Money Rehab with Nicole Lapin - Insider Tips for Buying a Car (In This Economy!)

Episode Date: April 28, 2022

Between the used car shortage, rising gas prices, supply chain issues and inflation— it’s a really tricky time to buy a car. Today, Nicole brings on auto broker Alec Johnston to give the best advice if you’re looking to get a car in these, yes, unprecedented times. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. We've been getting several questions to the Money Rehab email account about best practices around buying a car.

And let me tell you, this one is a toughie. Between the used car shortage, rising gas prices, supply chain issues, and inflation, it's a really tricky time to buy a car. And I know this personally because I just had to replace my car after getting into a car accident. I'm okay-ish, but my car was totaled. It was a total loss. The whole messy aftermath following a car accident is a topic perhaps for another episode or two. But on today's episode, I want to focus on the questions I've gotten from money rehabbers about how to buy a car right now without completely breaking the bank. To help answer that question, I'm bringing on Alec Johnston, the auto broker that helped me replace my old car.

May she rest in peace. Alec, welcome to Money Rehab. Let's start by getting some background on what you do. You and I have been working together for a few weeks since I got in a car accident. You're an auto broker. I've never dealt with an auto broker. So can you explain to me what that actually means and what you do? First off, an auto broker certainly is not a common or well-known service. I myself didn't even know what one was until I moved to Los Angeles and became one. The best way to explain it is we're kind of real estate agents for cars. That's when people ask me to kind of relate.

Everyone's familiar with working with a real estate agent. You give them what you need. They provide you options, negotiate on your behalf, and then take care of all the logistics and semantics in the background, making your life inherently easier. As an auto broker, we do the same thing for cars. So what are the benefits of using an auto broker versus just going to the dealership? No, of course. First is we save you time and money. One, anyone going into a dealership, it's a nerve-wracking experience. No one likes going to a dealership. It's a time in your life where you're like, I wish I could somehow bypass all of this. You go in and you spend probably countless hours there. So as a broker,

we work with all makes and models. We can discuss pricing offsite via text, phone calls, you know, whatever you want. And then when the time comes, we can have the car delivered to your home, your office, the studio, wherever you're having lunch that day. It takes five minutes versus, you know, hours at the dealership waiting for the finance guy

to get back from lunch, da, da, da, da, da. So that's one. Secondly, is we do save you money. We push enough volume with the dealerships every month that we get best pricing upfront. Now you're, you know, your average American consumer, if he's leasing, he or she are leasing. Uh, if they are leasing, that they probably only, you know, get a car once every three, five years. Correct. So a broker, we do anywhere from 300 to 400 cars a year.

Now with the dealerships, we have a lot more buying power. And trust me, they want our business. And not that I'm saying they don't want yours, but when it comes to us, they answer our phone calls. We'll get the best price upfront, which then again, saves you a lot of time. So then how do you get paid? So we get paid referral fees by the dealerships. So it's actually a separate chunk of money that doesn't come out of the consumer's deal. A lot of brokers, they do charge for our services. We primarily work for the entertainment industry.

We work with finance advisors, wealth managers, things like that. They consider us an extension of their own office. So we don't charge for our services to our clients. Our services are completely free to use. So essentially, it's like a mortgage broker to where the mortgage broker gets paid from the banks that do the deal with the client and then the client isn't out of pocket. They just have the opportunity to have somebody essentially shop around for them. So that's what you're doing as well. So can we talk a little bit more about buying a car? Why, when you said going into dealership, you'd rather get a colonoscopy or something for a lot of people, why is it so stressful? And why is it so scary for so many folks?

I'll be honest. It's because the people that work at dealerships, they're not car guys. They're not car enthusiasts. Most of the people that work there, you'd be surprised. They don't know anything about cars. They heard from their high school friend. They're making a little bit of money. They're looking for a job. Dealership will hire any salesman to sit there. And that's why at our brokerage, and I think maybe most brokers do this, I've never hired anyone that's actually worked at a dealership. Most of us were just car guys. We're car enthusiasts. A lot of us were engineers that became car guys. And so there's

zero sales pressure. On the other end, you go into a dealership and these guys give you the sob story like, I need to feed my kids. Buy now. You have to buy this car now. Oh, really? I've never heard that, but that sounds aggressive or intense. Well, I mean, there's, there's different levels. You got, you know, I work from Hondas up to Ferraris, uh, you know, depending on what dealership you go into, but again, the dealership experience is bad purely. And I hate to say it because I hope none of my dealers are listening, but, uh, it's purely the personnel that that's hired there. You either have the young kids who are out front who don't know anything about cars,

or you have the guys in the back that have been sitting there for 30 years, and they're just jaded. And there's no middle ground there. So that's why we try to take a different approach to the car buying experience. There's no pressure. We're car guys. Just talk to us. You can talk to us for five minutes or six months. We don't care. So it's an inherently different process. So if someone is looking to buy a car right now, are there any general tips that you would give

them if they're hunting around? Are there makes and models that you consistently recommend? So obviously, we're having this conversation in 2022, which would be an entirely different conversation if this was 2019, 2020. A lot has changed. The car market's changed. And again, that's why we're probably having this show, is to discuss this. And that's another advantage of using a broker because as different makes and models, their factories have been shutting down at different times based on the supply chain issues in the country. So at the beginning of this, BMW was doing great.

