.
Remember that credit checks within a 30 days period for an auto-loan are grouped into one “hit” on your credit, so you don’t have to be too concerned about getting your credit run once again to find refinance opportunities.
You may have done it by way of a loan, but this is the best way to use your cash to buy a car. If you skip the loan and pay for the car entirely in cash, you’ll end up paying far more than if you take out a loan and pay it off early.
Assess Your Financial Situation
Now that we’ve unveiled our master plan for how to use your cash most effectively to buy a car, we should take a step back and ask if it’s a good idea in the first place.
If you’re asking “should I pay cash for a car,” we’re assuming you have a hefty savings account and financial portfolio. However, if paying cash for a vehicle will drain your savings completely, it might make more sense to finance the loan and put a large amount down for your down payment.
It’s also worth shopping around for different financing offers. No matter what, we always recommend having a pre-approval from an outside financial institution before you go to the dealership so that you have leverage when you are in the F&I office. In some cases, captive lenders offer special financing offers (like 0% APR) that no outside lender can beat. In those cases, financing through the dealership is the only logical option.
Not Directly or Not at All
Since you now know paying for a car with cash won’t get you a better deal, you might want to reconsider the entire idea. Is this the best use of your cash? If you still think it is, make sure you take out a loan and immediately pay it off instead.
It’s vital that you don’t tell the salesperson, sales manager, or F&I manager that you’re going to pay off the loan immediately. They really don’t want to incur the chargeback.
Instead, go through the motions of taking out a loan and simply pay it off a week later. With this strategy you’ll get the best car deal possible.
