Everything You Need to Know About Buying a New Car

Buying a new car or truck requires a careful balance of cents and sensibility. So, instead of simply signing and driving, why not formulate a car purchasing strategy that blends logic and emotion?

This approach — coupled with the following insights — will help to ensure the deal you strike today keeps you smiling for years to come.

The Price of a New Car

When it comes to buying a new car or truck, the number advertised in commercials or painted across the windshield rarely reflects the true cost. Instead, pay attention to three key figures, which collectively determine the price you'll ultimately pay:

• Manufacturer's Suggested Retail Price (MSRP), also known as the sticker price, is what the automaker recommends the dealer ask for the vehicle.
• Fair market value (or range) is the "going rate" for a particular car or truck in your area.
• Invoice price, or dealer cost, is the amount the automaker charges the dealer for a vehicle.

MSRP basically serves as a reference point for negotiations, while the fair market value allows you to compare pricing for similarly equipped vehicles where you live.

Invoice price is the smallest of the numbers and, arguably, the most important. The closer you can get your vehicle purchase amount to it, the better.

Average Price of a New Car

According to automotive research company Kelley Blue Book, the average MSRP of a new vehicle in the United States (as of August 2021) is over $41,000. This marks the highest average new car price in history, a figure that's 12% above the cost of a new car in 2019.

How to Negotiate the Price of a New Car

When prices climb, the art of negotiation becomes more important than ever. You can make the process more productive and pleasant by following these rules.

Do Your Research

Better bargaining for a new car begins with checking prices, ratings, and value information. Good resources include:

• Kelley Blue Book
• Edmunds
• TrueCar
• Dealer websites

Also be sure to look for rebates, discounts, monthly specials, and incentives on manufacturers' websites.

Understand What's Negotiable

Besides cost, there are other things you should try to negotiate when buying a new car or truck. They include:

• Interest rate
• Extended warranties
• Upgrades and add-ons
• Trade-in value

Talk Price, Not Payments

As you negotiate your new vehicle, concentrate on getting the best deal before discussing payment options. Once you settle on a final price, you can then explore ways to get your monthly rates where you need them to be. Many dealers will try to focus you on monthly payments, which can skew your vision of the overall price and lead to unnecessary costs.

Auto Loan Financing

If you're like most buyers, you'll need to finance your new car or truck. You can work with the dealership to secure lending through the manufacturer's finance company or take out an auto loan with a credit union, bank, or online lender.

Regardless of the source, financing a vehicle is a huge investment, second only to buying a house for most people. You'll likely be making payments for three to five years, so you should be comfortable with all aspects of your lending agreement.

Pay special attention to these components, which affect both your monthly payment and the total amount you'll have to repay:

• Loan amount. The size of your loan can be significantly less than the value of the car, depending on whether you're trading in a vehicle or making a down payment.
• Annual Percentage Rate (APR). Commonly referred to as the APR, this is the effective interest rate you pay on the loan.
• Loan term. This is the length of time you have to repay the loan. Terms typically range from 24 to 72 months, though some go to seven years.

When trying to reduce the size of your monthly payments, resist the temptation to extend your term past 60 months. Otherwise, you run the risk of owing more on your car or truck than it's worth, or you'll pay an excessive amount in interest charges over the life of the loan.

For example, say you negotiated a sales price of $40,000 for a new vehicle and were able to secure a 60-month loan at 1.99% APR from a credit union. If you put 10% down or were allowed $4,000 for your trade-in, you'd be financing $36,000 over five years. Your loan payments would run $631 monthly, bringing your total loan cost to $37,851.

If you stretched your term to 72 months, your monthly payments would drop to $537. However, the APR would increase to 2.39%, and you'd wind up paying $858 more in interest. The total cost of the loan would also climb to $38,679.

To lower your monthly payments, you're better off putting more money down or trying to find a lower interest rate. You can use an auto loan calculator to estimate the impact these and other variables will have on financing.  

Average Auto Loan Rates

Average interest rates for new car loans can vary dramatically depending on a host of factors. They include:

• Type of lender
• International lending rates
• Credit score
• Loan amount
• Down payment
• Loan term

As a whole, credit unions offer better rates and more flexible payment schedules than other lenders. For example, the average APR for a 48-month new car loan among federal credit unions in 2021 Q1 stood at 2.86%, compared to 4.68% at traditional banks. Some credit unions may feature even lower rates.

3 Tips for Getting an Auto Loan

Since the vehicle you're financing serves as collateral, it's generally easier to qualify for auto lending than for lines of credit and other types of unsecured loans. Whether you apply for a loan through the dealer or from another lender, you should know if you're approved within a few minutes or hours. Here's how to increase your chances of getting approved:

1.  Check Your Credit Score

A higher credit score will help you secure a better interest rate, so if your credit is less than stellar, work to raise it. 

2. Get Prequalified

Knowing if you're likely to be approved for a loan will help you more effectively compare rates and terms.

3. Shop Rates and Terms.

Research traditional and online lenders, as well as financing offers for manufacturers and dealers, to find options that meet your budget and needs.

Fees and Add-Ons

There are numerous fees and optional add-ons not reflected in a new vehicle MSRP that can impact the overall cost. Knowing about these costs up front can help you negotiate or avoid them down the road.

