Tips on purchasing/negotiating for a car

There's been a lot of questions about buying cars recently. I wanted to share my tips, and collect others in this post.

This post is focused more on the purchasing and negotiation of a car.

1. Know what car you want. List your top 3 decision making factors: fuel economy, performance, design, color, body style, etc. Go on a website like AutoTrader to narrow down your choices. Do some consumer research to find reviews and reliability concerns: Consumer Reports and Edmunds are great resources for that. Finally determine your price range, and find out if the car you want is within that. Edmunds and Kelley Blue Book are the best resources for price.

2. Know what final price you want to pay. Base this on your monthly payment budget plus prevailing interest rates. The dealer will always ask what you want your monthly payment to be, but do not tell them. It is a distraction. The monthly payment could remain the same for cars with many different purchase prices. If you want a $250 monthly payment, it could be for the used 2007 on a 3 year loan, or a brand new 2013 on a 7 year loan.

3. Research prevailing financing options. For new cars, there's lots of crazy deals 0.9% APR, 0% for 60 months, zero down payment, etc. For used, interest rates are around 3.5%. It is best to secure your own financing before going to the dealer. Dealers want you to go through their bank so they get a bigger commission, but often these banks charge higher interest to compensate for the dealer kickback. If the dealer will not agree to prevailing financing options, go somewhere that will. There are always other cars at other dealerships. For low-credit consumers: there are more options for low-credit consumers than to buy directly from the dealer. Check out a credit union or work out multiple loans from multiple banks. The dealer is not your friend. The dealer is also not a bank. Don't think they will be good at either.

Determine your trade-in value:

4. Research the value of your trade-in. Kelley Blue Book, Edmund's TMV, and Craigslist will all give you a good idea of what your car is worth. Print this information and take it to you with the dealership, because the dealer will most likely low-ball the value of your trade-in.

5. Discuss trade-in value first. Trade-in and purchase price will be two separate transactions. Say your car is worth $2500. Get the dealer to agree that your trade-in is worth $2500 first, then discuss purchase price, then determine final price: purchase price minus trade in. You will lose negotiation power if you try to leverage for concessions on trade-in after gaining concessions on purchase price. Ultimately you are negotiating to make final price as low as possible, but you can't negotiate it from two ways at the same time.

6. Make sure your trade-in is reflected in the final purchase price. Many dealers will hide the fact that they are taking the trade-in price and adding it to the price of the vehicle. This is especially prevalent when leasing a car. This is called a "disappearing trade-in" or "over-allow, under-allow." This practice is unethical and illegal, but in this case, "only if they get caught." It's up to you to catch this tactic and demand compliance. If you catch a dealer doing this, I would walk away immediately. They are effectively trying to steal your car. How could you trust that anything else they do is ethical? These articles cover this better than I could: Buying, Leasing.

7. If your car is too old to trade-in, sell it yourself. Got a 1996 Toyota that has 220,000 miles? Chances are a dealer may not even take it, and definitely won't offer KBB value for it. Sell it yourself and get some extra cash to apply towards your down payment.

Once you have selected your car and are educated on financing:

8. Call the dealer and ask if the car you want is on the lot. If it's not, don't go. Don't just walk on to the lot and say "I need a car." That's like giving a kid a key to the candy store. The dealer will push hard on a bad deal because he needs to move the oldest inventory, and will use any tactic to sell it. Instead, say "I am looking at this white 2010 Hyundai Elantra you have right here."

9. Express interest in looking, but do not say you are ready to buy. A dealer that knows you have your checkbook open will do anything to close the deal. Keep a cool demeanor and always be aware that there are 5 other car dealers right down the road. Do not say you are buying a car until you are ready to sign your name on the purchase contract.

10. When buying used cars, check the status of the car. Ask to see the Carfax. Look for past damages, recalls, service record, etc. Additionally, you may have the car reviewed by an independent mechanic of your choice. The dealer will act like that shouldn't be necessary, and will do just about anything to stop you from doing that, but as a consumer, you legally have the right to do this. If you fear the car is in suspect condition, have a mechanic look at it, or just walk away.

11. If you go to buy, do not fall for a lease. Leases are a distraction – the dealer wants you to focus on monthly payment rather than total cost. The new car at $219 a month vs used car at $300 a month sounds attractive, but there are many downsides to a lease. You can't keep your car, the equity you pay, you can't drive past certain mileage annually, maintenance is not covered, and there are high lease termination fees at the end. Think about if you rented an apartment and had to pay for rent AND maintenance AND any normal wear and tear AND mow the lawns – nobody would think that is a good deal. If you want to lease, say that up front. Don't get backed into taking a lease.

If everything looks good and you’re ready to buy:

12. Don't fall for negotiation tactics. There are many, but the most frequently used one is good cop/bad cop. Bad cop can be the invisible finance manager that just won't accept your offer, or it could be a guy that comes out to use fear or threats to make you second-guess your negotiation positions. Check out these common negotiation tactics for more information. Counter a negotiation tactic by identifying it, and moving past it. Say something like, “I feel like you are playing good cop/bad cop here, and I think that is making this negotiation more confrontational than it needs to be. Let’s go back to (subject) – here are my demands, will you meet them, yes or no?”

13. Demand clarity and transparency. Dealers also use a lot of financial jargon, especially with leases, and if you aren’t familiar with the terminology, they will take advantage of your ignorance. When reviewing the paperwork, ask them to explain how each number is calculated in detail. Have them break it down to you like you are 5 years old. There are a lot of numbers and a lot of fine print on the contract, and they are hoping you will just sign without reviewing it. Most times, the contract will not match any verbal agreements you made with the salesperson, especially for price and interest rate, and the explanation will help to expose that. If you cannot get clarity and transparency, bring it up – “I feel like this is a big game of funny money, and you’re using too much financial jargon for me. I need these questions answered: What is the final purchase price? What part of that are taxes and fees? What is the principal? What is the interest rate? What is the term of the loan? How much total interest will I pay? Now, given that, what is my monthly payment? Show me.” If you don’t understand compound interest now, get familiar with the topic, because everything with financing revolves around that subject.

14. Establish a cool-off period. Ask to take the contract home and review it overnight. Get the dealer to agree that the price will be the same tomorrow. Not only will this give you time to do your own research, but it will give both parties a cool-off period. The dealer won’t want this because they want you to sign on the dotted line right now, but without any time to review the contract, how do you know what you are agreeing to? Also, turn the contract over and read the back – bet you didn’t know anything was on that side of the page, did you? The actionable terms of the contract are written in mouse-print on the backside, with a clause on the front saying you agree to everything printed on both sides. Scour them and make sure nothing funny is included.

15. When in doubt, walk away. Do you feel like the deal is bad? Is the dealer being unfair in any way? Is the negotiation too aggressive? Is the dealer trying to make you feel bad for negotiating (i.e. “This job is how I feed my family, and you are trying to take money away from me.”)? Are they trying to scare you away from walking out (“This car won’t be here tomorrow, this price won’t be the same tomorrow, your current car may not make it much longer,” etc.)? Do you have doubts about the car’s condition? There are other cars at other dealerships. Walk away and don’t come back. Don’t get pushed into buying a car. You will be stuck with this decision for a long time, and the consequences of a bad decision could be costly. If you have any doubts that the deal will not be in your best interest: Walk away. Walk away. Walk away.