Getting a new car is one of the better feelings in life, I'll admit.
But, it’s also one of the biggest financial transactions most people make.
Get a good deal, and you'll save a ton of money over the life of the car. Strike a bad deal, and it can haunt you for years.
It can even interfere with the next car you buy!
You can avoid this outcome by preparing yourself for the new car purchase ahead of time.
And, one of the main factors in getting a great deal on a new (or new to you) vehicle is how you go about choosing when to buy a car.
So, “When's the best time to buy a car?” you ask?
Hold it right there. Let's talk about a few points, first.
1. Don’t Even Think of Buying a New Car if You’re “Upside Down” on Your Current Car
If you’ve never heard the term “upside down”, it’s probably because you’ve never worked in the car business.
Everyone who does knows exactly what it is. It’s a new car buyer who owes more money on his current car than the car is worth.
He goes to a dealership hoping for the best – and lo and behold, that’s what he gets. Or at least he gets the answer he wants to hear. That’s the dealer telling him that he can buy a brand-new car.
The deficiency on the car loan may come up, or it may not. But whether it does or not, Steve is still clearly upside down on his current car.
Here’s how this will play out…
After confident assurances by the dealer that, yes, Steve can buy a brand-new car, the process moves forward. In fact, it’s almost as if the deficiency doesn’t exist.
That’s because the dealer can make the deficiency do a disappearing act. Or so it will appear.
Obviously, Steve has no down payment for the new car. No problem. And if he trades in his current car, he’ll have a shortfall. No problem there either!
Steve wants to buy a $30,000 car, and plans to do it with what he thinks will be 100% financing. But that’s not quite what will happen.
How Car Dealers Make Loan Deficiencies “Magically” Disappear
Sure, the dealer will give Steve 100% financing on the $30,000 car.
But they’ll also add the $3,000 deficiency from the old car to the new loan. When Steve drives off the dealer lot with his $30,000 car, it’ll come complete with a $33,000 loan.
Do you see what happened there?
The dealer simply took the deficiency from the old loan and rolled it over into the new loan!
Maybe Steve knows that’s happening, and maybe he doesn’t.
All he knows is that he was able to drive away with the new car of his dreams. In the end, he's still upside down – only this time he’s upside down on his brand-new car.
But it gets worse…
The typical new car loses at least 10% of its value the moment you drive it off the dealer’s lot.
That means Steve’s car is actually only worth $27,000 at that point. But he owes $33,000.
The original $3,000 loan deficiency was converted to a new $6,000 deficiency in a matter of hours. He drove in upside down, and drove out even more upside down!
Here’s the important take away: Being upside down on a car is practically a lifestyle. Once you get upside down on one car, it carries over to the next.
Usually, the deficiency gets a little bigger each time. In theory at least, you could spend a lifetime being upside down on your car.
Moral of the story: You can’t afford to buy a new car if you’re upside down your current car – no matter what the dealer says.
2. Know the Value of the Car You Want to Buy (And Stick to Your Budget!)
This is something every new car buyer should know, especially since there are so many resources online that can help.
But it’s even more important if you’re buying used.
After all, used-car values are based on very specific factors, such as the age and mileage of the car, as well as options and wear-and-tear. You’ll need to know the approximate value of the vehicle before you even begin negotiating on it.
The purpose of this step is to make sure you’re an informed buyer. If you know the approximate value of the vehicle, you’ll know immediately if a dealer or seller is trying to overcharge you.
Never assume that the dealer has your best interests in mind. After all, he’s trying to get as much for his cars as possible. Your job is to make sure he doesn’t, at least not in your case.
If you really want to go in prepared, print off the value of the car you’re looking to buy. Be prepared use it as a negotiating tool. Few things get a car dealer to behave more than recognized third-party documentation.
3. Know the Value of the Car You Want to Trade In (HINT: Don't Take The First Offer)
The same thing goes for the car you’ll be trading in.
