BUYING A NEW CAR
Steps you can take
to get the best deal

By MARY ANNE COLE

It’s that wonderful time of year — the time for celebrations, for getting together with friends and family to show off your new stuff, and maybe overspending.

Christmas? Hanukkah? Kwanzaa? No, no, it’s the purchase of your new car!

The end of the year often brings great sales on this year’s vehicles as dealerships hurry to beef up their sales figures for the year and to make room for new models. While you can get a good deal on a car any time of year, many people focus on the end of the year as the best time to buy a car at an attractive price.

There are four steps to buying a car: Finding the one you want, finding the loan, negotiating the price and selling your old car. As a rule, it’s a good idea to keep these steps separate from one another and to do only one of them — negotiating the price — with the dealer.

WHICH CAR?
Ten years ago, you would have had to visit dealerships at the beginning of the process, but now there’s a wealth of information available on the Internet to help you narrow down your choices before you take that step.

Dealers know how easy it is to get new-car fever as soon as you get behind the wheel and will want to put you in a car “today,” so put off your first test drive until you’ve done your research and narrowed your choices way down.

When narrowing your list and checking prices, don’t forget to take into account the longer-term costs of owning one car over another. Monthly payments are one thing, but insurance premiums, gas mileage, gas type (premium or regular) and average repair cost can make a big difference in your annual expenditure after you’ve bought your car.

NEW OR USED?
While this article deals mostly with buying a new car, many people find that used cars are much better financial deals, and they are willing to give up the latest features and that newcar smell in exchange for significant savings. Not only will the car cost less than a new car, but insurance premiums are also likely to be significantly lower. On the other hand, a used car is likely to require maintenance and repair sooner and may not have the latest safety features. There’s also a significant difference between buying a used car from an individual, where you may get a lower price than from a dealer, and buying from a dealer, who is more likely to offer limited warranties and financing.

Whichever used car you choose, be sure to get a vehicle history report (see box), which will tell you if the car has ever been wrecked, returned under Lemon Laws or used as a rental vehicle.

FINANCING
OK, so you’ve narrowed down your list. Time to visit the dealers for your test drives, right? Nope. Time to think about financing. Your first step is to check out your credit rating and fix it if it’s not so good. One of the easiest ways to boost your score is to reduce the number of credit card and other loan accounts you have open. Even if you don’t carry a balance on a card, it counts against your score. Of course, if there are any inaccuracies in your credit report, get those fixed as well.

Before you ever go to the dealership, it’s a great idea to have your financing in hand from a bank or credit union. Having your financing in hand before you visit the dealership makes you a“cash buyer.” The dealer knows you are able to buy the car, which gives you an edge in negotiating your price. So negotiate your best rate with your bank or credit union, and ask them to tell you what the monthly payment will be per $1,000 borrowed for a 3-year, 4- year or 5-year loan. Then, while you’re negotiating the price with the dealer, you can easily calculate what your monthly payment will be.

If you must get your loan from a dealer, you should go in with about 100 percent more basic knowledge about financing than the average person has. Fortunately, this is not difficult. When negotiating your loan, the dealer has four things with which to negotiate, and all can affect the amount you pay in the end: the interest rate, the term (or length) of the loan, the amount you’re financing (the price of the new car) and the trade-in price for your old car.

Assuming you’ve wisely decided to separate your trade-in from your negotiation with the dealership, the four variables will be down to just the interest rate, the term and the price of the car.

Some people think the only thing they need to consider is the interest rate, but the term of the loan and the amount you finance can often have just as much impact on what you pay in the end. So which has more impact on what you pay: the term, the amount of the loan or the interest rate?

Let’s take a loan of $20,000 at 7 percent for five years and try three new scenarios: one in which the term of the loan is reduced by 20 percent, one in which the amount of the loan is reduced by 20 percent and one in which the interest rate of the loan is reduced by 20 percent. Lowering which of the three will cost you least in the end?

It should be clear from the example that reducing the amount of your loan can have a significant impact, so negotiating a good price to start with and applying any rebates to the amount of your loan (rather than spending them on a new plasma TV) can make a big difference in your monthly payments and the amount you pay over the course of the loan. Get the best deal you can for the car first, then worry about the interest rate.

Of course, if you’re negotiating with a dealer, you may be presented with a case that is not so straightforward, but the point is that it’s worth doing a little figuring before you assume that a 3 percent loan with no rebate and a five-year term ($21,180 total payback) is better than a 7 percent loan with a $1,000 rebate and a three-year term ($20,520 total payback).

And by all means, watch out for the finance manager who asks, “What can you pay per month?” He’ll make the numbers fit your payment capabilities but will stick you with a loan term so long that your total payback will be much higher than it would have been if you’d chosen a car you could really afford. (Total payback for a $20,000 loan at 7 percent for 36 months is $21,560, while total payback for the same loan at 84 months is $25,030.)

Another trap to avoid is “no payments until ...” If you’re offered this kind of deal, ask if interest will be accumulating on your loan during that “free” time. If it is, you’re adding to the principal amount of your loan. A “free” 6 months on a $20,000 loan at 7 percent will cost you about $700.

Remember when I said it was a good idea to secure financing separate from the dealer?

NEGOTIATING THE PRICE
Do your homework on the price you should pay for your car by checking the true “factory invoice price”, decide on your bottom line, and stick to it. Start out at 1 percent to 2 percent over the factory invoice for domestic cars and 4 percent to 6 percent over factory invoice for imports, and negotiate from there. Try not to let your emotions take over, and make it clear that you’re perfectly willing to walk out the door without the car. If you can’t get the price you think is fair, go to another dealer, or move to your secondchoice car.

If you separate your financing and the sale of your old car from negotiating the price of your new one with the dealer, it’s much less likely you’ll get lost in a morass of “what ifs” as the dealer plays with the interest rate, the loan term and the price for your old car.

SELLING THE OLD HEAP
As with the loan, it’s often a good idea to separate your trade-in from your negotiations with the dealer. First of all, you’ll usually get more for your old car if you sell it yourself to an individual buyer, who really wants it, than you can if you trade it to the dealer, who doesn’t. Also, what the dealer will pay for your old car often depends on the price you negotiate for your new car: less for your old car if you pay less for your new one, or more for your old car if you pay more for the new one, which makes sense for them, but not for you. Sell it yourself, and use what you get for it to pay down the balance on your loan.

So keep the four steps — choosing the car, finding the financing, negotiating the price and selling your old car — in mind, keep them separate, and help ensure that your new end-of-year car is
cause for a real celebration.