- Finding Your Car
- Auto Financing
- Loan or Lease?
- Right Time to Buy
- Rebates & Incentives
- Knowing The Dealer
- Negotiation Tips
- Miscellaneous Fees
- Car Buying Checklist
One of the hardest parts of buying a new car is picking which car works best for you. There are over 300 new models every year to choose from and it can be intimidating. At this point you might have an idea of what new car will be yours, but until you analyze the pros and cons of each vehicle, that’s all you have—an idea. Nobody wants to be the person who jumped the gun and bought a Yugo 30 years ago. This is an exciting time; this is your chance at a new start with the car you have always wanted. So get in, buckle up and enjoy the ride.
I wish I could say that just thinking about what kind of new car you desire is all it takes, but there are several steps you must take to drive home with the right one. The good news is that all of your research can be done with just a click of the mouse. With the exception of a test drive, you can do most of your car research online including researching different cars, figuring out your financing options, and getting free price quotes. More and more dealerships have Internet sales managers who specialize in dealing with Internet buyers (that’s you).
The best way to narrow down the field is to make a prioritized list of the factors that are most important to you. When someone asks us for advice on a new car purchase, these are our three starting questions:
1. How Much Money Can You Spend?
The car that you buy must fit into your budget. Just because you want a Mercedes-Benz doesn’t mean that you can afford one. The next section discusses how to incorporate your new car into your budget. There are tons of great cars out there that can fit your practical needs and look good doing it.
2. What Will You Need From Your New Car?
This is the practical side. Fuel economy, towing power, maximum seating, etc.
3. What Would You Like Your New Car to Have?
This is the fun side. Sunroof, Bluetooth connectivity, leather interior, etc.
OTHER QUESTIONS TO ASK YOURSELF
1. How Much Driving Do You Do?
Do you travel often? Do you spend hours commuting to work every day? Do you like to take your car on road trips? Are you miles away from civilization or friends? Do you want something comfortable, spacious and fuel efficient? If you spend lots of time behind the wheel, it would be wise to get something that is fuel efficient, comfortable, and reliable.
2. Are You an Off-Roading Machine?
Do you live in areas that require more muscle and towing capacity? Are there many unpaved roads? Do you have lots of gear and equipment that you’re hauling all over the place? You might have to carry tons of gear for your job or you might need space for your growing family and all of your belongings. Four-wheel drive might be a standard feature then, as far as you’re concerned. What are you using your car/truck/SUV for?
3. How Green are You?
Do you spend tons of money on gas? Would you rather have a smaller car with a smaller engine in order to save money at the pump while maintaining a high resale value? Are you concerned about your carbon footprint? Remember that not every SUV is a gas guzzler, and not every sedan is fuel efficient.
4. Who Will be Driving/Riding in the Car?
Will your husband, wife, mother, father, children, co-workers or friends be driving the car as well? Do you take your dog with you everywhere? If you are sharing the car with someone else, then take into account their style and measurements. If you are picking up the elderly, then you want a car that’s easy to get in and out of. If you have children, you want to have enough room and high safety ratings.
5. How Safe Do You Want to Be?
Is safety for yourself and other passengers a major concern to you? Do you want a structurally sound car with several safety packages? Airbags, child seat safety, and advanced braking technologies are all real concerns. Safety ratings are based on four criteria: crash tests, accident avoidance, rollover resistance, and rear-impact protection. Finding out how your car stacks up in these categories will help ensure that you are getting the safest vehicle for you.
6. Will You Go on a Power Trip?
Some of us love the roar of a powerful engine, the smell of burnt rubber when the light turns green. Do you salivate at the thought of hundreds of horses under your hood? If 0-60 actually means something to you and a car is more than just something to get you from point A to B, then power up, my friend!
7. Does Resale Value Interest You?
Hybrids and certain makes have a higher resale value than others. Honda and Subaru are among the leaders in resale value among manufacturers. Even if you don’t plan on selling your car in the future, buying a car that keeps its value gives you flexibility and options if a situation should arise.
8. How Important is Looking Important?
Not everyone can be Magnum P.I. and drive a Ferrari. Not everyone can grow a killer mustache either—but that’s beside the point. I would love to have an Aston Martin, but my Kia budget can’t accommodate that. Let’s be honest, cars can reflect one’s personality and status. If you take satisfaction in how your car makes you look, then spending money on the appearance is well worth it.
