‘The 4-square method’: Here’s how American car dealers make big profits off you — and how not to get fooled when buying your vehicle

How the four-square method works

The four-square method is a simple but effective technique. Its name refers to the dealer making four squares on a piece of paper. The squares contain the following figures:

• The value of your trade-in
• Your down payment
• The price of the vehicle you're buying
• The monthly payment for your new car

Writing this info down might seem innocent, but there are a few big problems.

First, it can easily confuse you by including many different numbers. This can be overwhelming, especially since dealers often cross numbers out and write them all over the sheet, causing you to lose track of what's happening.

Dealers sometimes try to obscure the car's total costs when using this method. Instead, their goal is to get you focused on monthly payments. They want to convince you that it's affordable if you can manage the monthly payment.

Unfortunately, dealers often put you into long-term car loans to make that price appear lower. But what it does is increase the total cost of the car, leaving you in debt for longer and owing more interest, which is never good considering you also have to account for the ongoing cost of car insurance. Of course, the total cost is nowhere to be found on the squares.

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Avoid falling for a car dealer's strategy

Fortunately, you can avoid being fooled by the 4-square method — or any other methods dealers use to squeeze every dollar out of you. Here's what you can do to ensure you pay a fair price.

Do your research before you go

An informed customer is less likely to be swindled, so doing your own research can help you stick to a budget that makes sense for you. Taking advantage of sources like the Kelley Blue Book and AutoTrader can be a good way to find out the going rate for a car so you'll know how much you can expect to pay.

Get preapproved for a car loan independently

You don't have to borrow from the dealer when buying a car. While they sometimes offer great incentives, the rates are often comparable to car loans from private lenders.

If you pass up dealer financing, this factor is removed from the equation, leaving dealers with fewer chances to tack on hidden costs or trick you into a low payment over an extended loan term.

Take the time to shop around, compare rates and find out what you can afford with a reasonable loan term. That way you can leverage your preapproval at the dealership and see if they can offer a lower rate.

Look at total costs

Dealers use the 4-square method to present so many numbers that you won't notice they aren't disclosing the total costs. The problem is that not understanding the actual price you're paying can lead to bad choices.

Say you're looking at a $50K luxury car. If you financed the car over a reasonable period, say 36 months, and made a 10% down payment, you'd borrow $45,000. If you secured a loan with a 7.2% interest rate, you'd have a monthly payment of $1,393.59 (which includes $143.59 of interest per payment). Your total cost including the loan and down payment would be $55,169.24 before tax.

If you took out an 84-month loan instead, you'd slash your payments to $683.58 per month, but your total interest per payment would rise to $147.87. You'd make monthly payments for an extra four years, committing income to your car instead of other financial goals. A piece of paper from the dealer showing a $683.58 payment might seem attractive, but you would end up paying over $7,000 more for the vehicle.

The bottom line is, don't let the dealer drive your decision making — and don't let them confuse you. Go in with a clear budget and an understanding of what the car should cost. If the dealer doesn't align with your financing needs, find a lender that does.