What Are the Elements of a Good New-Car Deal?
Focus on the Big Picture, Not Just the Purchase Price
You stare at the price quote you just got from the dealer and ask yourself, is it really a good deal or not?
It's possible that the price of the car is a good one, but the deal — meaning all the related pieces of the transaction — is not. As a new-car buyer, it's all too easy to focus on the single number of the car's price and ignore the other essentials. As a result, the dealer can quote you a low price, and then make up profit somewhere else.
Here's how to analyze your car deal and make sure all its parts are what they should be.
Purchase Price of the Vehicle
It's really pretty easy to tell if the dealer's price for the new car is good. Check Edmunds' True Market Value (TMV®) price, making sure you add all the options and mileage (for used cars) correctly. But remember, this is the average price that other people paid in your area. "Average" is fair, but not a great deal or even a good deal.
Many people are satisfied to pay the average price. Others want to haggle over the last penny. You won't know how low the dealer will go until you negotiate or — an easier route — shop around for other dealer quotes.
Be aware that if you push too hard on the price of the new car, the dealer might try to find his profit elsewhere in the deal. For example, he might set a lower trade-in price or include the sale of an extended warranty. So be wary of prices that are unrealistically low. If a dealership offers you a car below invoice price and there are no incentives to explain it, proceed with a little more caution.
Now that you know how good the price of the car is, let's look at the other pieces of the deal.
Incentives and Rebates
Incentives and rebates have become a big part of car buying in recent years that can save you thousands of dollars. This group of money savers includes customer cash rebates, low-interest financing and lease specials. It also includes "dealer cash," which is a hidden incentive described on the Edmunds.com site as a "manufacturer-to-dealer" incentive.
Check on the rebates and incentives that are available in your area and make sure that the dealer correctly applies any incentives for which you're eligible to the purchase price. When it comes to customer cash rebates, the rule of thumb is to negotiate your lowest price and then subtract them.
It's true that it's very convenient to trade in your old car at a dealership. But many shoppers looking only at the purchase price of the new vehicle can throw away thousands of dollars by accepting too little for their trade-in. Determine the value of your old vehicle by looking up the TMV trade-in price. Remember to include all options on the car and its mileage when you calculate the TMV trade-in price. And be realistic about the condition level — almost no used car is "outstanding."
Also remember that you don't have to trade in your car. You can sell it to a private party, and you'll usually get more money than the dealer would give you. You can even take it to CarMax, where the prices sometimes beat dealer trade-in offers.
Legitimate and Bogus Fees
In a good deal, the dealer only charges three fees: state and local sales tax, a reasonable document fee and motor vehicle registration fees.
In some states, documentation fees are limited by state law. When these fees are not state controlled, there will be an average local documentation fee price. Call a few local dealers to see what the going rate is. In Arizona, for instance, the doc fee is a whopping $395. Florida is also known for having high doc fees.
Some dealers will invent their own fees, with official-sounding names, and add them to the contract. You need to find out about these fees as soon as possible, since these extra charges might be enough to convince you to shop elsewhere. Many such fees are in the range of $200-$400 and have names like "Dealer Prep." Sometimes it will just be an abbreviation, such as "D&H." With popular or recently introduced cars, a dealer might try to add a "market adjustment" fee that can be thousands of dollars. These additional charges are highly negotiable.
For more about extra charges, read "What Fees Should You Pay?"
Smart car buyers shop for a loan with the best possible interest rate long before going to the dealership. It's a good idea to get pre-approved financing from an independent lender — particularly if you're someone with imperfect credit. Then you can go to the car lot with a blank check (which has a credit limit set by the lender) and negotiate as a cash buyer. The dealer might still be able to beat your lender's pre-approved interest rate, but with that loan in hand, you have an excellent bargaining chip.
Unnecessary or Overpriced Add-ons
With a good price, a good trade-in or used-car sale and the right application of incentives and rebates, you may have put together a great deal. But if you drop your guard when you walk into the finance office to sign your car contract, you run the risk of purchasing overpriced or unnecessary products and services.
Examples include the "paint protection package" — $275 for pinstriping and a wax job; "VIN Etching" — $100 for etching the vehicle identification number into the car's major parts; or perhaps an unnecessary additional alarm system. Extended warranties can be valuable but dealers often inflate the price or hide the true cost in the sales contract.
Other Factors To Consider
Once you have all these pieces of the deal before you, we recommend giving consideration to a few intangibles. Customer service, for example, is very important. Do you find your salesperson responsive, knowledgeable and efficient? Do you have confidence that he or she will honor the deal and continue to be responsive to your needs even after the deal is closed? And what about the dealership itself? Is it part of your community? Is it convenient for service visits? You may consider it worthwhile to pay a few hundred dollars more for your car once you consider the importance of these other issues.
And before you make another round of calls, trolling for a deeper discount or playing dealers off against each other, ask yourself what your time is worth. If you believe you can still save $1,000 or more, then go for it. But if you are negotiating in a narrow range where the most you can save is maybe another $200, ask yourself if it's really worth it. Saving that $200 might mean a longer drive to pick up the car or a prolonged tap dance from a sales team. Either one could turn your vehicle delivery into an ordeal.
The Whole Package
The purchase price is only one of a number of factors that can affect the actual amount of money you spend on a new car. If you know what to look for in every aspect of the deal, you can be like a chess player, who is always looking several moves ahead. You want to negotiate a deal that's good in all its aspects — not just price.