9. Do You Like Paying Mechanics?
In a recent survey, 0% said that they enjoy taking their car into the shop. In another survey, 0% said that they love paying for auto repairs. Certain makes and models are known for their dependability and some are known for their tendency to break down like a 15-year old computer. Not only do you want a car that will stay out of the shop and keep ticking for hundreds of thousands of miles, but you don’t want engine failure in the middle of Death Valley.
MAKE SURE THAT YOU DO THE FOLLOWING:
Test Drive Three Different Cars
Once you have narrowed your list of features and you have an idea of the type of cars you are interested in — take them out for a spin. Just because a particular car has all of the features you like doesn’t mean that you will feel comfortable behind the wheel. Make the test driving day different than the purchase day. That way you can focus on the car and not the financial pressures.
When you know what car you want, you can have the dealers compete for your business without leaving home. Once you have submitted a request for free price quotes, and been contacted by the Internet Sales Managers in your area (or out of your area, depending on how far you are willing to go to save an extra buck), tell them that you are doing competitive bidding and you want the “drive it off the lot” price including all of the fees. If they tell you that they don’t provide price quotes, then tell them that they just lost your business and that the next dealer will get your money. The idea behind this is that you can get dealers to compete against each other for your business without ever having to visit the lot.
BOTTOM LINE: There are many variables that go into selecting your next new car. How much you can afford, what you like, and what is practical are the most influential factors. No matter how much you like a car, breaking your bank to drive it is the last thing you should do. Be patient, do your homework and you will be happy because a new car, no matter what it is, is always fun!
The vast majority of shoppers have to take out a loan to buy a new car. If you have the cash to pay in full, that is the best financial position since you will not have to pay any interest on a loan. People think that obtaining affordable auto financing is a painful, humbling or potentially embarrassing process — and often they’re right. However, there are ways to be informed and to ensure that you make a smart decision that puts you in the best position to buy.
1. Determine How Much You Can Spend
Before you do anything, evaluate your budget and determine how much you can afford to spend every month. Financial experts believe that you should not spend more than 20% of your monthly income (before taxes) on car payments. Take your rent/mortgage and other expenses into account and determine how much you can pay for a new car. Determining how much car you can afford knocks down the first domino of your new car purchase.
2. Figure Out What Cars You Can Afford
Instead of finding a car and then figuring out how to finance it, use a reverse payment calculator to find out what cars you can afford. Simply input your desired monthly payments, desired term and down payment amount and we’ll give you a list of cars that fit those criteria. There are plenty of new cars out there that can fit your needs and are well-within your budget, so don’t get greedy!
3. Do Your Homework
You are not only in the market to buy a new car, but to do so at the lowest cost, and spending less on a new car starts with your car loan. 73% of all new car purchases are financed, so unless you are in the remaining 27%, you will have to either take out a loan or finance through leasing. There are many different loan types with varied interest rates and term lengths, so doing your homework to find the most cost efficient loan is very important.
4. Count Your Cash
If you have enough money to buy a new car outright, do it! If the space under your mattress is filled with cash and you can afford to buy a new car without taking out a loan or agreeing to a lease, you will end up saving the most money. If the bed is bare, then you will have to finance, but using whatever cash you have on hand can still lead to savings. The more money you use as a down payment, the less money you will spend on interest; it’s that simple. A four-year loan at an interest rate of 7% on $16,000 instead of $20,000 will shave $600 off the total cost. Not only will you save $600 in interest, but you will lower your monthly payments from $478 to $383. Experts advise paying at least 20% of the price of the car as a down payment to help minimize your monthly payments. You can also use the value of your trade-in to get as close to 20% as possible. Calculate your down payment, interest rate, and other factors to get an accurate auto loan estimate.
5. Know Your Credit
Find your FICO, also known as your credit score. Even if you have excellent credit, it is to your benefit to find out exactly what your credit score is. It will determine what loan rates you qualify for, which translates into how much interest you will pay during the period of your loan/lease. Most people don’t know their score and usually are afraid to find out. However, if you have bad credit, it is much better to know it before you’re trying to negotiate a low payment at the dealer. You never know though — you might be pleasantly surprised by your credit score.
