Insights

Buying a car will probably rank as your second-most expensive purchase, behind investing in a home. This means that you should take special care when plunking down your dollars for a new ride.

It's terribly easy to overspend on a new car, and that is a shame. A new car might be useful. It might even be necessary. However, it is never a good investment. That's because the value of a car depreciates the minute you drive it off the dealer's lot.

That is just a fact. However, if you need to purchase a car — and most of us do at some time — then you can at least take the following steps to make sure that you don't overpay.

Budget First

First, never start shopping for a car until you determine exactly how much you can afford to pay for a vehicle. Take a close look at your monthly household budget. How much wiggle room is there for a new car payment?

Be careful here: Never buy a car with a payment that will suck up all the money you've budgeted for your vehicle. Owning, operating and maintaining a car costs money. In addition to your monthly payment, you need to pay for insurance, gas, repairs and maintenance. That is not an insignificant sum. A good rule of thumb then would be to purchase a car with a monthly payment that is 5 percent lower than your total car ownership budget. This will give you room to spend on all of the other associated costs. However, if you find that you’ll be putting a lot of miles on the car, you might want to adjust your purchase numbers down even further.

Buying a used car might seem to be the most frugal path to take, but that is not always the case. Used cars are not always the bargain that they seem. If you are financing that used car, you'll pay higher interest rates on a used car loan than you will on a new car loan. That could eat up any savings from buying used. You also want to make sure that you are not financing a used car purchase beyond the useful life of the vehicle. Nothing would be worse than having to continue to make payments on a car that has already bitten the dust.

Besides, newer cars today are coming out with lower price tags. You might be able to find a good bargain in the current model. Check around to see what’s available.

Arming yourself

When you go to the car dealership and find a car you like, it can be hard to know whether you are getting a good deal or not.

However, you can take steps to boost your odds at getting the best possible price. Start your auto shopping by browsing dealerships without buying. Make sure to tell the salespeople that you are just researching different models and that you will not be making any purchases. This is a good way to get a feel for the cars that interest you and their price tags while avoiding high-pressure sales techniques.

After you have done this and narrowed down your choices to a few options, do some online shopping. Again, see what prices you can find for the models that you like. Read some reviews, too. There are sites that rate cars and provide tips for car shoppers. Most dealers these days have online sales departments. Take advantage of them. These Internet sales teams will usually provide you with quotes for the models you like within three to five business days.

By shopping around online, you can get quotes from a few more dealers than you might have otherwise been able to do by visiting each of them. Once you have the pricing information in hand, most on-floor sales staffs of dealerships you do visit will match prices from competing dealers. So come armed with this information.

Invoice price is key

It's important that you learn the invoice price of any car that interests you. Invoice price is the amount that dealers pay for a car. If you know this price — which you can find at a variety of web sites — you again give yourself more negotiating room. If you know that your dealer paid $12,000 for a car, you now know that you should not pay $20,000 for it.

At the same time, you should scour the Internet and newspaper advertisements for sales and incentives. Many dealers offer cash rebates if you buy a particular model. Others will offer special financing for a set number of months. Others will offer steep discounts depending on the time of year. All of these sales and incentives can help you reduce the price tag of your next vehicle.

If you are ready to buy a car, don't be intimidated. If you're a smart shopper, and you do your research before stepping on the lot, there's no reason you should overpay for a new vehicle.

Want to get pre-approved?

Get an idea of how much you can afford, before you ever start car shopping. Knowing how much you can borrow makes the buying process easier and being pre-approved gives you more negotiating power.




This content is not intended to provide legal, tax, accounting, financial or investment advice or indicate the suitability of any product or service for your unique circumstances. You are encouraged to consult with a qualified legal, tax, accounting, financial or investment professional based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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