Do Your Homework

Buying a new or used car or truck...

You can literally save yourself thousands of dollars and a great degree of future aggravation and grief by performing some basic groundwork before you head to a dealer to find a car. Read about some of the simple things you can do to be a confident and prepared car buyer.

Determine your budget

Dick Poe Toyota SucksHow much can you afford to spend on a new or used car or truck? That sounds like a relatively simple question, but the answer can actually be quite complex. Many people rely on a dealer to keep them within reasonable limits when purchasing a vehicle, only to realize later that they have bitten off far more than they can chew. No one can tell you what you can afford better than yourself. Besides, what you can afford to pay should be treated as confidential information from anyone but your spouse or accountant, and in some cases you may not want your spouse to know the limits of your financial reach.

How much can you reasonably spend on a car?

This seemingly simple question should determine the scope and extent of your vehicle purchase. You should sit down and create an accurate list of all income and expenses in order to arrive at a realistic and reasonable amount of money you have left to spend on a car.

Some basic financial considerations:

How much money do you make?

How much money do you have in savings?

What is your total debt? This includes things like credit card and student loan debt as well as your total monthly expenses, including rent, house payments, food, fuel, utilities, entertainment, clothing, insurance, loan interest, etc.

How much (if anything) do you owe on your current vehicle? How much do you spend on fuel, insurance and maintenance annually?

What car do you want to buy? How much is it? What are the estimated annual costs for fuel, maintenance and insurance for the car you want to buy?

Will you trade-in your current vehicle? Is it worth more than you owe? If so, how much?

How much money will you put forth as a down payment for your new car?

Once you have collected and computed your base information you should have a clear idea of how much money you can reasonably afford to spend on a vehicle without putting yourself at risk of overreaching financially.

Once you have determined the amount you can safely spend on a vehicle it is very important that you stick to this number. You must resist the urge to be oversold by the dealer or you could end up paying severely for your indulgence at a later date. Always remember that the dealer is not your friend and that they are not going to help you make your payments if you get in a bind.

Determine your credit worthiness

Are you a good financial risk?

Credit agencies maintain records on a person's history of debt and the repayment of that debt. Using simple and consistent criteria, a credit agency can arrive at a score which rates your willingness and ability to repay money you have borrowed over a given period of time.

In the United States the most popular credit scoring system is known as the FICO (Fair Isaac Corporation) score, which represents a statistical analysis of your financial history. These scores are typically calculated differently for three major lending areas: consumer credit, mortgages and automotive financing.

There are many ways to determine your credit scores. You can, by law, once a year find out your credit rating from each of the major credit reporting agencies free of charge, but the process takes the longest and requires that you write each firm a letter requesting your annual report. You must include some form of identification with your letter, such as a photocopy of your driver's license.

The fastest and easiest way to determine your credit ratings is to use a credit reporting plan that includes your score from the main three reporting agencies: Experian, TransUnion and Equifax. This will cost you a nominal fee, but it is well worth it to know this information before you start the car buying process. We do NOT recommend that you enroll in any monthly, annual or otherwise recurring credit reporting service unless you have bad credit that you are trying to repair and require constant monitoring of your credit situation.

Most people who are responsible and credit worthy already know their credit scores. If you do not know your score or if you are recently entering the credit market it is absolutely essential that you make an effort to discover and maintain a good credit rating. Your credit score can mean the difference between obtaining quality employment, housing, insurance and many other areas where companies factor your reliability and responsibility into their decision making process.

If, for example, you have poor credit because you did not repay your last car loan in a timely fashion (or at all) then you will see that you have very few options regarding a new car purchase other than to agree to pay an exhorbitant interest rate offered by predatory lenders which can add several thousands of dollars to your loan repayment over the term of the loan.

On the other hand, if you have excellent credit you will have absolutely no troube securing a loan at an extremely favorable interest rate which can translate into an immediate savings of thousands of dollars over the term of your loan.

Determine the realistic value of your trade-in

You like it, but how much is it actually worth?

Before you can realistically set a price on your existing vehicle you must first determine an approximate actual value. This isn't as easy as it may sound, and will require some effort on your part.

You should begin by going to the Edmunds, NADA and similar websites and use their vehicle calculators to arrive at an average fair market value for your make and model vehicle, including any options your vehicle may have. These numbers are greatly dependent upon the condition of your vehicle, both mechanically and aesthetically. Obviously if your transmission only works in reverse or you have a huge chunk of paint missing from your roof and hood then your vehicle isn't going to bring top dollar.

What is not so obvious but which equally affects the vehicle saleability and value are any modifications you have made to the vehicle since your purchase. For example, if you spent several thousands of dollars 'chopping and dropping' your lowrider or in raising your four wheel drive above the roof level of most cars, then very likely you have actually diminished the market value of your vehicle.

Heavy customizations tend to greatly decrease the actual buying market for a given car to customers who share those tastes. You may love a lowrider or skyscraper, but not everyone does so the number of buyers for a heavily customized vehicle is pretty small, and out of that market the number of people who may be willing to pay your price is even smaller.

In these situations your best course of action is to sell your vehicle to another car buff who shares your tastes, because any offer you get from a dealer will likely only upset you.

We highly recommend that, prior to deciding which car you will be buying, you actively shop your trade by going to various dealers and seeing what they will pay you outright for your car. In most cases you will see that you are better off trying to sell your car to another person as opposed to a dealership.

Determine the vehicle you want to purchase

You, your wife and 4 kids won't fit in a Prius.

