Understanding Dealer Reserve Prices: A Key to Negotiating Your Car Purchase

In the context of a car dealership, dealer reserve price is a significant factor that can significantly impact the overall cost of your vehicle. This article will explore what a dealer reserve price is, how it works, and how you can use this knowledge to negotiate better financing terms and purchase your dream car without being scammed.

What is a Dealer Reserve Price?

In financing scenarios, the dealer reserve price can also relate to the interest rate offered to the customer. Dealers often have a formal or informal agreement with lenders that grants them a certain percentage of the interest earned on financed cars.

This reserve can vary based on several factors including the vehicle's make and model, the dealership's pricing strategy, and the financing terms. Understanding the dealer reserve price is essential for buyers negotiating a vehicle purchase or financing terms. It can help you secure a better deal and lower the overall cost of the vehicle.

Deceptive Practices in Car Dealerships

Unfortunately, some dealers engage in deceptive practices that can cost you thousands of dollars. One such practice is known as dealer reserve, often used to boost the dealer's profits at the expense of the car buyer.

How Dealer Reserve Works

When a car buyer applies for financing at a dealership, the FI salesperson contacts one or more banks or captive lenders. These banks provide the FI salesperson with the interest rate at which they will finance the vehicle, such as 3%. The FI salesperson is allowed to increase this rate in most states by up to 2%, making it a 5% rate. The difference between the two rates adds up to thousands of dollars in extra interest over the life of a loan—money that goes directly into the dealer's pocket.

You might wonder if it's worth paying nearly $1,600 for a dealer to arrange financing. The answer is no. It is crucial to know the interest rates you can get from your own bank. However, always give the dealer a chance to beat that rate. If the FI salesperson refuses to reveal the buy rate, it is a clear sign that you are being scammed by dealer reserve. In such cases, it may be better to leave and find a more transparent dealership.

Practical Tips for Negotiating

To avoid falling victim to dealer reserve practices, here are some practical tips:

Shop around for the best interest rates: Check with your local bank or credit union for competitive financing rates before visiting a dealership. Compare quotes: Get financing quotes from several dealers to compare rates and terms. Negotiate the buy rate: Ask for and inspect the buy rate the dealer sells the vehicle to the lender. If they refuse, it's a red flag. Understand the total cost: Calculate the total cost of the car, including interest, registration fees, and other expenses, to ensure you are not misled. Be informed: Research the vehicle you want to buy and its market value to set a fair price.

Conclusion

Understanding and recognizing the practices behind dealer reserve prices can help you make an informed decision when purchasing a car. By doing your research, comparing quotes, and negotiating with transparency, you can save money and avoid being taken advantage of by unethical dealers.