Updated: Jul 12, 2021
These are the steps to buying a new car that will save you a lot of money. Each Step is Simple yet Powerful.
“Do you ever wonder why some people get a better deal than others when buying a car? The answer is simple preparation, knowledge, and persistence. It does not matter if you purchase a $15,000 or $150,000 car; the principles are the same. Let’s get excited before, during, and after we buy the vehicle.
Throughout each blog, you will see information in Blue, which is a quick reference to help you along the way. In Red is an important point you will want to remember. In Green are savings based on the scenario.
Let’s Get Started
1) Go to (https://www.kbb.com/compare-cars/) first and foremost to decide which cars you are interested in; this will give you up to four choices. New cars are great, but you should know that you will lose around 15-20% when you drive it off the lot, so a $30,000 car is worth approximately $24,000 the week after you are enjoying the new car smell. This is why you want to get the best possible price. These are what I believe are the steps that should be taken when buying a new car. Doing your homework ahead of time will pay big dividends.
2) Decide your maximum budget and be realistic; this tool (https://www.cars.com/car-affordability-calculator/ )will help you see how much you can afford. The price you can afford is based on how much you can put down, your credit score, how long you will be financing, and your trade-in. Key fact: never combine your trade-in as the car’s total price until you have negotiated the best price for the vehicle without the trade.
3) Get pre-approved for a loan
Before you go out looking for a car, get pre-approved for a loan. Dealerships make a lot of money on the financing of your vehicle. This is how it works: They have several banks they deal with and shop the best rate based on your credit score; it might be 4%; however, they turn around and add 1-2% or even more for getting the financing for you. Given the example above on the rates and you financed $28,000, the dealership would make around $1500 on the transaction. Going to a bank or credit union, you save that $1500. Your monthly payment based on 60 months at 4% would be $516 a month; at 6%, it would be $541 a month. Another way to save even more is to have a bi-weekly payment. (BI weekly calculator) Be careful with this, though; some banks will charge you a monthly fee or a one-time fee to do this. They don’t want to lose any money. Since most people get paid bi-weekly, this means you will be making 26 payments of $258 and would reduce the time of paying off the car by four months and saving $230 in interest. My suggestion is to join a credit union. Credit unions are not-for-profit, member-owned “banks” to provide loans and other financial services to their members at reasonable rates. For example, my credit union does not charge for bi-weekly payments, and their rates are the same for new and used cars. At the time of this writing, the interest rate was 2.99% for 60 months. Savings $1730
4) Manufacture financing.
This is another way to save and lose money. Many manufacturers will give you a rebate if you finance with them, for example, $1000 if you use GM financing; the key here is that the loan has a higher interest rate than you might receive at a credit union. You can refinance the manufacturing loan; however, you might have to wait six months. Let’s run the numbers; we will use the $28,000 for the financing amount. We will assume we can get a rate of 4%, but the manufactures rate is 7%, and the term is 60 months. It would cost you an additional $38 a month for $228 more; however, the total interest for the six months is $945 because all loans are front-loaded with interest. You received a $1000 incentive to finance through them; the actual savings is $1000-$945=$55. The thought behind this is, giving you $1000, and you will continue making the payment over the 60 months and making the manufacture $5266 in interest. If you refinance after six months at 4% for 54 months, your balance of $25,214, you would only pay $2,379 in interest. Savings $5266-$2379=$2877
We can save even more if we make bi-weekly payments, half of the amount every two weeks. Savings of $255 and 4 fewer payments.
Total Savings $2877+$255= $3132
5) O% Financing
Is it a good deal? The way an automaker can make money with a zero percent deal is simple: It still earns the same amount it would earn on any car deal, but now the money is earned over a more extended period. The money isn’t made on financing but rather the car itself. Suppose you’re getting a zero percent financing car deal. In that case, you might have a hard time getting any other incentives on top of that, which means the automaker is still pocketing a nice profit on the sale of the car itself despite not making any profit on the financing. Manufacturers will often advertise zero percent interest, even when it’s only available to “well-qualified buyers.” If you have anything less than excellent credit, obtain financing ahead of time, as stated above. You don’t want to start negotiating with the dealership and be disappointed.
6) Know what your trade-in is worth.
Go to: https://www.kbb.com/
Knowing this can save you thousands of dollars. Take these numbers with a grain of salt; they can have a large range of 2-4 thousand dollars on the trade-in price. Check multiple sites to compare your car is worth and take it to 2-3 dealerships; it could be worth $200-$400 per hour in savings a visit. If your car has dents, scrapes, torn seats, etc., this is an excuse for them to make you feel bad and give you less. They will say it will cost $x to put this up for sale. Depending on the year and mileage, it will stay on their lot, sold wholesale, or go to auction. To put some numbers behind this a 2016 Toyota Camry SE with 50,000 miles private sale ranges from $11,800 - $13,200, trade-in value $9,100 - $10,200, dealership online price was $13,797. This is just an example as you can see if they give you $10,000 and turn around and sell it for $13,000 nice profit on your behalf. If you don’t want to sell the car yourself through time and effort, be prepared to receive thousands of what your used car is worth. You will receive the wholesale or auction price. This is a separate transaction from buying the car. Don’t fall into the dealer’s trap; it will be a very costly mistake if you do this.
7) Test Drive the car or cars you would like to purchase.
This is such an essential factor when picking out a car. When the salesperson goes with you on a predetermined route, you can do the worst thing to test drive a car. How do you know how comfortable it is, are the controls easy to adjust while driving, will my child’s car seat fit? Ask if you can test drive it overnight or pick it up in the morning and have it for an hour or two. This way, it is like driving a rental car; after driving an hour or two, you know if you like the car. The other thing that can be done is to rent the vehicle you want to buy; you will have it for a day, and it could be money well spent, especially if you don’t like it.
Key point: If you are in an accident while test-driving a car, your liability insurance coverage kicks in, and pay for the losses based on your policy.
In the next part, I will discuss pricing and the keys to negotiation a great price.