Car Buying 101
Buying a brand-new car (buying used warrants a whole ’nother article) can be an intimidating, exasperating process, especially if you go into it unprepared. After you've narrowed down the makes and models, you'll need to do more legwork before you even set foot onto those car lots, but the extra time and effort can be worth thousands of saved dollars in the end.
Here's an insider’s guide to making sure you get the best deal possible — and don’t pull your hair out in the process.
Do Your Homework
The biggest mistake you can make when buying a car is going into a dealership without a plan. With the inevitable sales pressure, you could get easily swayed into driving a car right off the lot — or leave completely deflated. The more prepared you are, the less likely a salesperson will be able to take advantage of you.
Research cars' price ranges on Edmunds, Kelly Blue Book, and NADA Guides, says Katie Brewer, CFP, financial coach at Your Richest Life. "Once you do your homework and you know the invoice price and the MSRP [manufacturer’s suggested retail price] for the cars you are interested in, you are armed with negotiating power," she explains. Make sure you bring printouts while shopping to help you cut through the sales speak.
Set a Firm Budget
If you know you're going to need a car in the next couple of years, open a separate savings account and start making a "car payment" into that account, Brewer advises, so you can save as much as possible for a down payment. "If you need to buy a car on a loan, decide what you can pay per month, which should be easy if you've already been making a 'car payment' into your savings. Then use a loan calculator to determine how much car you can buy on a three- to four-year loan," she says.
But don't focus on monthly payments alone. Make sure that when you negotiate the monthly payment down, the salesman isn’t proposing a longer repayment plan. Sure, you’ll pay less monthly, but you’ll end up paying much more in the end.
Timing Is Everything
Timing can have a big impact on final price, so buy strategically. Typically, you want to aim for the end of March, June, September, or December, says Jon Lal, CEO and founder of BeFrugal.com, since those months mark the end of sales quarters. "This is when dealers and salespeople are trying to reach their sales goals," he explains.
Shop for Loans Beforehand
If you're not able to buy a vehicle outright, you should shop for loans before you set foot into a dealership. Most people don’t do this and it can really inhibit your negotiating power. Someone at your bank or credit union can assist you with how much to put down and can offer financially responsible advice.
"You will have excellent negotiating leverage," Susan Tiffany, CCUFC and director of consumer periodicals for the Credit Union National Association, explains, since you'll already be cleared financially for purchase. "By arranging preapproval for your car loan, you can skip the financing rodeo at the dealership — that’s where consumers often end up giving back in financing what they gained in price negotiation."
Shoot for a repayment period of three or four years, and don't finance a car with a balloon payment at the end of the loan.
Email Local Dealerships Before Going In
Should you choose to buy a new car, it’s a good idea to contact the Internet managers — the person whose job it is to answer email and website inquiries — at a few nearby dealerships before walking in. "They can usually find you what you need, and they are on a less desperate commission structure," Brewer says.
Have their quoted prices in-hand when you visit and reference who you spoke to for extra collateral. If you find a better deal online or at another dealership that's farther away from where you live during the negotiation process, ask whether your local dealership will meet that price.
It's also important to be candid about that fact that you've been speaking with multiple dealerships — and that you did research on pricing yourself — so you can get the best possible deal.
Focus on Total Price
Once you start going into dealerships and test-driving, many car salespeople will talk in terms of monthly payment as a way to veer away from the total amount you'll be spending on your car — which can cost you in the long run. You should stay focused on the total cost. “For example, if you tell the dealer that $300 per month is too much, they might come back with $260, appearing to be giving you a great deal,” says money management expert Lauren Gruetman. “But in reality, they might have simply extended the loan from 48 months to 60.”
Also, hold off on mentioning that you want to trade in your old car, advises Brewer. You want to get the best price for the new car first. Once that’s settled you can negotiate how much you'll get for your old one.
Be Prepared to Walk Away
Buying the first car you test-drive is a rookie mistake. Car dealers are expecting you to walk away and shop around, so you will not get the best deal right out the gate. Mention that you’ll be visiting multiple dealerships and then walk away. This is all part of the game.
"Don’t feel intimidated about negotiating; you can take the passive route," Brewer says. "Just walk away and wait for the dealer to get back to you with a better offer.”
In the rare event that the dealer doesn’t come back with a better offer, make sure your research is correct. If it is, you should be able to find a similar car at another dealership for that price. “If you find that other dealerships will only come down to a similar price, you can always go back to the first dealership and take their offer,” Brewer says.
Read the Fine Print
Before signing on the dotted line, read the entire contract, and don't be afraid to ask questions. Take as much time as you need to be clear on the terms. Expensive extras tend to be tacked on at this stage, so be diligent.
Also watch out for a hard sell on a "necessary" extended warranty or service contract. "This is one of the biggest money makers for car dealerships," Gruetman explains. "There is a very high markup, and service warranties cover things that are never likely to break and are often not backed by the automaker."