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How to Negotiate and Buy a New Car

Buying a new car is a significant investment of resources. For the sake of this discussion, I’m going to ignore the new car versus used car argument. I know the pros and cons of both, but emotional factors come into play when making purchasing decisions.

Being a little risk adverse when making large purchases, a new car’s lack of history, expected reliability and warranty (if needed) offer a sense of comfort that I’m willing to pay for – even knowing that the car will depreciate as soon as I take possession of it. But I go into this planning on keeping my new car for 10 years, so I don’t really walk away a loser at the end of the day because I’ll have gotten my money back in the utility of the car by the end of that time.

With all of that being said, I just purchased a new car this week to replace our 2002 Honda Civic. Our Civic had been a great car with only 87K miles on it. Although it wasn’t the flashiest car around, it started right up and reliably got us from point A to B.

Recently, however, we started to notice a few small problem popping up. The car had a slight shake in it every now and then; the driver’s side electric window would sometimes stop working; the cloth roof liner was coming undone; the check engine light came on. Some of these things are to be expected with a car that we’ve had for about 11 years, though. Still, I had gotten a good deal. For about $15K, I had a car that I used every day for over 11 years. It was time to move on.

Getting an Auto Loan


There are a few places/brands I’m loyal to. One of them is USAA. I love them, and if you’ve used their products I’m sure you can relate. Their service is second to none. I normally shop around to make sure I get the best rate for loans, insurance or banking. But, all other things being equal, I’m willing to pay a small premium for convenience and service. For my auto loan this week, I went straight to USAA.

The application process was easy, took less than 5 minutes, and I had my car loan approval instantly. It’s nice to go into a dealership knowing that you’re already approved for a certain amount. It takes a little pressure off the car buying experience. I knew what amount I was approved for, I knew the rate (APR) that I was offered, I knew the length of the loan, and I knew the monthly payment amount that I would need to make. With this knowledge, I was able to feel comfortable with the financial commitment I was getting into.

Pro tip: Use an online loan payment calculator to create a quick table listing expected monthly payment amounts for loan increments of $1,000. When you start the negotiating process, this table give you a quick point of reference to determine what you’ll be paying each month. It would look something like this:

$20K: $368/month
$21K: $387/month
$22K: $405/month
$23K: $423/month

Alternatively, type $1,000 into the calculator to see the payment change for every $1K. In the example above, it is about $18/month for every $1K the loan increases or decreases.

When applying for a loan online, especially through a bank or credit union you have some history with, there are only a few items you will need to provide:

  • Name of the person(s) requesting the loan
  • SSN (since I was a member of the financial institution, I wasn’t asked this because it was already on file)
  • Requested loan amount
  • Annual salary
  • Place of employment
  • How long employed at that location
  • Whether you rent or own a home (and monthly payment amount if renting; no additional info needed if you own your home)
  • If you are trading in a vehicle, whether or not you are currently making payments on that vehicle.

As you can see, it’s a short list of needed items to get a pre-approved auto loan. It took me less than 5 minutes from start to finish, and I’m sure you’ll have the same experience.

Pro tip: When determining the auto loan amount you are going to request, don’t forget to include the price of tax, tags & title! This could be an additional $2,000-$4,000 expense depending on where you live and the type of vehicle you’re buying.

Negotiating a New Car Sales Price

Although I’m sure you know this, it doesn’t hurt to say: don’t pay sticker price for a car. The price shown on the dealer’s lot is typically MSRP (manufacturer’s suggested retail price), and is not what you as a buyer will pay. To avoid paying this price is easy. With no experience at all and very little negotiating you’ll be able to get the dealer to come off this price. How much they will come down is up to you.

Negotiating is an art, but there are some basic tactics that you should know and use to ensure you get the best deal possible. I have used all of these in the past, and they work.

First, know your goal number. Negotiating is about coming to a fair price that you can feel comfortable with. Know the price you’re willing to pay for a car, and then feel good about purchasing when the negotiations get you to that amount.

For example, let’s assume that you want a new car that has an invoice amount (the amount the dealer pays the manufacturer) of $23,000 and an MSRP of $27,000, maybe your goal number is $24,000. This is a realistic number because the dealer is still making money and you’re not paying full asking price. When determining a goal amount, however, think WIN-win with you getting the better of the two.

If you talk the dealer down to $24K, you should accept the deal and walk out the door feeling good about yourself. It is always tempting to second-guess yourself after the deal is done and wonder if you could have gotten a better deal. Don’t go down this road with yourself; if you hit your goal you should have a feeling of satisfaction.

Second, know your walk-away number. Almost the opposite of the goal number, your walk-away amount is the max price you would pay before ending negotiations and leaving. Using our example above, let’s assume you set a walk-away amount that is just below MSRP at $26,250. If you are trying to purchase the hottest new car and inventory is tight, the dealer might not need to negotiate down too much due to the law of supply and demand – basically, if you don’t buy somebody else will. By setting in your head a walk-away amount of $26,250, you should be able to get up and walk away without feeling bad if you can’t get down to this figure.

Determining the walk-away number is an individual preference, but should be based (at a minimum) on what you can comfortably afford and what market value is. Don’t get yourself into a payment that you can’t make; be willing to admit to yourself when you’re not getting a good deal no matter how badly you want that new car.

Third, you need to realize the relationship between the value of the car you are purchasing and the value of your trade-in. Although they will combine to give you one deal, they are separate transactions and should be negotiated that way. Always start with determining the price you will pay for the new car. Getting a fair price here should be your main goal. Once you have completed that portion of the negotiation and came to a price you can live with, then start the discussion around the trade-in value of your old car.

Pro tip: It can sometimes be easier to execute the negotiation over two sessions. In the first session, deal only with the price of the new car without hinting that you will be doing a trade-in at all.

Remember that if you are including a trade-in, this is a package deal at the end of the day and the dealer is going to factor both the new and old car together in their numbers to determine if they can make the deal work for them financially. Although you want what’s best for you, the dealer is still in the business of making money so they are not going to lose money on the transaction.

Fourth, use a tactic called bracketing to get you where you need to be. Negotiating is a back and forth discussion on the price (and other options such as free car washes, reduced oil change prices or extended warranties) between two parties. You’re both trying to get the best deal for yourselves without moving too far away from your target goal amount.

One very effective way of doing this is bracketing around that amount. This means that your goal amount should be approximately half way between the starting points for each side. The dealer is going to start at MSRP of $27K. Your goal is $3K less, at $24K. So your starting point should be $3K below that goal at $21K. The difference between your $21K and the dealer’s $27K brackets the target goal right in the middle at $24K. If you both flex up at equal amounts, you would eventually meet right at your goal.

Pro tip: Don’t flex at equal amounts. If the dealer goes down $1K from $27K to $26K, you should go up $500 from $21K to $21.5K. This will give you a little more money to play with at the end if you still need to give before the dealer agrees to the deal.

Finally, be willing to walk away. If you don’t get a deal you’re comfortable with, walk away. There are other cars and other dealerships that you can do business with. Assuming your goals are reasonable, someone will give you what you’re looking for!

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