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Buying a new car: Things to consider

At a glance:

  • How to start looking for a new car

  • How to estimate the true cost of car ownership

  • What to consider when buying a new car

  • Summary of shopping for a new car

In an ideal world, a car dealer helps you find the perfect car for you at the perfect price, and you drive away with a smile on your face and many happy years ahead of you.

But in reality, that not exactly how it works. Unless you did your homework in advance, and learned how to navigate the process and how to work with dealers.

As some dealers put more emphasis on their profits than on their customers' satisfaction, an educated car-buyer must know what he or she wants and for how much, so that they make the transaction smooth and comfortable with no regrets.

How to start looking for a new car

Know what you want

The more clearly you know what you want, the less likely you are to be steered toward something you discover later you don't want, or can't afford. This includes the various options that come with a vehicle. If you don't know exactly what you want, at least have your preference narrowed down to a few choices.

Research the vehicles on dealer Websites or automaker Websites. Also check out consumer publications such as Motor Trend, Car and Driver, and Consumer Reports' annual car-buying issue. Internet sites like Edmunds.com and JDPower.com are also valuable sources of information on new autos.

Check the selection and pricing of several dealers in your area.

Know how much you want to pay

How much can you afford to pay for a new car, truck, minivan, or other vehicle? Factor that in so that you don't get sold on something you can't afford. The dealer will most likely ask you how much you can afford so that he or she knows what to offer you. Having a specific number handy can help you when it comes time to negotiate with a dealer.

A popular recommendation is that your total monthly car payments should not exceed 20% of your take-home pay.

Have your financing in advance

If you can't pay for a vehicle in cash or have someone else pay for it, are you pre-approved for a loan? Compare the financing options offered by the dealer (if it offers financing) against those offered by your financial institution.

A woman looks at a row of new Ford trucks at a Ford dealership in Colma, California. (Photo: Justin Sullivan/Getty Images)
A woman looks at a row of new Ford trucks at a Ford dealership in Colma, California. (Photo: Justin Sullivan/Getty Images)

Learn the pricing language

Several different prices are used in new-car dealings.

  • Invoice price. This is the price that the manufacturer charges the dealer for the vehicle. It may actually be higher than what the dealer charges you because dealers get rebates, allowances, and various incentives from the manufacturers. In addition to the price of the vehicle, the invoice price should have the destination and delivery cost built into it.

  • Base price. This is the cost of the vehicle without any options.

  • MSRP. The manufacturer's suggested retail price (MSRP) is the price that the manufacturer suggests the vehicle be sold. This price includes the manufacturer's installed options and the factory warranty. This price is also known as the Monroney sticker price, after the US senator who sponsored legislation to require disclosure of information on new autos. By law, a sticker with the MSRP and the fuel economy information must be affixed to the car window.

  • Dealer sticker price. The dealer sticker price is the MSRP plus the suggested retail price of any dealer-installed options and any dealer markups.

Ordering a car

Sometimes dealers don't have exactly what you want, so you can work with a dealer to order a car directly from the automaker and have it delivered to the dealer, where you can pick it up.

Buying on the Internet

You can also buy a new vehicle on the Internet, in which you will work with a dealer by email or phone.

How to estimate the true cost of car ownership

The following information is helpful not only for new cars but also used ones.

The true cost

Have you considered the true cost of ownership of the car you're interested in? Although one car you like might be less expensive to buy than another one you like, it may also carry higher ownership costs over time. This is important to remember when you just can't decide between two choices and you need a little nudge to move you in one direction.

You might save $1,000 or so by going with one of the two, but the purchase price is only the most immediate and obvious price. Think of three, four, or ten years down the road. Is the insurance on one more expensive than the insurance on the other? How will the make and model affect your gas consumption? Will there be special maintenance needed? How does the depreciation compare? Does one of them get tax credits?

What is involved in the true cost?

You might find that you can afford to buy the cheaper one but not afford to own it as time goes on. Here are the main factors to consider when thinking about the true cost of ownership of a vehicle:

  • Price you paid

  • Taxes

  • Fees

  • Fuel

  • Gas mileage

  • Insurance

  • Maintenance

  • Repairs

  • Tax credits

  • Financing (interest costs)

  • Depreciation

  • Trade-in value

  • Dealer service contract

Online calculators can help you plug in the variables above to arrive at an estimate that spans a certain time period.

What to consider when buying a new car

Buying a new car usually means going to the dealer, choosing a make and model, discussing the price, and driving the vehicle off the lot. Sometimes it also means cringing at the thought that it will have depreciated in value by the time it arrives home a few minutes later!

The discussion of price (haggling, in other words) is the part that's most exhausting for many buyers, a fact that has led some dealers to offer "no-haggle pricing." No-haggle pricing isn't always set in stone, however, there is sometimes a little wiggle room left. But the opportunity to save hundreds or even a few thousand dollars should be enough to convince you to learn some basic strategies.

Where to start

For starters, experienced negotiators don't look at the asking price and then lower their offer. Rather, they start at the other end: they start with the dealer's cost (invoice price) and negotiate up from that. In case the dealer's cost isn't apparent or you can't get it from the dealer, you can find it online on sites like Autosite.com and Consumerreports.org.

Know when to walk away … for now

Once negotiations have started and you are going back and forth on the price, you have some tools at your disposal. One of them is the ability to walk away during negotiations. That shows the dealer that you are in control and cannot be easily swayed. Walking away and then staying home for a few days (or visiting another dealer) often gets the dealer to call you and sweeten the deal a bit. This works best when the dealer feels that you are genuinely interested in the car.

Indecisiveness = money

Another is the ability to be indecisive while on the lot. On one hand, you don't want to tie up a dealer's time needlessly, but taking more time to decide may persuade him or her to lower the price or toss in some free options. If it's the latter, know in advance that you actually want those options and that they are useful to the vehicle.

Compare prices, too

You can save money by comparing prices among several dealers. Get quotes and print them out. Using these printouts can make dealers compete for your business, they might match other offers.

What's your monthly payment?

A dealer will likely ask you how much you can afford for a monthly payment. While this is a fair question that helps him or her narrow down available choices for you, the dealer may stack on some options in order to make the final price match the monthly payment, if it didn't before. This is why many people prefer not to divulge their monthly payment. Rather, they negotiate only with the price of the car in mind.

Another thing to remember is rebates. The dealer may mention them as a reason to ask for a higher price on the car. Rebates, however, are not provided by the dealer, but by the manufacturer.

Service contracts

A service contract is an extended warranty. The dealer may offer to sell you one. Since the new car will come with a warranty already, research the service contract to see whether it covers anything that the warranty does not. Find out how long it lasts, what repairs are covered, and who will do the repairs.

Summary of shopping for a new car

Buying a car is sometimes like shopping for groceries. If you don't have it planned out in advance, you can end up buying more than you really wanted or needed.

Given that a car depreciates in value right after leaving the lot, you want to make sure you get your money's worth. Learn the best tactics for getting the best deal. Start your search even before you are ready to begin looking.

Estimate the costs of ownership. New buyers are often pressured to buy more than they really need, and thus they may get stuck with a vehicle that they eventually owe more on that it is worth.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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