And now this month, BMW has no inventory. And so now their deals have gone awry. So it's a month-to-month type of thing. And that's why using a broker is a good thing to talk to. It's like, what is going on in the car industry right now? Who can I go to? Some of the brands like Mazda. Mazda has been great throughout the entire time, giving fair leases to people and great cars.

Cars I'd stay away from, Kia, Cadillac, most of the American brands. And I hate saying that. It's just we're living in different times. So the tips I really give to people are you got to do a deep dive. The car buying process takes a lot longer now. It used to be that leasing was the viable option for low car payments. Now, you have to look at both because if you look at the higher SUVs like the Lincoln Navigators, the Cadillac Escalades, the Range Rovers, purchasing is actually cheaper than leasing. And that's topsy-turvy, cats and dogs living together type of thing. So you got to take a deep dive and look at all the options instead of just going in and saying, hey, I want to lease this car

or I want to buy this car. Have them spread out all the different lease and finance structures for you. So to double click on the American cars, that's counterintuitive to me because I would think a bunch of the foreign cars are stuck in the ports. They are. So, you know, Porsche, BMW, they're stuck at, you know, ports missing like steering columns. Again, we could talk about the microchip shortage later. The American cars like Ford, Ford got hit hard. And first it was the microchips.

Then it was the, you know, was the road that blockades in Canada, blocking parts to their plants in the Midwest. So it's just some of these car companies like Ford, they haven't been able to get more cars. Like I said, BMW, Porsche, they're coming in waves, right? Ford, Chevy, Jeep, they've been stagnant this entire time with just you know trickling inventory in and they've been getting the the high prices for cars right now five ten fifteen thousand dollars over sticker ford edges you know thirty seven thousand dollar cars

five thousand dollars over sticker like it shouldn't be like that so yeah i mean i had a very interesting awakening when i was going through this process and paying over sticker price, which was definitely nothing I've ever experienced in my adult life. When I was also going through the process, I learned that you kind of have to decide whether you want to deal with a broker or you want to do it yourself. So when is that little moment where you need to decide? Because you kind of can't play in both camps, it sounds like. I mean, you can dip your foot in the pool of the brokers if you want. Everyone's kind of willing to help. For me, a lot of my job is just consulting. A lot of the business managers, the wealth managers, they'll call me and work with clients. And whether or not you

get a car through us, we're happy to talk to you and making sure that you are getting the best price. Brokers aren't for everyone. I do say, you know, if you want to save time and money, use a broker. But sometimes the process of going in there and just getting a car and not using a broker who's going to take the time to look at all inventories. I get that. Sometimes that is easier. We call it the path of least resistance. If you're in the dealership, the deal is halfway done and you want the car, get the car. If you see something you want, get it. I'm a big fan of that. Taking a step back and then involving a broker sometimes impedes the process. So if you're already going in one direction, I say go for it.

You can sometimes use a broker just to kind of like solidify your decision. And that's fine. Or you can take a step back and say, I really don't want to do this anymore. And then, you know, involve a broker. So, yeah, I'm weird. I, well, in a lot of ways, but I really don't want to do with this anymore. And then, you know, involve a broker. So, yeah, I'm weird. I well, in a lot of ways, but I really enjoy negotiating. It's my favorite sport, perhaps the only cardio I get these days. And so I get really stoked about the idea of negotiating directly. But it sounds like if you don't have your heart set on one particular thing through

the process, I learned I was like, no, I must have this particular color combination or whatever. Is it better to have a broker help you if you have a little bit more of an open mind than I did? Well, no. I mean, if you want something specific, you can use a broker too. Because if you walk into a dealership, they're going to try to pigeonhole you on the current inventory, what's on the lot. They want to make a sale that day, you know, a broker, we can, you know, pull inventory from all around the country. We have cars brought in from the East coast for people in LA all the time. And then, so it kind of opens up this range of, of colors and options and trim levels. Now, so when you were talking about being very specific

