How to buy a new car

Here are my simple rules for getting the best deal on a car, and how to avoid getting ripped-off by a car dealership.

1. Read my blog entry entitled “What car should you buy?”

2. Do not buy a car from a corner car lot. Only buy a car from a private party or an authorized dealer of the car you want. For instance, do not buy a used Toyota at a Ford dealership. If you buy a used car from a private party, have it checked out by a mechanic at an authorized dealer before you buy it. Never take "out of state delivery," because doing so will probably eliminate your rights under your local lemon law.

3. My favorite dealerships are Penske owned dealerships (i.e., Penske Honda (Ontario, California), Penske Toyota, Toyota of Rancho Santa Margarita, Longo Toyota). When you call the dealership, ask for the “fleet manager” or the “internet manager.” Note that these “managers” are just salesman who do most of their work on the telephone. They will almost always quote you a price on the telephone that is fairly reasonable. Call several different dealerships and get price quotes from each.

4. Before you go to the car dealership, find out the price you can buy the car from http://www.carsdirect.com/. You might even consider buying from them, but if you don’t, make sure that you don’t pay more than you could have from Carsdirect.com. Note that Penske is a part-owner of Carsdirect.

5. If you intend to finance, before you go to the dealership, get a finance offer from a bank. Check out http://www.bankrate.com/ for the best interest rates. If the dealer can offer you a better rate (they often can), take it. Otherwise, use the financing you got from the bank.

6. Never lease a vehicle. Leases are an excellent value for the dealer, but almost never for the consumer. Remember that the monthly payment on a lease will be much lower than a purchase because at the end of the lease, you do not own the vehicle. If you can’t afford the payment necessary to own a vehicle, then you can’t afford the vehicle. Don’t lease it!

7. Never negotiate your monthly payment. Dealers love to negotiate this way, because once you select a monthly payment (say $300 per month) they can often inflate the price or the interest rate or the length of the loan to reach the monthly payment you want. Negotiate the price (using carsdirect.com price as a maximum) and the interest rate (using the pre-approval letter you got from your bank as a maximum).

8. The interest rate, like the price of a car, is negotiable. This negotiation usually takes place in the finance office after you have agreed on a price with the salesperson. The finance “manager” (another non-manager with a "manager" title) gets paid based upon what you “buy” from him, including financing, extended warranties, and other types of “protection.”

When negotiating the interest rate, ask the finance "manager" to show you the letter from the financial institution which states the “buy rate.” The buy rate is the rate that the dealer can get from the bank. Banks send buy rate letters to dealers weekly (or more often) stating the rate for each type of vehicle and credit score.

When the dealer seeks approval for your loan from the bank, the bank will fax or e-mail a approval letter stating your “buy rate” and the “spread” (which is the number of percentage points the dealer is allowed to mark-up the loan). Ask to see the approval letter. Agree to pay the buy rate, and nothing higher. It is often easier to do this if you tell your fleet or internet “manager” in advance (before you come to the dealer) that you will not finance through the dealer unless they give you the buy rate.

Sometimes the dealer will claim that they don't know what you are talking about. If the dealer won’t show you the buy rate, thank the finance guy and tell him that you’ll use your own financing or go to another dealership. Since the finance manager will make more money if you finance through him, he will almost always cave in and do what you want.

9. Remember that the more time you spend with the salesman and the finance “manager”, the more desperate they will be to make the sale. They don’t get paid unless you buy the car, and thus, the more time you spend with them, the more desperate they will be to keep you from walking away.

If the dealer won’t budge on a particular issue, politely thank them for their time and begin to leave. You’ll almost always see an immediate change in their attitude. The longer you are at the dealership, the harder the dealership employees will push you to agree to a deal. Remember that their attitude is based upon desperation: They often need your sale today to meet a sales goal set by the dealer or the manufacturer, or just to pay their bills, and they believe that if you leave, you will never come back. You rarely need to buy a car today. I often find that I get the best deal if I repeatedly tell them that I need to think about it, and threaten to come back another day.

10. Never buy any extras including service contracts, extended warranties, any kind of insurance, or any other kind of protection from the car dealer. If you believe that the car you are buying is so crappy that it needs extra protection, you should probably buy a different car.