If you throw yourself at the mercy of the dealer on the trade in, you’ll have no idea if you’re getting a fair price. You probably won’t; car dealers know how to sniff out a weak hand, and they’ll take full advantage.
Don’t let this happen to you.
You’ll get around the problem by knowing the value of the car you want to trade in. Once again, you can do this by checking the car’s value on Kelly Blue Book or Edmunds.com.
At the same time, be aware that valuations on used cars – which is what your trade-in will be – are more subjective.
For example, the condition of the car is a major gray zone. You may believe your car is in excellent condition, but the dealer may counter that it’s in average or even fair condition.
If you’re accurate in evaluating the condition, you should get a pretty solid value of your car from the valuation sites.
Once again, print off the results – from both sites if necessary – and be ready to show them to the dealer when price negotiations begin.
You could even pore through local Craigslist ads to find comparables, if need be.
4. Better Yet – Have Your Down Payment BEFORE Going to the Dealer
Unless you have the cash to put down on the new car, you’ll have to sell your current car yourself. This will give you two advantages:
- It will remove the down payment hurdle, and
- Eliminate the need to rely on the dealer for trade-in.
#1 makes you a stronger buyer.
#2 puts the dealer in a weaker position.
It may not be as convenient to sell your own car, but it’s more important than it seems. Anytime you have to rely on the dealer for the trade-in/down payment, you’re leaving it to the dealer to decide how much that will be.
Let’s say your research indicates your car is worth $10,000. You have a $7,000 loan outstanding on it.
If you sell the car, you can pay off the loan and walk away with $3,000 for the down payment on your new car.
If you trade it in to the dealer, they might decide it’s only worth $8,000. That will leave you with only $1,000 to put down in your next car.
The difference will be made up by a larger loan, that will also include a higher monthly payment.
You owe it to yourself to try to sell your car on your own.
If you’re in a hurry, you can sell it to another dealer as a standalone transaction. Carmax buys cars this way, and they pay cash.
You’ve probably seen their commercials on TV lately – with the WBYCEIYDBO thing – “We’ll buy your car even if you don’t buy ours”.
You won’t get as much as you will if you can sell it yourself, but it will at least eliminate having to sell your old car and buy your new car from the same dealer.
The less control the dealer has, the more you have.
5. Get Your Financing Lined Up Before You Go to the Dealer, Too
Financing is an important profit source for car dealers, and you can make it work to your advantage.
Before you even go to a car dealership, first get a loan preapproval from your bank or credit union.
There are four reasons for doing this:
- Having your financing before you walk in the door gives you a stronger bargaining position with the dealer.
- It removes one more function of the sales process from the dealer, weakening their position.
- It prevents them from putting you into a high interest rate subprime loan (increasing their profit on the deal).
- Finally, it forces the dealer to give you a better deal than your bank or credit union, if they have one available.
At the same time, be careful not to be lured in by promises of low rate dealer financing.
Advertised rates are “teaser” rates, available only to the most qualified customers. If you’re determined to be anything less, the interest rate might be much higher than the promised rate.
Finally, dealerships frequently offer you a choice between a very low-interest rate and a cash back offer.
If you already have a low rate loan from your bank or credit union, you can take the cash back and lower the price of the car. You can crunch the numbers, but it will usually work in your favor to take the cash.
6. Speaking of Financing – If You Have Credit Problems, Get Them Fixed!
If you’re applying for a car loan with a bank or credit union, they like good credit scores.
You’ll need a FICO of at least 650 to qualify. The problem is when you can’t qualify for traditional bank or credit union car financing.
If you can’t, you’ll likely get a subprime loan arranged by the car dealership.
Car dealers love these loans. As I mentioned above, they make a lot of money on them. They’re only too happy to move you into one.
And if you can’t get a bank loan, that’s probably where you’ll be.
Subprime car loans aren’t just more expensive than bank and credit union loans, but much more expensive.
What a Bad Credit Score Can do to a Car Loan
Real Life Case Study: I knew a young man – we’ll call him Ed – who found himself in a situation where he needed a new car immediately.
