Cars are one of the few purchases you’ll make where there is normally an element of bargaining involved to get the best deal. Some car manufacturers, such as Tesla, have eliminated bargaining from the process almost entirely, but if you are buying a new (or used) car, chances are you’ll need to negotiate to score a good deal. The car buying process is normally stressful and unpleasant, but if you come prepared it’s possible to walk away feeling good about your purchase and time spent shopping.
Know what you want
Before you even start shopping for cars, online or otherwise, you need to narrow your search to focus on one or two vehicles. Going to a car dealership with an open mind is a recipe for disaster; the high-pressure sales environment is designed to get you to spend more money than you would have otherwise. If you know what make and model you want ahead of time, you can research typical prices and are more likely to get a good deal.
How do you know if a car is affordable? We have several ground rules to help you determine that. First, you should put at least 20% down when purchasing your car. Giving yourself a cushion of equity in the car partially protects from depreciation. You should aim to have your car paid off within three years, or one year for luxury vehicles. Paying the car off quickly also helps protect from depreciation and potentially being underwater on your vehicle. Your monthly payment for all vehicles in your household should not exceed 8% of your monthly gross household income. Lastly, you should be investing more for retirement every month than you are spending on your car payment. If you meet all of the other rules but your monthly investments are less than your car expenses, you may need to re-prioritize some of your financial goals.
Buying your new (or used) vehicle
How much should you spend on a used car? The car buying process isn’t the same as it used to be; you can now buy a car completely online without ever setting foot in a dealership. In 2020, that option may seem more attractive than ever. There are some cons to purchasing online, however; there may not be much or any room for negotiation. If you plan to purchase in-person at a dealership, it is normally best to know what price you’re paying for the car before you walk into the dealership. Once you’re on their turf and hypnotized by the new car smell, it’s more difficult to get the best deal.
Negotiating over email is typically best since it gives you time to craft a response and you have a paper trail. One strategy a dealer may use is to offer you the “dealer’s invoice,” the same price the dealer paid for the car. However, even if the dealer offers you the car “at-cost,” there still may be some room for additional negotiation. The dealer’s invoice doesn’t include other hold backs or incentives dealers receive from auto manufacturers, which could be 2% to 3% of the purchase price or more. If the dealership won’t budge on the price of the car, start asking for add-ons, such as floor mats, oil changes and service, or swag. You can also negotiate for a higher trade-in value for your older vehicle if you there isn’t any more room for negotiation on your new car.
If negotiating with a car dealer still sounds like an unpleasant experience that you would rather not have, you do have the option to pay someone else to do it for you. CarBargains is a paid service that negotiates with dealers on your behalf – all you need to do is tell them what car you want. If you are a member at Costco, you may be able to use their car buying service. Your local credit union may also offer such a service, and since they typically have relationships with car dealers in the community, they’re pretty good at making sure you get a deal.
Our latest show, “How to Get a Good Deal on a Car Purchase,” includes even more tips and tricks for buying your next vehicle, including our car payment rule of thumb. Learn more about depreciation (and which car brands are better and which are worse), ground rules, and how to negotiate and get the best deal on your new ride. Watch it now on YouTube below.