An example of how your credit might affect how much you end up paying: If a car costs $26,000:
a. Excellent credit (700+ FICO) at 6% interest for 3 years = $28,525
b. Mediocre credit (620+ FICO) at 11% interest for 3 years = $30,696
c. Poor credit (under 620 FICO) at 18% interest for 3 years = $33,895
d. Cash in full = $26,000
6. Check the Term
In loan speak, the number of months to pay off the loan is called the term. The shorter the term, the more you’ll save. REMEMBER: Each payment you make means more interest you’re paying.
a. Shorter is Better: When determining the length of a loan, you must weigh a few options. If you can afford higher payments during a shorter term (24-36 months), you will save money. If you want lower monthly payments that will stretch over a longer period (48-60 months), you will actually spend more money because of the interest and the odds of becoming upside down are increased.
b. Don’t Get Upside Down: Being upside down means that you owe more money on the loan than the car is worth. When you take out a loan on a car, there are two factors at play: the depreciation of the vehicle and the amortization of the loan. Depreciation is the rate at which the value of your car declines; amortization refers to the payments you make on a loan. At the beginning of your loan, the value of your car will depreciate at a faster rate than your interest payments amortize. So, after a year or two, you may owe more on the car than you could get if you sold it. For example, if you buy a car for $20,000, after two years, it may be worth only $11,500 due to depreciation, but you still owe $14,000. That means that you are upside down on your loan by $2,500. Why is this bad? Well, if your car gets totaled in an accident (we hope not!), the insurance company would only pay you $11,500, and you would have to make up the $2,500 difference that you owe the bank.
7. Be Wary If You Have Bad Credit
If you have poor credit, you will not be eligible for those great low rates that the dealer is advertising. You may be able to get a better rate by shopping around at your local bank or credit union. If your credit is spotty, there are often other loan options.
8. Explore Your Options
There are three places to obtain financing.
a. Online: There are several websites that can provide your free credit report and there are websites out there that will actually pre-approve you for a loan.
b. Your Bank or Credit Union: Visit your bank or credit union and discuss the rates that you qualify for.
c. The Dealer: The dealer has many credit/loan sources; each source gives their rates to the dealer, who, in turn, may add additional percentage points. So it’s imperative to know what kinds of interest rates you qualify for from outside sources before you go to the dealer. This allows you to avoid confusion at the dealership, saves you money, and let’s them know that you are serious about car buying.
c. TIP: NEVER roll an upside down loan on a trade-in into a new car purchase. Why? Because you will immediately be upside down in your new loan, which, as I mentioned before, is a very risky place to be.
TIP: Get a flexible loan if you can. A flexible loan allows you to increase your monthly payments, or pay it off completely if you are able to do so.
BOTTOM LINE: Cash is the bottom line. The best way to save money on a new car is to have as much cash as possible at the time of purchase. The more cash you can pony up front will trim down your monthly payments as well as the interest you will pay over the duration of your loan/lease. Saving is the name of the game. If you save your cash for a big down payment, you will be saving money in interest over the term of your loan, while having lower monthly payments as well.
What does it mean to lease a new car? Essentially, leasing is similar to renting – you make payments for the use of the car over a certain time period, and you return the car at the end of that period. Most likely, you will lease a car for 2-3 years and then have the option of buying the car or giving it back to the dealer. There is no cut and dry choice when determining whether leasing or buying is the better choice; your economic situation and how you intend to use the car will play the largest role in your lease vs. buy decision.
WHOM AM I LEASING THE CAR FROM?
You are not leasing the car from the dealership that you bought it from. You are leasing it from a finance company. The car is “sold” to the leasing company by the dealer and then that company leases it to you.
WHAT ARE THE DIFFERENT TYPES OF LEASES?
The two main types of leases are:
The most popular consumer lease. Closed-end leases allow you to walk away when the lease is over. At the time of the lease, the leasing company determines the estimated lease-end value, or residual value, of the car. If you return the car at the end of the lease and it is worth less than the estimated residual value, the leasing company takes the hit. All you are responsible for is any excess mileage and wear-and-tear fees. If you really like the car and want to keep it, there is generally an option to purchase the car when your closed-end lease runs out.
Open-end leases require you to purchase the vehicle at the end of the lease. You will have lower monthly payments than with a closed-end lease, and you will have to pay the residual value once the lease is up. If the calculated residual value happens to be lower than the actual market value at the end of the lease, then you’ll get a deal because you will be able to sell the car for a profit. There aren’t any excess mileage or wear-and-tear penalties assessed, but there is an element of risk involved. Open-end leases are popular among businesses and fleets that can negotiate better prices and buy in quantity.
WHY DO LEASES HAVE LOWER MONTHLY PAYMENTS THAN LOANS?
When you take out a loan to purchase a car, you are paying the entire purchase price plus interest over a fixed period of time. When you lease a car, you are paying the difference between the purchase price and the projected residual value, and you only pay interest on that amount.
Example: You’ve negotiated and determined the price of a car to be $20,000. If you want to lease the car for three years, the dealer will determine what the car’s value will be after the three years of depreciation. Let’s say that after three years the car is estimated to be $11,000. Basically, you will be paying $9,000 (plus interest) over three years. If you choose to take out a loan, you will be paying $20,000 plus interest over three years, and therefore you will have higher monthly payments. But, you will own the car at the end of the three years.