He crashed his previous car, and needed to get it replaced. But he had a credit score of 500-something.
No bank or credit union would give him a loan. But the dealer was only too happy to provide financing.
It was a $10,500 loan for 72 months at 22.99%! The monthly payment was about $265.
Not only that, he got hit with a bunch of add-ons, like a prepaid maintenance program, and gap insurance – both of which he was told were mandatory.
It’s how the car business works when you’re playing with a weak hand.
18 months later, Ed raised credit score by more than 100 points. He was then able to refinance the loan through his credit union.
At that point, the balance was paid down to about $9,000.
He took a 36 month loan at 3.99% – a full 19 points below the original subprime loan! The monthly payment stayed right around $265.
But, he chopped 18 months off the loan! In doing so, he saved close to $4,800 over the life of the loan (18 months X $265).
That true story shows why it’s important to clean up your credit before buying a car.
And, if you can’t do it ahead of time, do it as soon as possible after you buy the car. Subprime car loans not only have ridiculously high-interest rates, but they keep you locked in the loan longer than the car is likely to last.
Did I mention the 72-month loan was on a used car?
7. Factor in ALL Costs! (NOT Just The Sticker)
When you purchase a new car, don’t be singularly focused on the purchase price alone. That’s never the actual price.
There are a series of add-on fees anytime you buy a car, and that’s what determines the final buy price.
Add-on costs can include:
- State sales tax – If your state has a sales tax in place, and it applies to the purchase of motor vehicles, it can have a major impact on the final price of the car. For example, if you live in a state with a 7% sales tax, and you purchase a car for $30,000, sales tax will add $2,100 to the final purchase price. In some states, there are even county and municipal sales taxes added on top.
- Document fees – Simply put, these are extra fees the dealer adds on top of the purchase price. They can have various names. Some states limit these fees, others don’t. Where they’re imposed, they can add several hundred dollars to the final purchase price.
- DMV fees – All states impose these fees. They can be registration fees and/or title transfer fees, and they vary by state. For example, Illinois charges between $101 and $114 for your registration fee, plus $95 for the title fee.
Let’s do a quick example of how these fees affect the final purchase price:
New car purchase price: $30,000
State sales tax (6%): $1,800
Document fees: $500
DMV fees: $300
Final sale price: $32,600
As you can see, the add-on fees increase the final price of the car by $2,600, or almost 9%. That’s just a ballpark.
In some states it can be lower, in others it can be much higher.
The Cost of Owning a Car is Different from One Vehicle to Another
While we’re on the subject of cost, let’s take a moment to consider the ongoing costs of owning a car.
The Automobile Association of America (AAA) estimates the annual cost to be $8,469, or $706 per month. That’s just an average.
It ranges from $6,354 per year for a small sedan, to $10,054 per year for a pickup truck.
Those figures are comprised of the following expenses:
- Depreciation (this is how much your car drops in value each year you own it)
- Maintenance and Repair
- Car Insurance
All except car insurance will be approximately the same across the country. Car insurance varies widely by state.
For example, while the average car insurance cost nationwide is $1,318 per year, it ranges from a low of $864 per year in Maine to a high of $2,394 in Michigan. Those are just averages.
Premiums can also vary considerably based on the type and cost of the vehicle you’re purchasing. That’s why it’s important to get a car insurance quote from your insurance carrier before buying a new car.
Trading in a small sedan for a pickup truck could cause your insurance to increase by more than $1,000 per year. You’ll need to know that before you make the purchase.
8. Timing is Everything – When to Buy a Car
Now that you're prepared to get a good deal, by the numbers, let's about when you should make your purchase.
This is super critical.
There are certain times of the year, or even the day of the week when you’re more likely to get a better deal. Here are a few of the best times to buy a car:
The end of the model year. Car manufacturers work on a fiscal year that ends August 31. That’s when they change their model years.