Most people drop the ball when it comes to picking out what new car they want. Of course it would be nice to tool around in a sports car or a four wheel drive truck but those aren't always practical or realistic purchases for a given situation. Face it, if money was not a consideration then you wouldn't be reading this article.

Your budget should help determine the vehicle you buy, but you must also factor in the size of your family and how you live in order to determine what vehicle is the best choice for you. Maybe you can afford a Supra, but packing your wife or husband and four kids into it and pulling a boat to the lake during the summer just isn't a viable scenario.

It is important that you determine what is best for you before you go car shopping. A 'good' salesperson will put you in whatever vehicle puts the most money in their pocket without even the slightest consideration for your needs. Knowing what you want will help you a great deal when you decide to purchase your new or used vehicle.

Determine the actual cost of the vehicle

Compare apples to apples.

Unlike buying toothpaste, car prices are not easily determined. Manufacturers and dealers have spent a great deal of time and effort at obfuscating the actual cost of a given vehicle. This makes comparison shopping an extremely difficult proposition because it is very difficult to find two cars equipped exactly the same.

There are many methods people use to arrive at a price they will pay for a vehicle, such as paying what the dealer asks, subtracting a percentage of the 'sticker price' or paying 'invoice price'. Almost none of these methods result in any real savings to the car buying public.

There are many factors to consider when determining the price you will pay for a given vehicle:

Customer incentives

Dealer incentives

MSRP (Manufacturer Suggested Retail Price)

Dealer sticker price

Dealer holdback

Current market and sales climate

As I said, the manufacturer and dealer expend a lot of effort to make it very hard for you to arrive at what might be a fair market price for the vehicle you wish to buy. That should be a warning to you regarding their intentions.

In order to stimulate sales manufacturers will offer customer incentives in the form of cash rebates, special financing offers and leasing offers. Be careful, don't assume that because the manufacturer is offering an incentive on the vehicle you wish to buy you will receive a good deal. Usually these incentives are used to intentionally direct your attention away from other, less appealing, aspects of the deal you are being offered. Most dealers will tell you that if you accept the rebate then there is no room for any other concessions. That's a lie and do not fall for it. Taking only the dealer incentive is not much different from paying sticker. The best place to discover customer incentives is to go to the manufacturer's website or by going to places like the Edmunds website or

In addition to customer incentives, manufacturers also offer dealer incentives, which are programs offered to the dealer to encourage sales, help reduce inventories or to promote specific cars. Dealer incentives do not apply to cars that are special ordered. These are not necessarily in the form of monetary incentives. Some manufacturers offer trips or other tangible prizes to the dealer and it's employees, which makes dealer incentives both hard to discover and to quantify into a dollar amount. Dealer incentives are much harder to discover because they are not widely reported. You have to look for these incentives in trade magazines like Automotive News.

One of the oldest and most used lines at a dealer is that many people pay MSRP (Manufacturer Suggested Retail Price) because a car is a hot item or that there is a waiting list on a particular car. Sometimes this is true, but that is rare. If a dealer has the car on the lot available for sale, it isn't that hot of an item or it would have been sold already. MSRP represents the highest price a manufacturer was willing to suggest be paid for their product, and they tend to be very ambitious numbers which do not realistically reflect the vehicle's actual fair market value. You can discover a given vehicle's MSRP by visiting the manufacturer's website, Kelly Blue Book, Edmunds, or any of the many automotive websites that specialize in providing vehicle pricing information.

In addition to the MSRP posted in the window of a new car, many times you will see additional charges which are added by the dealer which is usually referred to as the dealer sticker price, sometimes referred to as the DSRP (Dealer Suggested Retail Price). The dealer added sticker displays the dealer suggested retail price of any dealer-installed options, plus additional dealer mark-ups such as advertising as well as additional dealer profit and other dealer preparation costs including paint protection and undercoating if applicable. DSRP's are merely another attempt to drive up and obfuscate the actual value of the car. For example, some dealers attempt to charge over $500 for 'paint protection' that is nothing more than a sprayed on silicone wax coating. Dealers add these 'extras' to vehicles as a means of charging more money for essentially the same car.

Dealer holdback refers to money, such as a percentage of the purchase price, that the dealer pays when it initially purchases the vehicle from the manufacturer that is then returned to the dealer after the car is sold. Holdbacks tend to range between 2% and 3% of the selling price of a vehicle. Typically, manufacturers send holdback payments to dealers on a quarterly basis, and holdback amounts vary from manufacturer to manufacturer, differ in price depending on the make and model and are contingent upon certain criteria, such as a dealer's customer service index, advertising budget and other associated operational costs. Dealer holdbacks are typically non-negotiable during the course of the sale, but knowing about them and being able to calculate an approximate holdback for your vehicle can help you to get a better deal when it is time for you to make your purchase. Automotive sites such as Edmunds are an excellent source for determining current holdback rates for different manufacturers.

Sometimes certai vehicles get a lot of extra attention in the media and as such are in much higher demand than other vehicles on the market, such as hybrid vehicles. When a vehicle's current market value is inflated due to high demand it becomes much harder to obtain a deal on that particular car or truck. If you are determined to purchase a vehicle that is hard to find or is otherwise in high demand then you should be ready to pay the dealer's sticker price and possibly more. Our suggestion is to look for an alternative vehicle in these situations.

Summarize your information

Know your limits.

Once you have done your homework you should summarize the results of your research and then commit these results to memory so that you can recall them at will. The ability to recall this information during a high pressure sales pitch is invaluable in helping you to maintain both your composure and your limits regarding a vehicle purchase. Knowing your limits and sticking to them is the best course of action when dealing with any automotive dealer.