3 Investment Tips for New Car Buyers

Buying a new car can be exciting, intimidating, and confusing all wrapped-up into one. I recently bought my first car and learned just how taxing the ordeal can be. Aside from the deflating feeling that hit when sending a large down payment from my bank account to the car dealership, it felt great to finally get some wheels. I brought along an experienced family member to theatrically lose his cool at predetermined times during the negotiation process, but still learned quite a lot from the experience. Here are three investment tips for new car buyers.

Do your homework
Knowledge is power. You won't know how badly you are getting worked over, or how great of deal you are presented with, if you don't do your due diligence. Check around several local dealers to see what kind of cars they have in stock. Play around with online payment calculators for several realistic scenarios for your situation to get a rough range of payment plans. You can even use online tools such as TrueCar.com to explore a range of fair prices for your region. Despite all of my efforts, I only managed to get a "good price" according to the site. I'll take it.

It's also important to look into dealer incentives. Many dealerships slash the sticker price for recent graduates, members of the armed forces, and returning customers. Don't expect the dealer to hand these to you, though. In my case, the salesman informed me of all the great incentives I qualified for only to "forget" when we sat down to negotiate. That leads into the next lesson I learned, which may be the most important.

You have more bargaining power than you think
After you take a nervous test drive and watch the salesman fail to work the touchscreen, you sit down to do the dreaded price negotiation. Salesman will be tough with you (it is their job), but unless cars are flying off the lot, they won't lose you as a customer over a few hundred dollars in negotiation. This is where research helps. My car salesman quoted me an inflated price in his first offer, but quickly lowered it after I pointed out how the numbers didn't quite add up. If you really want to test your power, walk out if the negotiation isn't headed in the right direction. You may get a phone call the next day from the salesman with a lower price in hand.

The important thing is to realize that you have bargaining power. Tell the salesman a much lower monthly payment price than his first quote -- even if it's unrealistic -- and work from there. Don't feel bad going back and forth several times: it's called negotiating for a reason. The salesman will likely tell you how much money he's losing (poor guy), but stick to your guns. I managed to save hundreds of dollars from the original offer just by playing tough. I am by no means an expert car buyer, but I couldn't help but wonder how many buyers are unaware of their power if they don't accept the first offer.

A down payment is a great idea
Being my first car and all, I had to make up for a lack of trade-in value with a sizable down payment. One of the salesmen actually encouraged me not to use a down payment at all. He attempted to persuade me that it would be better to have that money for other uses and lower monthly payments, in general. He even cited how bad the economy was as a reason that I would be better off forgoing a down payment. Ha. I quickly assured him that a down payment was certainly coming his way. Deal with it.

But why would a car salesman not want a down payment? Dealers get kickbacks from the interest rates you pay on your loan. It may not seem entirely legal (it is), but if a bank tells the dealer you qualify for a 5% rate, the dealer may actually charge you 7% and pocket the difference. The worst part is that you may never know. It's a deceptive way to overpay for your new car. Luckily, you can often get a better rate by getting a car loan from your bank or credit union and cutting out the middle man altogether.

Foolish bottom line
I cannot help but picture my car salesman reading this article and laughing at the fact that I think I got a "good price" because a website told me so. Chances are that even if you feel like you did a good job negotiating, you probably are just getting a fair deal. Nonetheless, similar to investing, it's important to keep your emotions in check when buying a car. Do your homework. Use your bargaining power. And don't let your excitement trap you into paying higher monthly payments. This isn't a comprehensive list of things to know when buying a car, but you can use it as a good starting point.

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  • Report this Comment On June 29, 2013, at 1:28 AM, herky46q wrote:

    These are buying tips, not investment tips. Cars are always an expense.

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