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A new car is second only to a home as the most expensive purchase many consumers make. That’s why it’s important to know how to make a smart deal.

Think about what car model and options you want and how much you’re willing to spend. Do some research. You’ll be less likely to feel pressured into making a hasty or expensive decision at the showroom and more likely to get a better deal.

Before determining what vehicle you want to get, consider the following:

  • How much can you afford?  You need to subtract all your living expenses (such as home, groceries, clothing, utilities, insurance, bill payments) from your take-home pay. From this amount you can figure out what you can comfortably afford every month for a car. Don't forget to include fuel and annual fees such as licensing, registration, and insurance.
  • Narrow your choices to a few vehicles that meet your needs (or at least most of your needs). Too many people buy a car based on how it looks (or how they think they will look in it). You need to think about how you are going to be using the vehicle today and over the time you own the vehicle. A really nice looking sports car does not work well for hauling landscape material or more than a small child or two.
  • What are the annual registration fees?  Depending on your state of residence, these fees can vary considerably.
  • How good is the gas mileage?  The U.S. Department of Transportation reports the average person drives over 13,500 miles per year. Buying a car with only average gas mileage could cost over a thousand dollars every year just for fuel. A large SUV or truck could be even more expensive. It is worth it to figure out how much your gasoline is going to cost for each model vehicle you are considering.
  • What will it cost to maintain and repair the vehicle after the warranties run out?  Consumer Reports evaluates repair rates on vehicles. You need to look at how often the vehicle goes in for repairs as well as how much it will cost on average each time it goes in.
  • How much will it cost to insure the vehicle? Different makes and models have different insurance rates. Call your insurance carrier for a quote before you make a final decision on a car.
  • Know what special features or options you need.  Write down all the information you can find on the models you are interested in and bring the information with you when you go to the dealership.   

Once you have decided what vehicle you want, consider the following:

  • Research new car features and prices. Gather info on the dealer’s costs for specific models and options. A good source to get this type of information is from Consumer Reports, which also will let you know how reliable previous years' models have been.

  • Shop around to get the best possible price by comparing models and prices in ads and at dealer showrooms. You also may want to contact car-buying services and broker-buying services to make comparisons.

  • Plan to negotiate on price. Dealers may be willing to bargain on their profit margin, often between 10 and 20 percent. Usually, this is the difference between the manufacturer’s suggested retail price (MSRP) and the invoice price.

  • Consider ordering your new car if you don’t see what you want on the dealer’s lot. This may involve a delay, but cars on the lot may have options you don’t want — and that can raise the price. However, dealers often want to sell their current inventory quickly, so you may be able to negotiate a good deal if an in-stock car meets your needs.

Learning the Terms

Negotiations often have a vocabulary of their own. Here are some terms you may hear when you’re talking price.

  • Invoice Price is the manufacturer’s initial charge to the dealer. This usually is higher than the dealer’s final cost because dealers receive rebates, allowances, discounts, and incentive awards. Generally, the invoice price should include freight (also known as destination and delivery). If you’re buying a car based on the invoice price (for example, "at invoice," "$100 below invoice," "two percent above invoice"), and if freight is already included, make sure freight isn’t added again to the sales contract.
  • Base Price is the cost of the car without options, but includes standard equipment and factory warranty. This price is printed on the Monroney sticker.
  • Monroney Sticker Price shows the base price, the manufacturer’s installed options with the manufacturer’s suggested retail price, the manufacturer’s transportation charge, and the fuel economy (mileage). Affixed to the car window, this label is required by federal law, and may be removed only by the purchaser.
  • Dealer Sticker Price, usually on a supplemental sticker, is the Monroney sticker price plus the suggested retail price of dealer-installed options, such as additional dealer markup (ADM) or additional dealer profit (ADP), dealer preparation, and undercoating.

Financing Your New Car

If you decide to finance your car, be aware that the financing obtained by the dealer, even if the dealer contacts lenders on your behalf, may not be the best deal you can get. Contact lenders directly. Compare the financing they offer you with the financing the dealer offers you. Because offers vary, shop around for the best deal, comparing the annual percentage rate (APR) and the length of the loan. When negotiating to finance a car, be wary of focusing only on the monthly payment. The total amount you will pay depends on the price of the car you negotiate, the APR, and the length of the loan.

Sometimes, dealers offer very low financing rates for specific cars or models, but may not be willing to negotiate on the price of these cars. To qualify for the special rates, you may be required to make a large down payment. With these conditions, you may find that it’s sometimes more affordable to pay higher financing charges on a car that is lower in price or to buy a car that requires a smaller down payment.

Before you sign a contract to purchase or finance the car, consider the terms of the financing and evaluate whether it is affordable. Before you drive off the lot, be sure to have a copy of the contract that both you and the dealer have signed and be sure that all blanks are filled in.

Some dealers and lenders may ask you to buy credit insurance to pay off your loan if you should die or become disabled. Before you buy credit insurance, consider the cost, and whether it’s worthwhile. Check your existing policies to avoid duplicating benefits. Credit insurance is not required by federal law. If your dealer requires you to buy credit insurance for car financing, it must be included in the cost of credit. That is, it must be reflected in the APR. Your state Attorney General also may have requirements about credit insurance. Check with your state Insurance Commissioner or state consumer protection agency.

Trading in Your Old Car

Discuss the possibility of a trade-in only after you’ve negotiated the best possible price for your new car and after you’ve researched the value of your old car. Check the library for reference books or magazines that can tell you how much it is worth. This information may help you get a better price from the dealer. Though it may take longer to sell your car yourself, you generally will get more money than if you trade it in.

Considering a Service Contract

Service contracts that you may buy with a new car provide for the repair of certain parts or problems. These contracts are offered by manufacturers, dealers, or independent companies and may or may not provide coverage beyond the manufacturer’s warranty. Remember that a warranty is included in the price of the car while a service contract costs extra.

Before deciding to purchase a service contract, read it carefully and consider these questions:

  • What’s the difference between the coverage under the warranty and the coverage under the service contract?

  • What repairs are covered?

  • Is routine maintenance covered?

  • Who pays for the labor? The parts?

  • Who performs the repairs? Can repairs be made elsewhere?

  • How long does the service contract last?

  • What are the cancellation and refund policies?