and using a broker, and that's not why there wasn't a connection. It was more what you said was, I enjoy negotiating. I enjoy going in and holding these guys at the grindstone and seeing what I can get out of them. Very on brand, of course. So I would say that's the point where probably using a broker isn't for you. We have clients calling all the time that say, hey, I've shopped every dealer in the Southwest trying to get this price down to like $5, $2. Oh, I want the price. I want the price. And then they call in the broker. I'm like, well, you already did our job for know. So you've already brokered your own car at that point, which is fine. I also learned during the process that there are these territories that can't necessarily share. You said that sometimes people get cars from the East Coast to the West Coast or something

like that. Has that changed during the pandemic or supply shortage? Is it possible to trade from other places now or is it more difficult? It is a case by case basis, but it is more difficult now. A lot of people or a lot of dealerships that are selling their cars, they want to keep it local. Why? Because most dealerships make a lot of their money on the service end. So if they lease you a brand new Range Rover or Mercedes or whatever, they're banking on you coming back to that dealership for the service contracts, which honestly probably constitutes about upwards of sometimes 70% of the revenue to that dealer. So they want you there. So a lot of you call for an out-of-state deal. A lot of them are hesitant to do that because they don't want to lose that service

contract by sending the car out of state. In a particular case, when we're talking about Land Rovers, Land Rovers is a different monster because they're the one brand that has franchise territories. And when it comes to new cars, they're not allowed to cross those borders because the local dealerships will get fined from the Land Rover headquarters. A lot of Land Rovers end up in China and Russia. And if that happens with the non-export policies, that dealership will have large fines. So that's the only instance of when you and I were talking about Land Rovers is it's tough to cross those boundaries. So I picked the hardest one. Well, shocking. Not the hardest, but, you know, those policies are in place for Land Rovers.

Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more Money Rehab will be right back. Now for some more Money Rehab. And you were talking about leasing being more expensive for some brands or some models than others. I have very strong opinions on this one. But what do you think generally are the pros and cons of leasing a car? I suppose generally and now based on the sign of the times? Typically, leasing versus buying, I can talk on either side of the fence, pros and cons for

either. And it's really catered to the individual, their lifestyle. I mean, are you a traveling salesman that's going to put 100,000 miles on a car in a month, are you, you know, are you working from home, uh, or type of situation. And it, this day and age, a lot of people are monthly payment sensitive. Um, it used to be that, you know, leasing historically yields a lower monthly payment. Um, so unless you're buying cash for a car, right. Uh, you're pretty much going to have a car payment the rest of your life. Either you're going to, you know, you're going to lease it or you're going to buy it. You're going to have a car payment. So you might as well take the lower monthly payment and get a new car every three years. Because when you lease, you're effectively only financing half the worth of the vehicle, right?

So typically, lease payments are much lower. And a lot of people are monthly payment sensitive. And so they're going to choose the lease option. There are other advantages such as you can use a tax write-off if you have a small business, you can write those payments off under a lease. Most people like the fact that a lot of these cars include maintenance packages. It's a lot of peace of mind knowing that the car is one going to always be maintained for free and two is going to be under warranty. You know, you buy a used car. Two things. One, you don't know how much maintenance cost is going to get you at the end. Two, if you say you get into an accident, God forbid, the value of your, it's not an investment,

let's be honest, but the value of your asset probably just went down 10 or 20%. With a lease, you don't have that problem. You fix the car with insurance, you hand the keys back over to the dealership, you say, thanks for playing. There's no inherent risk to leasing. You don't have the asset. So you're basically renting the car at a lower payment. You get a new one every three years and you go about your life. Well, you're renting it essentially at the new car price even after a few years. And then you're giving it back. So overall, financially, it's not the best option. Sure, it's super convenient and the rest. But after a few

years, you're still paying the brand new car price and you have nothing to show for. Well, I'd actually argue with you on that one. So a lot of people say, hey, I don't like leasing. I don't actually own the car. Hey, guess what? If you finance the car, you don't own it either. The bank does, right? So when you're le car, you don't own it either. The bank does, right? So when you're leasing, there is a residual value and you're making payments and that value of the car is going down, right? And so at any point during the lease, you can choose to buy it. You can say, hey, you know what? I like this car. I want to buy it. But it is a contracted price, you're right. But at any point in this time, used car pricing has gone up

and a lot of people are selling their leases and making $5,000, $10,000, $15,000 on their lease tournaments. We've been doing that all year for clients. Can you explain how that works? So at any given point in a lease, there's a payoff, right? Just to make the numbers easy, say there's a $30,000 car. At the end of the lease, they're banking on the car being worth $15,000, okay? So a lot in this market, the used car market's crazy. It's super inflated due to, and we could talk about that,

the current market. So, you know- Supply chain, et cetera. Yeah. So you can, at the end of the lease, you can buy your car for $15,000. But at this day and age, that car is probably worth $20,000, $22,000. So guess what? You can sell it. They'll hand you a check for $7,000. And pretty much your car was almost free for those three years. Again, these are different times. This is currently what's going on. So this isn't standard. Typically, there's not a lot of equity in your lease. And you just hand over the keys and let the dealership or the bank deal with it. Right now, you can make a lot of money on your leases.

