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Car Buyer Research

Previous Page - Typical Automotive Dealerships

Performing basic research in preparation for a new car or truck purchase can save you hundreds to thousands of dollars. Choosing the 'right' dealer can further prevent complications resulting from underhanded and shady sales practices. By 'right' dealer I mean whichever dealer that has the least amount of complaints. You still should keep in mind that EVERY dealer wants to make as much money as they can on each and every sale.

HOW MUCH CAN YOU AFFORD?

Can you afford the new or used car or truck that you want to buy? The answer to this fairly simple question can actually be somewhat complex. For example, if you can 'afford' to pay $400 per month, but you don't have any down payment and your credit rating is not very good then that's not going to get you much car. Car buyers often mistakenly rely on the dealership to help them determine realistic limits to price, payment and financing terms when buying a new car or truck. This is a terrible idea for several reasons, the main reason being that dealers do not care about you, they care about themselves. They didn't buy that big building or auto complex by extending big discounts; they make their money by maximizing profits on each deal. If they can convince you to pay more than sticker price for a vehicle then that is exactly what they are inclined to do.
You are in the best position to determine what you can afford to spend on a new or used car or truck. What you can spend should always be considered privileged information to be shared only with your significant other. You wouldn't tell your waiter how much you were willing to spend on a date before they tell you the price of a dinner, why would you tell a car salesperson how much you can spend on a car?

HOW MUCH DOES A CAR COST, ANYWAY?

The answer to this question will help define the amount you can spend on your new or used car or truck. You should calculate the expected cost of insurance, fuel, etc. of the vehicle you wish to purchase. If you have a vehicle you can use your current expenditures as a basis for how much you spend on insurance, fuel, parking, etc. on an annual basis. You should next make an effort to generate an accurate accounting of your income and expenses to determine an accurate amount of money you have to spend on a vehicle.

Some financial basics:

Your total income

Your total debt (including credit card and student loan debt, recurring expenses such as rent or house payment, food, utilities, entertainment, clothing, insurance, etc.)

INCOME – DEBT = DISCRETIONARY INCOME

For example, if you have a monthly income of $3,200, and your monthly expenses add up to $2,323, then your discretionary income equals $877. Does that mean you can 'afford' an $800 car payment? Hardly. First, most people have other regular expenses that they do not consider, such as date night, a daily latte or going to the movies every other weekend. Also, it is prudent to put some money in savings each pay period, as well as maintain an emergency fund. You must also understand that vehicles require maintenance as well as repairs, and these costs are not included in your payment.

Only you can decide what you can afford with respect to a car payment, but for purposes of the above example let's say that $500 per month is affordable. Insurance will be around (for example) $87 monthly, dropping our available payment to $413. Interest will eat up a chunk of that, and we can arrive at a rough approximation of what is affordable by applying a simple formula:

$413 x 12 (months per year) x 5 (number of years financed) = $24,780 Total Payments
$24,780 x 7% (interest rate) x 5 (years financed) = $8,673 Total Interest
$24,780 - $8,673 = $16,107 Amount Financed

As you can see, even a modest rate of interest eats up a significant portion of your payments because of the amount of time it takes to repay the loan. In our example (calculated using simple interest) the amount you can afford to spend (finance) is $16,107.

The last thing you need to know is the amount of down payment you have to put down on a new car. This can be either cash or in the form of a trade-in, or some combination of each.

It is critical that you stay within your budget and resist any efforts by the dealer to convince you to spend more than you can afford. The dealership is not going to help you make your payments.

YOUR CREDIT RATING

Credit organizations collect and preserve records of an individual's history of debt and the repayment of that debt. Using simple, reliable benchmarks a credit organization can derive a score which denotes your ability and inclination to repay money you have borrowed and to track your performance over time.

The most popular credit scoring system in the U.S. is called the Fair Isaac Corporation (FICO) score, which characterizes a numerical analysis of your financial history. FICO scores are characteristically calculated differently for three major lending areas: consumer credit, mortgages and automotive financing.

