7 Steps to Getting the Best Deal on a Car | ModMoney

7 Steps to Getting the Best Deal on a Car

Driving a new car is fun. Buying a new car is not. Does anyone agree that negotiating with a car salesperson can be a downright nightmare? My lease expired last month, so I recently navigated through this process. In doing so, I noticed that when a young person walks into the dealership, many salespeople assume that (1) we don't know how to negotiate a car, and (2) we can be manipulated. However, by asking the right questions and exhibiting a baseline knowledge of car buying, we can quash those notions. Nobody should have to feel manipulated, so this post lays out the 7 things to understand before walking into the dealership.

As a side note, I prefer to lease cars because I don't drive many miles, I like driving a new car every three years, and I like that my car will always be under warranty. These tips will focus on leasing, but many can be applied to buying as well.

1. Residual Value

Residual value is the amount that your car is worth at the end of your lease. It is often expressed as a percentage of the full value of the car. For example, if you lease a $30,000 car for 36 months, your residual value may be 55%, or $16,500. This means that you will only use $13,500 of value during those 36 months. Under a lease, you will only pay for that $13,500, not the full $30,000.

It is important to understand the residual value because it impacts your monthly payments. Let's say the residual value on my $30,000 car is 50% instead of 55%. That means my car is worth $15,000 at the end of my lease, and I have "used up" $15,000 of value instead of $13,500. In this case, my monthly rate will be higher because I am paying for $15,000 of the car instead of $13,500. So a higher residual value is better.

The residual value is set by the manufacturer and can't be negotiated. However, asking the question will show the salesperson that you're on top of your stuff.

2. Money Factor

If my $30,000 car has a 50% residual value at the end of 36 months, couldn't I just take $15,000, divide it by 36, and calculate my monthly payment? Not exactly. While the majority of your monthly payment is the "value" of the car spread out over those months, it also includes a little thing called the money factor.

You can think about the money factor as the interest rate on your lease. It can be confusing in that it is often expressed as a decimal, not a percentage. However, you can convert it into a relevant interest rate by multiplying the decimal by 2400. When I asked my dealer what the money factor was on my car, he said 0.000833. This was not helpful to me. However, I whipped out my iPhone and multiplied this number by 2400, arriving at 2.0%. This helped me better understand the scenario in an interest rate context.

Your money factor is primarily determined by your credit score. The better your FICO score, the lower your interest rate. Most people don't consider the money factor, and it's not required to be disclosed in your contract. So be sure to ask!

3. Vehicle Purchase Price

While you can't usually negotiate the residual value or money factor, you CAN negotiate the purchase price. I always start by inputting the vehicle information into Kelly Blue Book. This site will give you a fair price range based on actual transactions completed for that car in your zip code. I highly recommend coming to the dealership equipped with this information! The fair purchase price of a $30,000 vehicle may be closer to $25,000, which can substantially lower your monthly payment.

If you are OK with the current year's model, a good time to purchase or lease a new car is in September. This is when next year's models start coming out. When I leased mine, the 2017 models were already hitting the lot. I knew the manufacturer incentivized the dealership to move the 2016 models off the lot quickly. So I had more leverage to negotiate down the price on my 2016 car.

4. Down Payment

Some dealers will ask you to put more money down as a way to lower your monthly rate. I would discourage putting any money down for a few reasons.

  1. The act of putting money down only to lower your monthly rate is mostly just optics. You are still making the payment, just upfront instead of spread out. If you want to lower your monthly rate, try to negotiate the purchase price instead.
  2. If your car is stolen or totaled, your down payment is not protected, and you will likely not get it back. If you pay $3,000 down to lower your monthly rate by $80 or so, you will lose this if something bad happens to your car. That's a good chunk of cash!
  3. Most states charge taxes upfront on your down payment. Without the down payment, you will still pay taxes, but in smaller chunks over the lease term
  4. Interest rates are low, so it makes even more sense to pay over time versus upfront.

5. Lease Term

The lease term is the number of months you will use the vehicle. Your dealer will most likely present you with an extended lease term in order to make your monthly rate seem lower. So instead of 36 months, they may present you with a 42- or 48-month offer. While this is sometimes OK, make sure the warranty covers you during your entire lease. A warranty is often expressed as "48 months OR 50,000 miles." If you drive 15,000 miles per year, then your warranty expires in month 40 because you will have hit the 50,000-mile limit. The last thing you want is for something to go wrong in your 41st month and have to pay for repairs out of pocket.

6. Mileage

Mileage is another lever your dealer may pull to lower your monthly payment. He or she may present you with a 36-month, 10,000-mile per year offer at a very compelling rate. However, be realistic about how much you drive. If you drive 12,000 or 15,000 miles per year, you will pay for each mile over your limit. This will be significantly more expensive than setting the correct target upfront.

7. Fees

There are a variety of fees associated with leasing a vehicle. Many of them cannot be negotiated, but it's still important to understand what they are.

  • Acquisition fee. Most leases will come with an acquisition fee. This is the price for setting up the lease and can range from $250 to $1,000. Sometimes this fee is paid upfront, and sometimes it is rolled into the purchase price of the car and spread out over the lease term.
  • Disposition fee. Some leases don't charge this fee, but most do. This is the amount charged when you return the car to the dealership at the end of your lease. I would ask questions if this fee exceeds $450.
  • Security deposit. Not all leases include a security deposit. If yours does, it can likely be negotiated away.
  • Tag, title, registration, and documentation fees. The dealer collects your tag, title, and registration fees and forwards them to the appropriate state and local entities. These can't be negotiated. The documentation fee reimburses the dealer for all of the paperwork they fill out on your behalf. Many states put a limit on this fee, but in other states, the fee is at the dealer's discretion. See this chart for a better sense for what your documentation fee should be.
  • Sales tax. In many states, you only have to pay taxes on the portion of the vehicle that you use during your lease. However, in Texas and Illinois, you have to pay taxes on the full price of the vehicle, even if you're just leasing. These taxes are rolled into your monthly payment.

The Bottom Line

Buying or leasing a new car doesn't have to be an unpleasant experience. Asking your dealer the right questions is the first step to making sure you get a fair deal. Dealers have a few levers they can pull to make your monthly payment "look" lower. Some of these include a down payment, longer lease term, or lower mileage. I would suggest telling your dealer upfront what terms you want. I told my dealer I wanted a 36-month lease with zero money down and 10,000 miles per year. I was not willing to budge on any of these terms. Next, I would suggest lowering your monthly rate by negotiating the actual purchase price of the car. The dealers have plenty of room to negotiate here and are often provided extra incentives by the manufacturers that they can pass on to their customers. Next, while you can't always negotiate these items, I would still ask about residual value, money factor, and fees.

The last and perhaps most important piece of advice I will give is to know when to walk away. If you know you are not getting the best deal, but the salesman seems unwilling to budge, walk away! Show that you are not in a rush to make a decision. I did this, and the dealer came back within 24 hours with the deal I wanted.

Finally, drive away knowing you negotiated a great deal on that new car, and drive it in good health!

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