WHY YOU WANT TO LEASE
1. Lower Monthly Payments
You are not paying for the whole car — just a portion. Monthly lease payments can be up to 60% less than purchase payments per month.
2. Always in Style
Evolve with the cars. Instead of driving the same car for 10+ years, you will be driving a new car every 3-5 years. If you look forward to new makes, models, and features, or if you like that new car smell, leasing is your ticket.
3. Are You Down with the Payment?
Because the total amount that you are paying over the course of your lease is significantly lower than if you were to purchase the vehicle, you aren’t required to fork over as large a down payment (if any) when you sign.
4. Say Goodbye to the Shop
If you are leasing the car for 3-4 years, the odds of major maintenance issues are unlikely. If something were to occur, you should still be under warranty.
5. Save Money on Taxes
When you lease a car, you are paying the depreciated amount of the vehicle over the lease period. Therefore, you are only being taxed on that amount. Plus, you are not paying that tax in one lump sum — it’s spread out over the course of your lease payments, similar to your insurance.
WHY YOU WANT TO BUY
1. Equity City
When you make loan payments, you are gaining equity. Equity is ownership. At the end of your loan, you will own your car. When your lease is up, you will have nothing to show other than a bunch of payment slips.
2. You Will Always Have a Car
Not only will your purchased car become an asset, but the bottom line is that you will still have a car after the loan has been paid off and you’ll have no more car payments. If you lease, you will have to return your car and lease another one.
3. Financial Freedom
When you are done paying for a car there are no more payments; there is a light at the end of the payment tunnel. If it takes four years of paying $500 per month to purchase a car but keep the car for an additional six years, you essentially paid $200 a month for 10 years. In addition to paying such a low fee over a long period of time, the car still has resale value.
4. Mileage Penalties
When you lease, you are usually allowed between 10,000-15,000 annual miles. If you think you will exceed that allotment, then you can buy extra miles at the point of purchase. You never know how much you’ll actually drive — lots of things can happen during the course of your lease. If each mile over the limit is $0.25 and you end up going 6,000 miles over your allotted amount, you will owe $1,500.
5. Wear and Tear Penalties
What defines ‘wear and tear’ is a bit abstract. Most lease contracts define ‘normal wear and tear’ to mean that if you have any significant interior/exterior blemishes, you will be penalized.
6. Early Termination Penalties
Just like switching phone carriers in the middle of a contract. If you wish to get out of your lease early, it will cost you. If you lock yourself into a lease, be sure that you honor it — for money’s sake.
7. Credit Check
Because leasing is the same as renting, your credit will have to be in better shape than if you were buying. You might need a co-signer. Check your Experian® Credit Report & FICO® Score.
When discussing a lease with the salesperson, you will hear several terms thrown around. If you don’t want to be as confused as a newly thawed out caveman, then it’s wise to know what they mean:
The predicted value of the car at the end of the lease.
Interest rates applied to leases are called money factors. Take the interest rate and divide it by 2,400 (it’s always 2,400 even when the term is longer than two years). EXAMPLE: If the interest rate is 8%, divide 8 by 2,400 and you will get a 0.0033 money factor.
The length of the lease in months.
BOTTOM LINE: The difference between getting a loan or lease comes down to how much money you can spend and the lifestyle you live. Buying makes the most financial sense and almost anyone can qualify for a loan. That being said, if you enjoy driving a new car every two to three years and money is no problem, then leasing is the way to go. The best advice is for you to do the fiscally responsible thing and stay within your means whether you choose to buy or lease your new car.
When is the right time to buy a new car? Unless you needed a car yesterday, it is wise to wait until there is pressure on the dealer to unload his inventory. Whether the dealer has to fill a quota or it’s time for him to dump older models—there’s always a right time to buy.
1. Be Your Own Santa
People are buying Christmas gifts, not new cars, at the end of the year, so many dealers slash prices. Some dealers reduce their inventory during the slow holiday period. Find a dealership that has a large inventory in need of unloading some cars.
2. Out with the Old
July through October is when dealers push the “old” models to make room for the next model year that’s coming in. If you’re willing to buy the current year’s model rather than next year’s, you can save some dough.
3. End of the Month Equals the Beginning of Savings
After the 25th of the month, you’ll generally be able to negotiate better deals because dealers have quotas to meet. There are many factory-to-dealer incentives that are tied to how many cars a dealer sells during the month so if they need to sell more cars to meet these goals, it can mean big savings for you.
