Cars
Wheel and Deal
The average sticker price now tops $30,000. But don't be put off: Smart shopping can save you thousands.
By Mark Solheim, Senior Editor
From Kiplinger's Personal Finance magazine, December 2004
Advertisement
Make a great deal
Half of adults in the market to buy or lease a new car within the next year say they aren't likely to pull the trigger without rebates or special financing, according to a survey from Harris Interactive and Kelley Blue Book. There are plenty of incentives around, but when you shop, remember that a rebate is cash directly from the carmaker. Because you're negotiating with the dealer, set aside the rebate amount and bargain hard for the best price.
Your goal is to pay as close as possible to the invoice price (often called the dealer cost). Paying invoice doesn't mean the dealer makes no money on the transaction. Sometimes the carmaker puts cash on the table for the dealer to dole out. Dealers can generate profit with pricey options, and in the financing-and-insurance office. They can also make a small profit from the holdback -- a discount the dealer gets from the manufacturer to help pay the cost of borrowing money to finance its cars.
Car prices are subject to the laws of supply and demand. Popular vehicles will sell closer to sticker than ones that tend to sit a long time on the lot. To give you a starting point for negotiations, this year we list the True Market Value as tracked by Edmunds.com. This is an average of what car buyers actually pay. (Note, however, that the TMV does not include the destination charge -- typically a $500-to-$700 fee that is included in our MSRP and dealer-cost figures.) Some models were too new at time of publication to have accurate TMV prices, so check Edmunds.com for updates.
The best way to get a rock-bottom price is to contact several dealers with a specific model in mind and let them compete for your business. Call or e-mail dealers in your area to solicit bids, and make sure you connect with someone who can give you a final price. Using the phone saves you from the often tiresome games some dealers play to wear you down.
Ask each dealership to bid an amount above or below the factory invoice price -- including the invoice price for any options--for the make, model and style you want. Playing off the invoice is key because it eliminates further dickering at the dealership if the car you want is equipped differently than you thought. Be sure rebates are not included and that you identify any miscellaneous charges that could show up on the final bill, such as dealer prep or port charges. Get the lowest bidders to send you an e-mail or fax confirming the price so you have it in writing.
One of the costliest mistakes car buyers make is not separating different parts of the transaction -- that is, not separating the purchase of the car from the trade-in and from the financing -- says Mary S. Butler, managing editor of Cars.com. "Dealers don't care where they make their money," she says. So another smart tactic is to line up financing from a bank or credit union, so the cut-rate loan doesn't become a bargaining chip for the dealer.
Should you take the zero-percent financing in lieu of a rebate? That depends on the size of the loan and of the rebate. If you use a $3,000 rebate as your down payment, as many people do, and line up your own five-year loan at less than 6%, you're better off taking a rebate than a manufacturer's freebie financing -- as long as the car costs less than $22,000. After that, the zero-percent financing is likely to be a better deal. Use our calculator to run the numbers. Another option is a home-equity line of credit -- you can write off the interest on your tax return (unless you're subject to the alternative minimum tax). But the rate on most lines is tied to the prime rate, so recognize that your cost will rise as the Fed raises rates.
As down payments decrease and loans are increasingly stretched to six and seven years, many buyers who trade in their cars are "upside down" on their car loan -- which means that when they trade the car in, they owe more than it is worth. Many lenders are willing to roll the remaining balance into a new loan, and many car buyers never stop making car payments.
If you're in that boat, leasing could be an attractive alternative. After several years of waning popularity, leasing is getting a new lease on life. That's partly because residual values -- what the vehicle is worth at the end of the lease -- are strengthening and interest rates are still low. The one-two combo drives down monthly payments. Makers of luxury imports prefer to push a subsidized lease rather than offer rebates on purchases because rebates tend to hurt resale values and because leasing makes their cars affordable to more people. And off-lease cars can be sold again through certified-preowned programs, where profits tend to be fatter than in the new-car market.
If you plan to lease a new car, bargain just as hard as you would on a purchase. The price built into the contract is the key to your monthly payments.
--Research: Joan Goldwasser