Due to a series of unfortunate events, car buying has been in the air at our office lately. This has been just another great reminder of the importance of planning for unforeseen circumstances. That reserve fund, also known as your emergency savings, is a meaningful part of your plan and highly recommended as we can attest. Here at AWMI, the Associate Financial Advisors are available through our Pathfinder program to coach the young adult children of our clients with financial strategies, including how to navigate buying your next car.
I was among the group in the office who needed a new car. As much as I dreaded the process of haggling with salespeople and signing a mountain of paperwork, a little research ahead of time paid off. There are a number of successful strategies to navigating the process; I am sharing what worked well for me.
First Step: Narrow Down Your Search
The first step in the process is to determine what vehicle you are looking for and what you can afford. These two aspects are not always in sync, so the trick is to narrow down your search to realistic options.
After an extended period of saving, I looked at how much I had available for a down payment and determined a comfortable maximum monthly payment. You can get a quick estimate by simply googling “car loan calculator”, entering the loan period you are comfortable with, using an estimate for current interest rates, and then playing around with the loan amount to get to the monthly payment you are targeting.
I then found it helpful to narrow down my search to five vehicles and created a spreadsheet for easy comparison.
I also checked Consumer Reports to get a feel for overall satisfaction and safety/reliability features.
You may want to get pre-approved for a car loan before you go to a dealership to help you with realistic expectations. However, if you know your credit score and are fairly sure the loan amount you are seeking will be approved, you can obtain financing after you have settled on a car (car loan applications are processed pretty quickly).
Second Step: Test Drive
Pick out reputable car dealers and plan a day to go test drive your choices. Even if you have a solid idea of the vehicle you are looking for, the less specific you are with the salesperson, the better. If what you are thinking is “I love this car – I have to have it”, instead say “I’m browsing similar models at a few dealerships.” It is okay to express some interest, but as soon as they know you are desperate to have a specific car, you’ve lost a lot of negotiating power.
Ask to test drive the vehicles to get a feel for how they drive, how much room you have, etc. I found it helpful to bring someone with me so after test driving, we asked for 15 minutes in the car to talk it over so we could look at the interior features without the pressure of having the salesperson in the car. It gave me breathing room to determine if and how much I wanted to offer.
Third Step: Negotiating Price
Keep in mind that if you are buying a brand new vehicle, especially next year’s model, you may have less leverage to negotiate. Not all hope is lost, however, as there are several people who have successfully brought the price down on a new vehicle. I aimed for a very slightly-used current year model, which made me a lot more comfortable making an offer below list price.
There are several websites online that you can use to get an idea of what the vehicle’s market value is to compare to list price. I used Kelley Blue Book, https://www.kbb.com/, to get an estimate. Truecar.com is another resource. Ultimately, some of the negotiating just comes down to comfort and instinct. Before you make an offer, develop an absolute maximum price so you know when to walk away. Then, if you are comfortable, offer below this price so you have room during the back and forth negotiation.
Some of the most helpful things I learned in my preliminary research about this step:
- Do not discuss what you are comfortable paying each month, how much you are willing to put down, or if you are trading in your vehicle. This was one of the best pieces of advice I read prior to my own negotiations. I got asked this question several times and in multiple variations. My salesperson was very nice, and was doing his job, but these are tactics used to try to drive up the price you pay or to get you to buy a more expensive car. My response each time was some variation of, “I want to settle on a price before discussing that.” It might feel uncomfortable or difficult to “stay strong,” but it pays off.
- The salesperson may tell you they cannot drop the price any lower, but if you’ve done the research ahead of time on the fair price, you will be armed to continue negotiating.
- Ask to see the invoice. Any legitimate fees will be listed here.
- The following website lists average DMV and doc fees by state so you can determine if the fees propsed by the dealer are resonable: https://www.edmunds.com/car-buying/what-fees-should-you-pay.html
- Be wary of vehicle-preparation fees, such as pulling the plastic off of your car (if it is new). This is easy enough to do on your own.
Fourth Step: Finance Your Vehicle (Unless you are paying all cash)
Many dealerships offer promotional rates, sometimes as low as 0.9%, so that would be the best place to start. However, these deals often do not apply to used vehicles, so at that point it pays to shop around. I have excellent credit, yet the rate the dealership offered me was over 2% higher than the financing I found, since my vehicle was slightly used. Credit unions offer some of the best auto loan rates and online banks are starting to offer competitive rates as well.
If you are like me, you want to minimize the number of hard inquiries on your credit, But I learned that credit scoring systems count multiple loan inquiries within a given time period (usually around 14 days according to Experian) as a single inquiry. This gives flexibility on shopping the best possible interest rate without fear of negatively impacting your credit.
If you opt for a longer loan period, your interest rate will likely be higher but your monthly payment will be lower. Be careful, however, as you want to avoid becoming “upside down” on your loan: owing more than your car is worth. I read that a rule of thumb is to target a 36 to 42 month car loan.
Fifth Step: Enjoy!
Purchasing a new (or new to you) vehicle, while maintaining an adequate level of savings reserves, is just one of the many financial goals we are excited to help our clients navigate. There’s nothing quite like ditching an old base model vehicle for one with a heated steering wheel!
Meghan Carson, CPA
Associate Financial Advisor