4. Fewer Customers Equals More Attention
You can do most of your research and legwork online, but buying a car will require at least one visit to the dealership. We recommend going if you can on a weekday. Because the weekends are jammed with customers, it’s like shooting fish in a barrel for the dealer. However, when the beginning of the week hits, the fish tend to be a bit scarce and the salespeople will be more eager to work with you.
5. The End of an Era
Manufacturers typically give their models a complete redesign every four or five years, with minor “refreshes” between redesigns. When a car receives a major redesign, dealers can’t wait to move the old designs off of their lots because they know that new buyers will be attracted to the new designs. So, keep your eyes and ears open for news of a redesign – you could save a lot of money if you’re willing to drive the older design.
BOTTOM LINE: Like all other aspects of the new car buying experience, timing is everything. Waiting for the right time to buy could save you just as much as haggling over the invoice price. Let timing work for you and wait for the dealer to feel the pressure of unloading his inventory.
When shopping for a new car, you will notice that the amount you can spend will limit the amount of cars you will be able to afford. Two ways to grab that new car that would normally be out of reach are with rebates and incentives (low-interest financing or APR). Most often rebates and incentives are offered by manufacturers to help dealers sell cars that aren’t in high demand. Our Rebate Center is a very useful tool for new car shoppers. Just enter your ZIP code and it will show you the latest cash rebates and low-interest financing offers on every make and model available in your area.
WHAT IS A REBATE OR INCENTIVE?
A rebate is a reduction in cost that is refunded to you by the manufacturer after the purchase. The good news is that there are generally no eligibility restrictions on rebates – if you can pay for the car, you’ll get the rebate. Note: in many states, you’ll still pay taxes on the full purchase price, not the purchase price minus the rebate.
An incentive is a reduced lease or finance interest rate, offered to you by the manufacturer’s financing division. Finance/interest rates are also referred to as an annual percentage rate (APR). The bad news is that the incentive interest rates are subject to eligibility restrictions, meaning that if you have poor to mediocre credit, then you won’t be eligible for the best rates. In these cases, you might be better off getting a loan somewhere else and taking the cash rebate from the dealer (if there is one).
Sometimes, rebates and incentive interest rates may be combined – for example, $2000 cash back plus 2.9% financing for 48 months. Other times, the offers are “either/or,” meaning you can’t have both. In these cases, how can you tell which is better – a rebate or low-interest financing? Fortunately for you, we have gone ahead and created a Cash Back vs. Low APR Calculator that will help you figure which is the better deal for you.
MORE FACTS ABOUT REBATES AND INCENTIVES
1. First Things First
One of the most important things you need to keep in mind during the negotiation process is to negotiate the price of the car before you mention anything about the rebates or incentives. Settle on a good price for your car, then any rebates or incentives that are offered will just equal that much more savings.
2. How to find Rebates and Incentives
You could spend all day going from one manufacturer’s website to another looking for the latest rebates and incentives – or, you can find and compare all of the latest rebates and incentives for all major makes and models in our updated Rebate Center. While looking for bargains, you will notice that the most lucrative deals can be found on the previous year’s model; the manufacturer doesn’t want the dealer to have a lot of old inventory sitting around on his lot.
3. What is the Most Common Rebate/Incentive?
Cash rebates from the manufacturer are the most common and least complicated. Cash rebates are money that you get back from the manufacturer after the sale. Here’s what you can do with them:
a. Increase Your Down Payment: If you have $2,000 for a down payment and the rebate is $750, you can combine the two and put $2,750 toward the negotiated price so you can have a lower monthly payment.
b. The Check is in the Mail: If you already have enough money to put down, you can choose to have the manufacturer mail you the rebate after the purchase is complete, and you’ll have some gas money to spend on your new ride.
c. No Money Down?: You can use the rebate as your down payment if you don’t have enough cash handy.
4. Other Types of Rebates
In addition to regular rebates, there are several different types of rebates offered to special groups. Here are four examples:
a. Loyalty: Some manufacturers offer loyalty rebates to customers who already own that brand of car.
b. Conquest: The opposite of a loyalty rebate. Conquest rebates are offered by a manufacturer to lure you away from the manufacturer of your current car. For example, if you currently own a Toyota, General Motors might offer you $2,000 to buy a Chevrolet instead of another Toyota.
c. Military: Many manufacturers offer special rebates for members of the military with proof of service.
d. Student: Some manufacturers offer rebates to students who are buying a new car for the first time.
