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The Ultimate Guide to Buying a New Car: Things to Know When Buying a Car

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Ahh the rumble of the engine starting up, the sun glinting off the new paint and that sweet new car smell. There are few things that are more satisfying than the feeling of driving your brand-new car off the lot for the first time. But before you walk away with keys in hand, there are a few steps you must go through first. There can be a lot of anxiety around the car buying process, especially if you aren’t familiar with it and don’t know what to ask. This guide will give you a comprehensive primer of things to know and look out for to ensure that your experience at the dealership is a smooth ride.

A couple exchanging documents and getting keys with a representative at a car dealership.

Research and Prepare

Arguably the most important aspect of this whole process is to do your research BEFORE you even step foot in the dealership. You absolutely need to know what’s considered a good deal for the car you want. Without this knowledge, it will be much harder to negotiate or know when you’re being charged too much.

One of the easiest ways to get a baseline of how much you should pay for the car is by checking dealer prices online. Typically, the price listed online will be one of the lowest prices you can find due to the internet being a price sensitive place. Online shoppers will buy somewhere else if they can find a better deal, so dealerships will usually have fairly low prices listed. Check out multiple dealerships to try and get an average price for the car you want.

You should also check out third-party sites like Kelley Blue Book, NADA, and Auto Trader that will help you estimate an average price.

Checking your credit score is another important step. Having a good credit score could save you hundreds, if not thousands of dollars in interest payments over the life of your loan. Typically, a credit score over 740 will get you the best interest rates. So, if you’re close to hitting that number, you may want to consider holding off on buying until you can boost your score.

If you plan to finance your car, the interest rate will be a key point in negotiating. Another step you can take before you go the dealership is to get pre-approved financing. If you get preapproved for an auto loan at a bank or credit union, you may get a lower rate than by going through the dealership. It also gives you a negotiating tool because you can tell the car salesperson you’re approved for “x” amount and that is all you can spend. Another negotiation tactic is to ask for a letter from your lender saying you’re preapproved for less than the actual loan.  For example, if you’re approved for $25,000, you could ask the financial institution for a letter stating you’re approved for $23,000. This gives you some wiggle room if the dealership balks at dropping the price. 

How Much Can I Afford?

So you’ve done your research and have an idea of how much your dream car will cost and what you’re approved for, but you still need to figure out how much you can actually afford. Ideally you should use the 20/10 rule, which suggests you have a down payment of 20% and that your total monthly car expenses (TMCE) don’t cost more than 10% of your take home monthly pay (after taxes).

Your total monthly car expenses include:

  • Monthly car payment (principle + interest)
  • DMV/registration costs
  • Maintenance & repairs (consider the make/brand of the car)
  • Insurance – get a quote from your broker/provider
  • Gas?

TMCE Calculator

To help you budget even further, you could break down the 10% you pay towards your TMCE by 8% going to your monthly payment and 2% going to other expenses.

$240

($3,000 x 0.08)

+

$60

($3,000 x 0.02)

=

$300

(TMCE)

8% +

+

2%

=

10%

Monthly Payment

 

Other Expenses

 

Monthly Take Home: $3,000

For example, let’s say your monthly take-home pay is $3,000. Here is the breakdown for your TMCE (10%), your monthly car payment (8%), and other expenses (2%).

You can adjust the 8/2 ratio depending on other factors, like your driving record and credit score. If you have a low credit score, you’ll probably have a higher interest rate and monthly payment. That means you either must find a way to spend less on other expenses or choose a car that costs less. If you have a bad driving record, your car insurance premiums will probably go up which would increase your other expenses. To balance that out you can do things like find a cheaper car, negotiate for a better interest rate, shop around for a lower insurance rate, or look for rebates or low-interest financing deals.

Negotiating Your Deal

Yellow lightbulb with dollar sign in the middle svg icon Car Buying Myth:

You have more negotiating leverage with the dealership if you can pay cash for a car.