There are several ways to discover your credit scores. By law, once a year you can request, free of charge, a copy of your credit rating from each credit reporting agency. This method takes the longest and requires that you request the report in writing via mail. You must usually provide some form of identification with your written request, such as a photocopy of your driver's license.

The quickest, easiest method of discovering your credit rating is to use a credit reporting service that includes your score from the three major credit reporting agencies: Experian, TransUnion and Equifax. This method will cost a small fee, but it is invaluable to know your credit scores before you begin the vehicle purchasing process.

Individuals who are credit-responsible already know their credit situation. If you are not aware of your credit score or if you are entering the credit marketplace for the first time it is important that you take steps to determine and preserve good credit ratings. Your credit rating will make a tremendous difference when seeking quality employment, housing, insurance and many other areas where your reliability and accountability factor into a decision making process.

If you have poor credit scores because you did not repay a previous loan on time or at all then you will discover that you have very few options regarding a new car purchase, other than to agree to pay excessive interest rates offered which can add several thousands of dollars to the amount of your loan.

If you make an effort to foster good credit scores you will have little trouble securing a loan at a favorable interest rate which results in instantaneous savings of thousands of dollars over the term of your loan.

TRADE-IN VALUE

You like it, but how much is it actually worth?

Before you can realistically set a price on your existing vehicle you must first determine an approximate actual value. This isn't as easy as it may sound, and will require some effort on your part.

You should begin by going to the Edmunds, NADA and similar websites and use their vehicle calculators to arrive at an average fair market value for your make and model vehicle, including any options your vehicle may have. These numbers are greatly dependent upon the condition of your vehicle, both mechanically and aesthetically. Obviously if your transmission only works in reverse or you have a huge chunk of paint missing from your roof and hood then your vehicle isn't going to bring top dollar.

What is not so obvious but which equally affects the vehicle saleability and value are any modifications you have made to the vehicle since your purchase. For example, if you spent several thousands of dollars 'chopping and dropping' your low rider or in raising your four wheel drive above the roof level of most cars, then very likely you have actually diminished the market value of your vehicle.

Heavy customizations tend to greatly decrease the actual buying market for a given car to customers who share those tastes. You may love a low rider or skyscraper, but not everyone does so the number of buyers for a heavily customized vehicle is pretty small, and out of that market the number of people who may be willing to pay your price is even smaller.

In these situations your best course of action is to sell your vehicle to another car buff who shares your tastes, because any offer you get from a dealer will likely only upset you.

We highly recommend that, prior to deciding which car you will be buying, you actively shop your trade by going to various dealers and seeing what they will pay you outright for your car. In most cases you will see that you are better off trying to sell your car to another person as opposed to a dealership.

WHAT VEHICLE DO YOU WANT TO BUY?

Choosing your vehicle is completely up to you, and we suggest that each person make a practical, realistic purchase appropriate for their specific situation. If money was not a consideration then you probably would not be reading about ways to save money buying a car. One way to save money is to buy a car that is appropriate for your situation. Singles can drive a two-seater, but a sedan would be more suitable for a family.

Your budget should help to define the car or truck you can afford, just remember that it is vital that you determine what is best for you before you go car shopping. You may not be able to decide on an exact vehicle, but should be able to determine an appropriate list of vehicles to look at for consideration. Having a secure knowledge of what you want will help you a great deal when you decide to make a purchase.

Unlike almost everything else you will buy in your lifetime, vehicle pricing is not easy to determine. Car makers and dealerships spend an enormous amount of time and effort complicating the real cost of a new car or truck. Their goal is to make comparison shopping impossible as it would be extremely problematic to find two vehicles with exactly the same equipment.

There are several ways to determine an appropriate price for a given vehicle; paying what the dealer asks, subtracting a percentage off of the manufacturer's suggested retail price or by paying the infamous invoice price. These approaches will not result in any real savings, unless you subtract 20% from MSRP and the dealer agrees. That would be a good deal.