That's really interesting. Yeah. And what is the greatest depreciation period? Is it still four years? When you say greatest, just obviously depreciate continues on as time goes on. So when you say the just obviously depreciate continues on you know as time goes on so when you say the greatest depreciation period so like does it i think it depreciates what 40 or 50 percent in the first four years and so is it best to get a car that's about four years old i mean because it's depreciated the most correct so the um you So as soon as you drive the car off the lot,

as you've heard people say, it depreciates. They say 30%. It's really like 10% or 15% off the top, gone. You can't turn around and sell it back to the dealership. But you're right. About four years is kind of where it's at, where we've told the bottom of the trough, where you can pick one up and maximize, you know, kind of the value in the car. So.

And when you're buying a used car, can you still use a broker? Yeah, of course. We, I would say about 90% of our business is new car leasing. A lot of the, again, we work primarily for the entertainment industry and a lot of the managers prefer their clients to lease based on the tax incentives and based on the ease of getting them in and out of new cars. Can you use a broker for used cars? Of course. Now, the benefits of using a broker on a used car are different. It's purely just the service. We have a lot of clients who call me, Alec, I need a slightly used Honda Civic for my 16-year-old. He just got his license. Great. I'll have it in your driveway tomorrow. Now, if you're calling a broker to get

the best price on a used car, there's no magic bullet there. Because of the internet, used car pricing is so competitive. Whatever you see online is typically the price. As a broker, he can't call in and get some crazy number on that car. But what we can do is provide the same process, the same logic, and the same white glove delivery. So making your life inherently easier. And for the dealership, from their perspective, is it different if you pay all in cash or if you finance it? Yeah, I wanted to talk about that too. That was actually on my notes. A lot of people, it's a common misconception. A lot of people say, Alec, I want to pay all cash. I want a great deal on the car. You're wrong because dealerships, they make money off

of financing. And this is my tip again for negotiating with these guys. When you pay cash for a car, it's not like this is some mom and pop tire shop where they're taking cash under their table and it doesn't get reported somehow that there's tax savings. No, it doesn't incentivize the dealership whatsoever to do a cash deal because they can't make money through the financing interest rate. So if you do want to pay cash for a car, I recommend going in, telling them you're going to finance, get the bottom line selling price that they're willing to go and then tell them you want to pay cash. Yes, this was actually a new tip that I figured out during my last car buying process, that the dealerships do not care in a lot of other big purchase situations.

If you're going to buy a house, especially now, if you're coming in as an all cash buyer, then that's going to be a benefit to you or, you know, a game changer in getting that deal done. Not so much in the car world, because they're all they also have their own internal financing department. And so they couldn't possibly, it sounds like, care less if you have cash or not. Nope, not at all. So don't put that as an arrow, the tool in your shed, an arrow in your quiver, whatever. A tool in your shed, yeah. Whatever the fuck. That's not a good negotiating tactic for you.

I like what you said, though, is sort of like a little bit of the bait and switch. If there is an incentive for them to do financing, is that the case for all of the brands or just some of them? No, that is the case for all of the brands. So typically dealerships will make one point of interest, which is a good negotiation we could talk about. Say, you know, they come back at you and say, you know what, we got you approved for 4.9%. You say, no, 3.9. They go, okay. Usually there's always a point wiggle room there. Interesting. And that doesn't go directly based on what your credit score is. They have say in what the interest rate is. Yeah. Because that's basically the money they're making, right? Is, you know, the bank says the rate's 2.9,

dealer says 3.0. And they collect the excess there, so. But then if you go back and say 1% lower, then they're not making the excess? True, but- So split the difference? One- 50 basis points?

If you want to split the difference with them, you can. I want to recommend it. I mean, at the end of the day, they're selling a unit, right? They're moving one unit. They're getting it off the lot. They're not running car museums. They want to move units. And so if it comes down to one point of interest or selling the car, they're going to sell the car.

But over time for you, 1% of interest turns out to be actually a lot. It does. Yes. For today's tip, you can take straight to the bank. Always negotiate when you buy a car. Unless you're looking at some crazy, exotic, one-of-a-kind ride, which you shouldn't be, cars are commodities. There are a ton of the kind you want or similar ones out there. Stay tuned to tomorrow's episode to find out how to approach the ultimate negotiating opponent, the car salesman. Da-da.

Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design.

And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.