BOTTOM LINE: If you plan to accept a manufacturer’s rebate, don’t let the dealer factor that in during the negotiation. A rebate is your money from the manufacturer (not the dealer) and is deducted once the price of the vehicle has been agreed upon. And, you’re more likely to be able to take advantage of rebates and incentives if you’re open to buying a slightly older design.
Okay, so you have an idea of what new car you want and how you are going to pay for it (I hope!). Sounds like all you have to do is test drive it and sign at the bottom line. Well, I hate to sound like a nag, but what are you going to do with your current set of wheels? Yeah, you’re going to have to do something about that old rust-bucket. The good news is that there are two methods of parlaying the equity of your current car towards your new one — selling and trading in.
SELLING YOUR CAR
Let’s get one thing straight. Selling your car to a private buyer can net you hundreds if not thousands of dollars over trading it in. When you trade your car into the dealership you are only receiving wholesale value, because the dealer has to incur costs to prep the car for sale, keep it on the lot, etc. If you have the time and patience, selling your car yourself is a worthwhile venture. Individual buyers won’t dock for dents and scratches as much as the dealer will.
TRADING IN YOUR CAR
If you aren’t concerned about keeping more money in your pocket, or if you’re too busy to deal with the sell-it-yourself process, you can trade in your car to your new car dealer. Note that you’ll likely get a better trade-in price for your car if you’re trading it in to a dealer that sells that make. In other words, you’ll likely get more money for your Volvo from a Volvo dealer than if you traded it in to a Nissan dealer. One important note: manufacturers will sometimes offer incentives on your trade-in, including extra cash, so do some research to see if any of those apply to your set of wheels.
DON’T TURN UPSIDE DOWN
A common mistake people make is trading in their car while being upside down with their payments. Being upside down means that you owe more money on your current car than it’s worth. If your car is worth $8,000 and you owe $12,000, you are upside down by $4,000. Trying to buy a new car while being upside down on your current car is a terrible, terrible mistake. If you are upside down $4,000 and the car you want is $20,000, you are adding $4,000 to your loan. This will make you even more upside down in your new car – leading to a never-ending downward spiral of debt. It makes more sense to get caught up on your payments so that you’re at least on level ground (and preferably far ahead) before you buy a new car.
THE UPSIDE DOWN EXCEPTION
The only time that you can get away with trading in your car while you’re upside down is when the new car that you wish to buy offers significant cash rebates that completely offset the amount you’re upside down. For example, if you’re upside down $1,500 and the new car has a $2,000 rebate, you come out $500 on the plus side.
Whether you decide to sell your car on your own or trade it in, make sure that your car is in the best shape possible. If you’re a smoker, grab the Febreze, and start airing your car out. Make sure that it is totally clean — inside and out. Perhaps spending a little to get it detailed would help as well, first impressions count!
FINDING THE VALUE OF YOUR USED CAR
Many sellers estimate the value of their used car with Black Book. Black Book is used by banks, car wholesalers, and dealers; it’s the authoritative wholesale guide. The Black Book numbers are taken directly from wholesale auctions nationwide and the data is updated daily. So for the most up to date appraisal of your trade-in, we suggest you use the Black Book Appraisal Guide.
As you use the Appraisal Guide, be completely honest when estimating the condition of your car. There is nothing more embarrassing than negotiating a trade-in price and having the dealer point out that you’ve misrepresented the vehicle’s condition. Make sure to take the printed Black Book appraisal form with you to the dealership (along with the Internet Price Quote). That tells the dealer you’ve done your homework and makes negotiation a breeze.
THIS IS THE MOST IMPORTANT PART
Once you are at the dealership ready to buy your new car, DO NOT mention that you intend to trade your car in to the dealer until you have finished negotiating the new car price. This way, there’s no confusion and you can negotiate both your best price for the new car and the best deal for the trade-in separately. If the dealer asks if you plan on trading in your car, do not say yes or no, just say “Possibly, but let’s just talk about the new car price first.”
How you want to approach the trade-in/new car purchase:
1. Conclude what the cost of the new car is.
2. Conclude what the trade-in value is worth.
3. Calculate the difference between the new car and the trade-in price. Add any rebates/incentives and down payment cash. Once you’ve found the difference, you can map out your monthly payments.
How the dealer makes money off of your trade-in:
The dealer is looking to make a profit at every turn during the car buying experience. Know that he wants to buy your trade-in at the lowest price he can (wholesale) and then sell it for a mark-up. If you don’t have a clue what the value of your trade-in is before you visit the dealer, you will not get a fair price for it.