Don’t tell the dealership that you can pay for the car in cash! That leaves them with no room to negotiate with offers of a “low monthly payment.” Hold you cards close and wait until after you’ve negotiated the total price and other features before telling them you don’t plan on financing the car.

Negotiating at the dealership is one of the best ways to save money when buying a new car. Unfortunately, most people either are uncomfortable with the idea, or don’t know which points to negotiate on. Let jump into some tips to help you navigate those discussions.

One of a car salesperson’s favorite negotiating points is how low they can get the monthly payment.

A monthly payment can be altered to look like a bargain, when in reality, you’re getting a longer term, a worse interest rate and paying a higher total price for the car. Often, a lower monthly payment means a longer term on your auto loan (how many months you’ll be paying). Most experts recommend that you try to pay off your car in 60 months or less. So, if the term is longer than that, make sure you’re factoring in how much more you’ll be paying in interest over the life of the loan.

Never make your decision based on a low monthly payment alone! Instead, negotiate these points to get yourself a better deal (this is where all your research and preparation comes into play).

  • Total price of the car
    • Use your research and question if they go over comparable prices or MSRP
    • If you have a pre-approval letter you can say you can’t go over the pre-approval amount
  • Interest rate
    • If you have a pre-approved financing, you can ask if they can beat the interest rate your lender is offering.
    • If they offer a lower interest rate, make sure that they haven’t changed other aspects of the deal like the length of the loan. Get an apples to apples comparison.

Other Items to Negotiate

Besides the price, interest rate and loan terms, there are other items that you can negotiate as well.

Warranties

Many people aren’t aware that you don’t have to get your car warranty at the same place/time you purchase your car. You can shop around for a warranty that best suits your needs from your bank/credit union, or other car dealerships.

The main benefit of getting your warranty at the place/time of purchase is so that you can roll it into your financing and monthly payments. If you’re not interested in that and can pay for it separately, then it could be beneficial to check elsewhere and see all your options.

When purchasing a warranty, be sure to double check the terms such as the:

  • Deductible – out-of-pocket costs before warranty benefits kick in
  • Coverage – what the warranty covers and for how long
  • Who’s allowed to work on the car – whether you’re required to take it to the dealership for maintenance
  • Maintenance logs – do you need to keep a log of maintenance not performed at the dealership

Gap Insurance

Gap insurance coverage pays off the balance of the loan if your car is totaled or stolen. Your normal car insurance may cover a portion of the actual cash value (ACV) of the car. But gap coverage would pay the difference between the original loan amount (what you paid) and the ACV (value of the car after depreciation).

 

Graph explaining how gap insurance works.

What you paid: $25,000
Actual Cash Value (ACV): $10,000
Insurance Coverage: Car Insurance ($10,000) Gap Coverage ($15,000)

 

Do you really need gap insurance?

When negotiating, you may question if you even need gap insurance. The general rule of thumb is the faster the car depreciates (losses value over time) the more you need gap insurance. Trucks and SUV’s tend to depreciate the slowest, while luxury cars tend to depreciate the fastest.

Don’t pay for things you don’t want on the car!

The last thing to remember when negotiating is to look at the purchase order and the different line items on it. You should review and ask questions to avoid being overcharged or paying for features you don’t want.

Some common costs that you shouldn’t pay for include:

  1. Destination/delivery fees that are not from the factory
  2. Advertising charge – typically already included in price from the manufacturer; don’t let the dealer charge you extra
  3. Theft protection – that’s what your car insurance is for. These rarely actually pay on a claim.
  4. Additional Dealer Markup (ADM) – ADM is an extra cost for no reason
  5. Accessories you don’t want
  6. Prep fee – part of the package and manufacturer typically already pays for that.
  7. Document fees – documenting the paperwork shouldn’t be overly expensive. If the fee looks marked up, ask the dealer what goes into the pricing.

Bottom Line

The dealership should be working with you to give you a fair deal if they want to earn your business. Remember that the dealership you’re at isn’t the only one in town and don’t be afraid of walking away. Know what’s a fair deal, what you want and don’t be afraid to negotiate!

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