New Car Buying Tips

To paraphrase a line from one of Captain and Tennille's more famous songs, when you're ready to buy a new or used car, you better shop around for a reliable vehicle and good financing.

Things to consider when buying a car
Household budget: When buying a car, most lenders suggest following the 20% rule, which means that your monthly car payment should not be greater than 20% of your take-home pay. To give yourself a few extra percentage points to play with, take some time to create an up-to-date household budget that reflects your expenses and miscellaneous daily expenditures. A budget like this can show you areas where you can cut back in order to afford the vehicle you want.

Fuel efficiency: With rising gas prices, spending too much on a new vehicle can make you car poor and unable to afford to drive anywhere other than to work or to the grocery store. Compare the miles per gallon; a hybrid with a higher up-front cost may have a lower monthly cost when you factor in the cost of gasoline.

Service history: For used cars, it's a good idea to get a CARFAX vehicle history report to make sure the car hasn't had an exceptionally difficult life. For any car, check online reviews and forums to find out if there are any service problems common to the model you're considering.

Take a spin
It may sound like a no-brainer, but the test drive is one of the most crucial elements of buying a new car. If you aren't familiar with the neighborhood around the dealership, ask the salesperson to recommend a driving route or grid where you can really evaluate the comfort, speed and reliability of the vehicle. If you want to buy a used car, make sure to take the vehicle to a trusted mechanic for their evaluation before signing on the dotted line.

How much is that Dodge in the window?
Though new cars have a sticker price, that number is not carved in stone. With a little research and confidence, you can negotiate a better price with your salesperson, unless you're shopping at a no-haggle dealership, where the sticker price represents the lowest price the dealer can accept.

If you're up for some negotiations, start with the MSRP, which will be posted in the window sticker on the car. From there, it helps to know the dealer price. Dealer invoices for new cars can be found online, but Consumer Reports says that the price on this invoice may not show the true dealer cost. Some car manufacturers can, for example, give the dealership additional incentives if they sell one of their cars, which the dealer can deduct from the sticker price in order to close the deal with you.

If you like a particular model but don't like the price, find out what options are included. You can often save hundreds by choosing a basic model without a sunroof or leather seats. If the dealer doesn't have a stripped-down version available, ask if you can order one or suggest that you can take your business elsewhere. Some dealers will offer discounts on the extras to close the sale.

Another tip for successful haggling is to wait until the end of the month to shop. Dealerships have monthly sales goals, and you might find them more willing to negotiate at the end of the month if sales have been slow.

Financing your new car
Finding the car of your dreams is easy, but the financing can turn into a nightmare if you don't do some research before you go to the dealership.

When you want to buy a new car, get a copy of both your current credit report and your credit score. You are entitled to a free copy of your credit report from AnnualCreditReport.com each year. A low credit score typically means a higher interest rate and vice versa, so you may have to do some credit report cleanup work before you buy that car.

A six-year loan does mean an attractive monthly payment, but the longer the life of the loan, the more you are going to pay in interest over time. If you can afford it, consider a 48- or 60-month term with slightly higher payments. Longer-term loans also have a higher risk of turning upside down, where the balance outstanding on the loan is higher than the actual value of the car, making it impossible for you to sell the car and repay the loan.

It's possible to simply walk into a dealership, do the test drive and arrange financing in a single evening, but this convenience can cost you cash in the long run. When buying a car, go to your bank or credit union's Web site to see what kind of auto loan interest rates they can offer you as a customer. Some lenders even allow you to apply online and have an answer within minutes. A decent-sized down payment can get you off to a good start with your loan because it reduces the principal right off the bat.

It's tempting to trade in your old car to cover the down payment, but this is always better for the dealer than it is for you. Dealers pay less than the fair-market value of trade-ins so they can resell them at a profit. If you don't need your old car, sell it yourself at a higher value and use the cash for your down payment.

Buying in the summer months can often provide low-interest financing from the dealership, if you qualify. Sales are slower at this time of year, and dealers need to clear out older models to make room for new ones.

In the excitement of buying a new car, it is easy to forget about sales tax and registration fees, so make sure that you have enough cash on hand to pay these fees after the sale. Old parking tickets or moving violations may also need to be paid off so you can register your car.