New Car Dealer Fees

If you look closely at the loan agreement and other paperwork before signing on the dotted line, you might notice the following charges:

• Dealership fee
• Financing fee
• Advertising cost
• Documentation fee
• Vehicle title and registration fees
• State and local sales taxes

Some of these costs are negotiable, while others aren't. Be sure the salesperson explains what each charge is and ask if it can be reduced or removed altogether.

Upgrades and Extras

Just when you think the process is nearing completion, the car dealer will unveil an array of optional upgrades and extras. They can include:

• Car service and maintenance plans
• Upholstery, paint, and lens protection
• Undercoating and rustproofing
• Window tinting
• Alarm system
• VIN etching
• Car mats
• Roof racks
• Rear entertainment system
• Key protection

You can choose any that you want and roll the price into your payments, decline them all, or ask the dealer to throw in (or at least discount) a few to help sweeten your deal. Think about what will truly come in handy for your lifestyle. If you'll only use it once or twice a year, the feature probably isn't worth it. Some features, like VIN etching, can be done DIY, so be wary of dealers who try to sell you everything under the sun.

Extended Warranties

Most factory warranties expire after five years or 60,000 miles (bumper-to-bumper coverage is shorter), which can leave you with repair bills should issues arise with major systems or components. You can purchase additional coverage through the dealer for roughly $2,000 to $3,000 or look for a reasonably priced extended warranty from a separate provider. Just keep in mind that if you roll this into your loan amount, you'll be paying interest on the warranty as well.

GAP Coverage

If you're financing a new vehicle, you may want to consider guaranteed asset protection (GAP) insurance. This coverage, which can be purchased through the dealership, your lender, or an insurance company, will help pay for your car if it's stolen or totaled in an accident and you owe more on your loan than your vehicle's replacement value.

When to Buy

Timing affects just about everything in life, including the price of your dream ride. Here are some of the best times to buy:

End of the Calendar Year

Vehicle manufacturers and dealers prefer to head into the new year with as little inventory as possible, making late December an ideal time for wheeling and dealing.

Second Half of Each Month

Generally, you're better off waiting until the latter part of any given month to search for a new vehicle, when sales managers are more likely to come off their prices to hit their sales targets.

Model Changeover Period

October is generally a good month for incentives and discounts as dealers make room for next year's inventory, particularly if the new models feature extensive restyling or design overhauls.

Early in the Week

Data from TrueCar shows that Sundays are the best day of the week to buy (followed closely by Tuesdays), with average savings of 10% below MSRP.

Holidays

MLK Day, President's Day, July 4th, Labor Day, Memorial Day, and Black Friday are typically good days for greats deals on new cars.

7 Easy Steps to Buying a New Car

Buying a new car can be a little overwhelming at times. Here are seven steps to simplify the process and make it a more enjoyable experience.  

1. Do Your Homework

Determining what type of vehicle meets your wants and needs is the first step in the car-buying journey. Visit the websites of car manufacturers and auto dealers as well as third-party sites like Kelley Blue Book, Edmunds, and TrueCar to research options, read reviews, and obtain pricing data.

2. Set a Budget

Ideally, you shouldn't spend more than 15% of your pretax monthly income on a new car or truck. We recommend coming in quite a bit lower than that, and remember to consider taxes, insurance, maintenance, and other fees.

3. Save for a Down Payment

Set aside between 10% to 20% of the vehicle cost for a down payment. Putting down as much money as possible will reduce your monthly payments and help you get a lower interest rate on a loan.

4. Secure Financing in Advance

Getting pre-approved for a loan will provide an estimate of how much you can borrow, loan terms, and the interest rate. It will also allow you to focus on negotiating the lowest price rather than worrying about what type of lending you can secure through a dealer.

5. Negotiate Remotely

Email the internet sales managers at several local dealerships and ask for their best out-the-door price on the vehicle you want. After comparing the various quotes, go with the lowest number or use it as leverage to get a better deal from another dealer.

6. Go for a Spin

Purchasing a new vehicle is a long-term commitment, so take it for a thorough test drive around town and on the highway before buying. Pay special attention to acceleration, handling, braking, and noise on the different types of roads and in traffic.

7. Close the Deal

Once you've settled on a price and payment plan and selected any additional accessories and services you may want, all that's left is to negotiate the price, review the contract and sign the paperwork. Then you can take the keys to your new ride.

Alternatives to Buying a New Vehicle

Although there are distinct advantages to being the first owner of a car or truck, it isn't for everyone. Here are some popular alternatives to purchasing a new vehicle:

Buying Used

You can save thousands of dollars on the purchase price, insurance, property taxes, and depreciation when you buy a pre-owned car or truck.

Purchasing Certified Preowned

A certified preowned (CPO) vehicle provides the peace of mind that comes with a thoroughly inspected automobile backed by a warranty from the manufacturer, all at a fraction of the cost of a new set of wheels.

Leasing

Leasing a vehicle allows you to keep and drive a car or truck for a set period, after which you can turn it in or purchase it for a predetermined amount outlined in the lease contract.

Car Subscriptions

With a car subscription service, you can rent a car or truck on a short-term basis for a monthly fee and even swap out your vehicle to a different model each month.

Breaking It Down

At the end of the day, buying a new vehicle is a big financial decision that's influenced by numerous factors.

If you plan ahead and avoid getting too swept up in the moment, you can drive home the car or truck of your dreams while living within your means.