How to Get the Best Deal On Your New Car Without Being Manipulated

How to Get the Best Deal On Your New Car (Without Being Manipulated)

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Driving a new car is fun. But buying a new car...not so much. I think we can all agree that negotiating with a car salesperson can be a downright nightmare. And what's more frustrating than a salesperson assuming that (1) you don't know how to negotiate a car, and (2) you can be manipulated?! Let's fix that. By asking the right questions and showing a baseline knowledge of car buying, you can turn the situation in your favor. With these simple tips, you'll never have to feel overwhelmed or vulnerable at the dealership again.

Side note: I lease my car instead of buying it because (1) I like driving a new car every three years, (2) I don't drive too many miles, and (3) I want my car to always be under warranty (because who has time for that?). These tips will focus on leasing, but most can be applied to buying as well.

1. Ask about the car's 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. Negotiate the car's purchase price.

While you can't usually negotiate the residual value, 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 great time to buy or lease a new car is in September. This is when next year's models start coming out, and manufacturers incentivize the dealerships to move old models off the lot quickly. The dealerships can then pass along those incentives to customers. That gives you a lot more leverage to negotiate the price to something that fits your budget.

3. Think about your 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 when you lease a car for a few reasons:

  1. The act of putting money down only to lower your monthly rate is 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.
  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. Set the right 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 just 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.

5. Consider the 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's confusing because it's often expressed as a decimal, not a percentage. But 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. That wasn't helpful to me, so 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 credit 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!

6. Choose the right mileage plan.

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. But 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. Understand the extra 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, you can probably negotiate it 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. And 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 "appear" lower, like a higher down payment, longer lease term, or lower mileage. Instead, tell your dealer upfront what terms you want. Next, lower your monthly rate by negotiating the actual purchase price of the car. The dealers have plenty of room to negotiate here and often have extra incentives by the manufacturers that they can pass on to their customers. Next, while you can't always negotiate them, ask about residual value, money factor, and fees.

Here's my last and most important piece of advice: DON'T BE AFRAID 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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