Keep in mind, however, that there are legitimate costs involved for the dealer in buying your trade-in. They have to fix any significant cosmetic or mechanical problems as well as replace certain parts before reselling your car to a used car buyer. They also needs to pay commission to the used-car salesperson and pay rent on the used-car sales lot. In addition, they have to pay to advertise the car, and have money tied up in it until it is sold.
NOTE: If you owe money on your car and you wish to trade it in, know that you won’t get much of a return. If you owe $8,000 on your current car and the dealer gives you $9,000, you’ll only be able to apply $1,000 to your new car down payment.
TIP: Do your homework first and get a used car valuation from Black Book. Take the printouts of your trade-in valuations to the dealer. If you have any questions with the negotiation you can refer to your paperwork for help.
BOTTOM LINE: In order to get the best value for your trade-in, sell it to a private buyer. If you don’t have the time to do that, get several quotes—both online and through used car dealers. Trading your car in to the dealer is the easiest way, but not the most cost-effective. Getting the maximum value for your car will help take the sting off of the price of your new car.
A recent poll of Americans found that they rate the car buying as one of the worst experiences around, next to stubbing your toe on a cabinet or a root canal. But we don’t believe that it has to be this way, not with the internet changing the way that people buy cars and putting more information than ever in the hands of consumers. We want to put you in the best purchasing position and are here to tell you a few things you might not know about dealers that will help you during your negotiations.
And please remember – car salespeople are human too, they’re just like anyone else trying to make a living. The majority of people we’ve dealt with at dealerships are decent folk (though there are a few bad apples out there). Most would even say that they appreciate someone who knows their stuff, because it makes for an easier negotiation. One final note: if you feel like you’re being mistreated at a dealership, simply walk away and go to another one that will be happy to have your business.
Here are a few things that are important to know before you walk into a dealership:
1. How Does the Dealer Make Money?
There are several ways that a dealer makes money off of your new car purchase.
Even if the dealer sells you a car at the invoice price, he is often still making money due to a little-known thing called a holdback. Holdbacks are compensation that the dealer receives from the manufacturer when they make a sale, usually at a rate of 2-5% of the MSRP. Thus, a dealer can make between $400-1,000 off of your purchase without even haggling with you. But you are not entitled to the holdback, so don’t even try to wrangle any of this money from the dealer when negotiating. You shouldn’t even mention it unless they complain that they’re not making any money off of the sale.
Similar to holdbacks, these are bonuses that the manufacturers give to the dealers to help them move specific cars.
As we covered in our Auto Financing section, getting the best deal on your financing requires some homework. If you don’t know what kind of rates you qualify for and visit a dealership, then the best financing they offer you will be the best you can get. It could be that the dealer’s financing arm will offer you 7% APR but at other places they could offer you 5%. But without knowing in advance what rates you can get, there’s no way to know. This is just another in a long list of reasons to either get pre-approved for your own financing before you visit the dealer, or at least know what rates and terms you qualify for.
It’s also important to know how much money you can expect to get for your used car, whether you choose to sell to a private party before you reach the dealership or trade-in. If you are going to trade-in, have several estimates for your trade-in so you can get the maximum for that old set of wheels; it will give you a leg up on the new set.
2. Things Not to Say to the Dealer
a. Don’t negotiate for a monthly payment, negotiate on the full price of the vehicle, out the door. That way you know exactly how much it will cost, rather than approximating with loans and interest calculations; keep it simple.
b. Don’t talk trade-in until you have negotiated the price, that way you will get the best price for both your new car and your trade-in. There is an exception to this rule: some manufacturers will offer a rebate for new car buyers that are also trading a car in. In this case, mention that you have a car to trade-in so the dealer knows you qualify for that rebate, but still conduct both negotiations separately.
3. Everything is Negotiable
What most people don’t know is that all of the options that are available can be negotiated. The prices of all of the little extras such as extended warranties, paint protection, LoJack, rust proofing, floor mats, etc. are not set in stone. I remember buying a new car and the dealer wanted us to chip in a marketing fee which I refused and the fee was waived.
BOTTOM LINE: Look at the car buying experience as a game. The dealer is the other team and the car is the trophy. The majority of dealers aren’t bad people — they just count on consumer being uninformed. In order to be successful at anything you must be informed. Knowledge is king and if you know the dealer’s tactics, you can win the car-buying game.
The dealer has been around this block thousands of times before—heck, it’s his job! Most salespeople are incredibly savvy and they now exactly what questions to ask to keep you off balance throughout the negotiation.