There are numerous things to consider to help determine the price you will pay for a new car or truck:

Customer incentives from manufacturer
Dealer incentives
Manufacturer Suggested Retail Price (MSRP)
Dealer sticker price
Dealer holdback
Current market conditions

To help encourage sales, car makers will occasionally offer various customer and dealer incentives in the form of cash rebates, special financing and leasing offers or a combination of both. Because a car maker is offering incentives does not automatically translate into good pricing. Any dealer will happily take the rebate and preferred financing and have you pay sticker price plus tacking points on to the financing. Dealers often use manufacturer incentives to deliberately deflect your focus from other, less attractive characteristics of the deal they are proposing.

For example, if you do not ask about the incentives they may not mention their availability, or they may tell you that if you accept the rebate then there is no room for any other concessions. If they can convince you to accept the dealer incentive as their only price adjustment that is not much different from paying sticker.

You can find out about the availability of various customer incentives by visiting the manufacturer's website or by going to websites like Edmunds.com or automotive.com.

Manufacturers also offer dealer incentives, programs offered directly to the dealership to boost sales, reduce stagnant inventories or to promote sales of specific cars. Dealer incentives usually do not apply to special order vehicles, and are not always in the form of monetary compensation. Some car makers offer vacations or other tangible prizes to the dealer and their employees.
Dealer incentives are both hard to determine and to calculate into a dollar amount and are not widely reported. Such incentives can sometimes be found in trade publications like Automotive News.

Sometimes a dealer will try convincing you to pay MSRP (Manufacturer Suggested Retail Price) on a car because it is a big seller or that there is a waiting list on a particular car. If the dealership has the vehicle in inventory and available for sale, it must not be that hot of an item or it would have been sold already or it should go to the next person on the list. You can determine a car's MSRP by visiting the car maker's website, the Kelly Blue Book website, Edmunds.com, or any one of the many car related websites specializing in providing automobile pricing data.

In addition to MSRP, you will often find additional charges added by the dealership often called the dealer sticker, or DSRP (Dealer Suggested Retail Price). This sticker presents the dealer suggested retail price of any dealer-installed options and added dealer mark-ups such as advertising, dealer preparation costs, paint protection, undercoating and other items as applicable. DSRP's are another method of driving up and confusing the actual value of the car. Some dealers charge over $500 for dealer-added 'paint protection' that is nothing more than a silicone wax coating. Dealers add these 'extras' to vehicles as a means of deriving more profit from each sale.

Dealer holdback refers to money, in the form of a percentage of the purchase price that the dealer pays when it initially purchases the vehicle from the manufacturer which is then returned to the dealer after the car is sold, sometimes requiring the vehicle is sold in a specific time frame. Holdbacks tend to range between 2% and 3% of the selling price of a vehicle. Characteristically, car makers will send holdback payments to the dealership on a quarterly basis. Holdback amounts vary from manufacturer to manufacturer and fluctuate in price depending on the make and model and are often dependent upon certain conditions, like the dealer customer service index, their advertising budget and other accompanying operating costs.

Dealer holdbacks are characteristically non-negotiable during the course of the sale, but knowledge of them and the ability to determine an approximate holdback amount for your specific car can help you to get a better deal. Popular car-related websites such as Edmunds.com are an excellent resource for discovering accurate holdback rates for different manufacturers.

Sometimes specific vehicles garner extra attention in the media and become subject to much higher demand in the market, like hybrid and all-electric vehicles. When a vehicle has an inflated market value because of high demand, obtaining a deal on that specific car or truck will be difficult or impossible. If you are resolved to buy a vehicle that is hard to find because of high demand then you need to accept the fact that you will likely pay the dealer's sticker price and possibly more.

TOTAL RECALL

Once your research is complete, condense the results and commit this information to memory until you can recall the facts at will. The capacity to remember helpful information during a high pressure sales pitch is instrumental in aiding you to sustain your composure and keep within your financial limits concerning a vehicle purchase. Knowing your limits and maintaining them is the best course of action when dealing with an automotive dealership.

Previous Page - Typical Automotive Dealerships

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