By the time August hits, they’re looking to get last year’s inventory off the lots. They’ll often discount those cars to move them quickly.
After all, they need room for the new models. You can usually find good deals straight through October, which is when they’re trying to close out the last of the older models.
Holidays. Dealers often run BIG sales on certain holidays, particularly Memorial Day, Labor Day and Independence Day.
Black Friday is another big one.
It has two advantages, one is that it falls on the Thanksgiving holiday weekend, and the other is car dealers are competing with Christmas shopping for business.
But the biggest holiday advantage may come between Christmas and New Year’s.
At this time of year, holiday celebrations and travel are crowding out car buying.
At the same time, dealers are concerned with meeting year-end sales goals. Dealer bonuses may even hinge on them meeting certain sales levels.
This is a time of dealer desperation, which is a big advantage for you as a buyer.
But what if you need one sooner and it's not a holiday season? When should you go?
Weekdays. More people shop for cars on weekends, because they work during the week. Dealers are usually more anxious to make sales on weekdays.
Mondays and Tuesdays are particularly good days because they’re quiet.
But this brings us to the next point… you can REALLY save…
When you don’t need a car. If you buy when you need a car, you might be desperate.
But if you buy when you don’t need one, you’ll have a stronger negotiating position. You'll be thinking with dollars and cents, not just to fill an immediate need.
9. Leave Your Emotions at Home
This can be a tough one to pull off.
After all, buying a new car is largely an emotional venture. We’ve all heard the saying you are what you drive, and that affects the car buying decision. It’s similar to buying a house – you’re not just buying a thing, but something that in some way defines both you and your lifestyle.
After the new car high wears off, the reality of the car loan will set in. Only then will you know if you actually made a good deal.
The time to make that happen is when you buy the car. And that’s why you have to leave your emotions at home when you do.
Car dealers know how to exploit emotions – in fact, they’re banking on it. (Good pun, right?! I'll see myself out.)
They can use your emotions to convince you to pay more for the car than you should, take options you don’t need, or even to put you into an upside-down loan.
None of that can happen if you approach the purchase as a business deal.
You may have to leave a thing or two on the table, but you’ll like yourself a lot better a few months later if you do.
10. Create Competition – Let the Dealer Know You’re Working With Other Dealers (Even If You're Not)
Never go to a dealership hinting you need to buy a car right now, and from this dealer. If you do, you’re setting yourself up to get your pocket picked.
Instead, make it clear to the dealer that you’re shopping.
Drop a name or two for added effect.
The point is to make sure the dealer knows he’s in competition with other dealers for your business. They’ll respect you more, and give you a better deal.
10. Go Easy on the Options and Add-ons
Dealers can quickly raise the price of a car with options and add-ons. Be careful with this.
Just as you never want to over-improve a house, you don’t want to overload a car with too many options. Not only will they raise the price, but they may not increase the resale value of the car by the same amount.
Most cars today have options packages that have most of what you need. It may be okay to add a couple more as preferences, but don’t get carried away with it.
Also, be aware there are options and add-ons that either don’t add value, or you plain don’t need.
Examples include credit life insurance, extended warranties (beyond those offered by the manufacturer), special car colors or editions, and various treatments, like undercoating, rust protection, sealants, and fabric protection treatments.
All can run up the cost of a car quickly, while adding very little value.
12. Bring Help
Some people are born negotiators, but it’s probably safe to say most aren’t.
If you aren’t, the workaround is to bring a negotiator with you.
This is perfectly acceptable.
You can bring anyone you want to a car purchase. You may also want to bring someone who’s knowledgeable about cars, especially if you aren’t.
The basic idea is to make sure you’re not going into the dealership alone.
After all, the salesperson you’re dealing with won’t be alone. She’ll have the support of her sales manager, finance manager, other salespeople, or anyone else she needs to make the deal happen.
If you have a more passive personality, you’ll be outnumbered and overwhelmed.
If nothing else, they’ll be there for moral support. But more imp