A new car is one of the most expensive purchases you may make. The average price of new vehicles recently topped $40,000 according to Edmunds, while AAA's 2021 Your Driving Cost study puts the figure at $9,666 to own a car, suggesting that the average cost of owning a new vehicle is even higher. Car prices are insanely high for reasons including a global semiconductor chip shortage, which is why it’s important to know how to make the smartest deal possible.
Research
First and foremost, do thorough research. Think about the car model and options you want, and how much you’re willing and able to spend. You’ll be less likely to feel pressured into making snap and possibly costly decisions at the dealership and more likely to get a better deal if you're prepared.
Here are some research suggestions and tips:
Check publications and websites that discuss new car features and prices for information on the dealer’s costs for specific models and options.
Shop around to get the best possible price by comparing models and prices in ads and at dealer showrooms. You also may want to contact car-buying services and broker-buying services to make comparisons.
Plan to negotiate on price. Dealers may be willing to bargain on their profit margin, often between 10 and 20 percent. Usually, this is the difference between the manufacturer’s suggested retail price (MSRP) and the invoice price.
Because the price is a factor in the dealer’s calculations regardless of whether you pay cash or finance your car — and also affects your monthly payments — negotiating the price can save you money.
Consider ordering your new car if you don’t see what you want on the dealer’s lot. This may involve a delay, but cars on the lot may have options you don’t want — and that can raise the price. However, dealers often want to sell their current inventory quickly, so you may be able to negotiate a good deal if an in-stock car meets your needs.
You can use this to determine bargaining room before negotiating the price of a new car. You can get the invoice price by looking at the dealer’s invoice or reviewing car publications.
Learn the Terms
Since negotiations can have a vocabulary of their own, become familiar with terms you might encounter when you discuss the price.
Here are some terms to learn:
Invoice Price - the the manufacturer’s initial charge to the dealer, usually higher than the dealer’s final cost because of dealer rebates, allowances, discounts, and incentive awards. The invoice price should generally include freight, also known as destination and delivery. If you’re buying a car based on the invoice price - “at invoice,” “$100 below invoice,” “two percent above invoice” - and freight is already included, make sure it isn’t added to the sales contract again.
Monroney Sticker Price (MSRP) - that label affixed to the car window and required by federal law, showing the base price, the manufacturer’s installed options with the manufacturer’s suggested retail price, the manufacturer's transportation charge, and the fuel economy (mileage). These stickers may only be removed only by the purchaser of the car.
Base Price - the cost of the car without options, but including standard equipment and factory warranty. This price is printed on the Monroney sticker.
Dealer Sticker Price - the Monroney sticker price plus the suggested retail price of dealer-installed options, such as additional dealer markup (ADM). additional dealer profit (ADP), dealer preparation, and undercoating. It's usually on a supplemental sticker.
Financing Your New Car
The financing obtained by the dealer may not be the best you can get, even if they contact lenders on your behalf. Contact lenders yourself directly if you are going to finance your car so you can compare the financing they offer you with the financing the dealer offers you. Offers vary, so shop around for the best deal by comparing the annual percentage rate (APR) and the length of the loan. As tempting as it is, don't focus only on the monthly payment. The total amount you'll pay depends on the price of the car, the APR, and the length of the loan.
Dealers sometimes offer very low financing rates for specific cars or models, but they may not be willing to negotiate on the price of them. You may be required to make a large down payment to qualify for the special rates. You may find that it’s sometimes more affordable to pay higher financing charges on a car that is lower in price, or to buy a car that requires a smaller down payment. Consider the terms of the financing and evaluate whether it is affordable before you sign a contract to purchase or finance a car. Make sure that you have a copy of the contract signed by both you and the dealer and completely filled in before driving off the lot.
Trading in or Selling Your Old Car
Discuss the possibility of a trade-in only after you’ve negotiated the best possible price for your new car and researched the value of your old car. Check the National Automobile Dealers Association's (NADA) Guides, Edmunds, and Kelley Blue Book to find out what your current vehicle is worth before you negotiate. This information may help you get a better price from the dealer. While it might seem like an off-putting task and take longer to sell your old car yourself, you will typically get more money by selling it than by trading it in.
Some car dealers advertise that they'll pay off the balance of your loan when you trade in your car to buy another one no matter how much you owe. If you owe more than the car is worth, you create something called “negative equity,” and while car dealers may say you won’t be responsible for the remaining balance on your old car loan, that might not be true. They sometimes roll the negative equity over into your new car loan, and you'll still end up paying it, because if the dealer adds the difference between your trade-in and it's value to the loan or subtracts it from the down payment, this increases your new loan amount and its monthly payments.
Dealers must give you certain disclosures about the cost of the credit before you sign the financing contract. Read the disclosures carefully and look for details about the down payment and the amount financed.
Service Contracts & Credit Insurance
Manufacturers, dealers, or independent companies might try to sell you an auto service contract with a new car for the repair of certain parts or problems, to help protect against unexpected or expensive repairs. While they might make it sound like a good idea, it could duplicate coverage you already have through your manufacturer’s warranty. Service contracts may or may not provide coverage beyond the warranty. Remember that a warranty is included in the price of the car, while a service contract costs extra, and read service contracts carefully before you purchase them. Learn the difference between a warranty and a service contract.
An auto service contract is a contract to perform or pay for certain repairs or services. While they are are sometimes called an “extended warranty,” they’re not a warranty as defined by federal law. You can buy them anytime, and prices and coverage vary. Some may extend the length or coverage of the included warranty, while others may cover some maintenance tasks like scheduled oil changes. An auto warranty is a contract to fix certain defects or malfunctions for a specified amount of time after the purchase of a car. Manufacturer's warranty's are usually included in the purchase price of a new car, although used cars may also come with some type of warranty coverage.
Learn what’s covered and if it's worth it by asking questions:
What’s the difference between the coverage under the warranty and the coverage under the service contract?
What repairs are covered?
Is routine maintenance covered?
Who pays for the labor?
Who pays for the parts?
Who performs the repairs?
Can repairs be made elsewhere?
How long does the service contract last?
What are the cancellation and refund policies?
Some dealers and lenders might try to offer you that will pay off your loan if you die or become disabled. Consider the cost, and whether it’s worthwhile before you buy this insurance. Check your existing insurance policies to avoid duplicating benefits.
There are four main types of credit insurance:
Credit life insurance pays off all or some of the loan if you die
Credit disability insurance, or accident and health insurance, makes payments on the loan if you become ill or injured and can't work
Involuntary unemployment insurance, or involuntary loss of income insurance, makes your loan payments if you lose your job due through no fault of your own
Credit property insurance protects personal property used to secure the loan; in the case of a car loan, it protects the car if it is destroyed by theft, accidents, or natural disasters
There may be cheaper ways for you to get coverage than buying credit insurance and adding it to your auto loan. Life insurance may allow your family to pay off other expenses in addition to your auto loan and be less expensive than credit life insurance.
Credit insurance is not required by federal law, so if your dealer requires you to buy credit insurance to finance the car, it must be included in the cost of credit, meaning it must be reflected in the APR. Your also may have requirements about credit insurance.
Sources:
Federal Trade Commission