If you wish to take control of the negotiation and feel empowered during the new car buying process you should be prepared for what the salespeople will ask you and how to deflect the pressures of the lot. The last thing a salesperson wants to do is have you walk away without a new car. Salespeople often get into trouble if a potential buyer walks away without speaking to a manager first. That means you have a lot of the power, even if you don’t feel like it. Remember, if you feel like a salesperson is pressuring you too much and you don’t feel comfortable, then walk away and take your business elsewhere. That is a more powerful statement than anything else.
Here are some questions the dealer might ask you with the appropriate suggested responses:
DEALER: “What can I do to get you into this car today?”
BUYER: “Nothing, I am not buying a car today.”
You can say this even if you plan on buying a car that day. Even though you told the salesperson that you don’t intend to buy a car during your visit, they won’t stop pressuring you to buy.
DEALER: “How much would you like to pay each month?”
BUYER: “How much I can afford per month is irrelevant. I just want to negotiate my new car purchase price.“
Remember to negotiate for the complete price of a new car, not a monthly payment, so you know exactly how much you’re paying.
DEALER: “How do you plan on paying for the car?”
BUYER: “I would like to negotiate the price of the car before we get into payment options.”
DEALER: “Do you plan on trading in your old car?”
BUYER: “No. I would like to negotiate the price of the new car.”
Only mention that you are interested in trading in your old car once you’ve negotiated the price of the new car.
This requires some research which you should do before setting foot in the dealership. We recommend using Black Book’s trade-in valuation tools which will give you an accurate estimate of your car’s worth. Negotiating separately for your trade-in makes it easier to ensure that you get the best deal on both transactions, which ultimately saves you money.
FAILSAFE: If a dealer insists that you buy a car that same day and is making you feel uncomfortable, let them know that you are willing to walk away and give your business to another dealer.
OR: You can contact the numerous Internet Sales Managers in your area by getting a free quote and bypassing this step altogether. Most, if not all of the negotiating can be done online without setting a single foot inside the dealership until it’s time for a test drive or to pick the car up.
When you negotiate the price of a car, you are determining the base price of the car and additional option packages. Once you have done so it is not the time to let your guard down. When you’re sitting across from the dealer you will be confronted with several other ways to spend money. Some are just necessary evils like tax and licensing and others are purely optional such as warranties.
NOTE: We like to negotiate on something called an “out-the-door-price” that includes the price of the car, option packages, and the extra fees listed below. You can try to do this as well since all of these costs get rolled into your car loan and it will give you the most accurate picture of the total cost of your new car. Keep in mind that some of these prices are negotiable, but licensing and taxes are set by the state and will have a set cost attached to them.
An extended warranty is an insurance policy on your car. All cars come with a standard warranty and the length of it varies from car to car. All dealers will try to sell you an extended warranty. There is no need to purchase an extended warranty on the same day you buy your new car. You can purchase an extended warranty at any time while you are covered under your factory warranty. But, if you want to buy an extended warranty from the dealer, you can negotiate the price. The price they tell you doesn’t mean that is the price you have to buy it for.
You’ll have to pay license and registration fees mandated by your state when you sign for your new car. Expect to pay between $50-200. Note that these annual fees will decrease as your car depreciates.
Don’t forget to factor sales tax into the price of your car. Apply your local sales tax to the total cost of your negotiated price. For instance, if you live in a state and county where the sales tax is 7.25% and the car you want is $25,000, the tax would be $1,812.50. Now your new car is $26,812.50. Some states apply tax to the monthly payment.
Stay focused and organized with the NewCarPurchase.us Car Buying Checklist. Keep track of everything you need to know when buying your new car.
Get your current car’s trade-in value with an appraisal tool.
If you opt to sell your old car yourself, find out its Private Party price. Or, get competing offers from dealers to buy your car.
Confident auto shopping begins with checking your Credit Report & FICO® Score.
Check with your bank or credit union for their best loan rates so you can compare them with the dealer’s best rate.
Calculate the monthly payment you can afford — 20% of your monthly income or lower is a good starting point.
Figure out how much cash you can put into a down payment — remember, the larger the down payment, the lower your monthly payments will be.
Use a payment calculator to determine the price range of new car you can afford, based on all of the above data.
Search for rebates to discover available rebates or financing and leasing deals on the cars you like.
Check whether you’ll save more money with a rebate or low finance offer.
Once you have settled on a car or two, go for a test drive to make sure they’re right for you. But remember, DO NOT start negotiating yet.
Get dealers to compete for your business by requesting free Internet Price Quotes. Often, you can complete your negotiations from the comfort of your home without even stepping onto a lot.
Visit the dealership, sign the papers, and drive home in your new car!