New Car Buying

New cars will cost less for repairs, because of their warranties, and can be custom ordered to an owner’s specifications. The downside is depreciation, or loss of value. According to the Automobile Lease Guide, the average car or truck loses 38 percent of its sticker price in the first year alone. After three years, most cars are worth from 30 percent to 60 percent of their original cost, depending on the model. A buyer who obtains a loan with four to seven years of payments is likely to be “upside-down” for a while. This means that their car is worth less than the amount owed on it.  Experts recommend that monthly consumer debt, including loan payments on a car, should not exceed 15 percent to 20 percent of net income. You’ll also need money for maintenance, insurance, and operating expenses.

Do the Math

• Compare low-interest, even zero interest, financing and cash rebate deals by “doing the math.”
• First, calculate the monthly payment under each scenario (that is, a low-interest loan versus a higher rate loan).
• Then multiply the monthly payment for each financing option by the term of the loan (for example, 48 months).
• Subtract the cash received from the scenario with the rebate and compare the net cost of the two options.
• The better alternative will depend on two main factors: how much below market interest rates the lower rate dealer financing is and the repayment period of the loan. The savings from a low interest rate decreases as the repayment period shortens. The most attractive cash rebates and other incentives are likely to be offered on models with a slow sales record.

Do Your Research

• Do some research before visiting dealer showrooms.
• Check out car pricing Web sites such as www.edmunds.com and www.kbb.com and carefully review local auto advertisements. Find out the dealer invoice price or, better still, the dealer’s true cost after manufacturer bonuses and incentives.
• Consumer Reports magazine provides new car price reports for a nominal charge at its Web site www.ConsumerReports.org and recommends starting negotiations at 4 percent to 8 percent over what the dealer paid, depending upon the demand for a particular car model.

Negotiate, Negotiate

• Keep each part of the transaction—car purchase price, financing, and car trade-in price—separate and negotiate them one at a time. Otherwise, it is easier for a car dealer to get a higher markup by offsetting a low price in one area with a higher price in another.
• Settle on the new car price first and get it in writing. Then get a price for a trade-in, if any, and dealer financing. Finally, compare the dealer trade-in price and loan interest rate with other alternatives (such as a private sale of your old car and a car loan through a bank or credit union).