Buying a new car is expensive. It is not a fun process. I recently went through this process for the second time in my life. I purchased a 2000 Hyundai Elantra in 2006 for about $4000 total. It was my first car and my mother was there to help me the entire time. She actually had to help me because at the time my stick driving abilities were not stellar and I really wanted a standard! I know, I’m weird.
This time around I was pretty much on my own. My dad helped a bit with the negotiation step. Well, actually he just sat there, made a few comments occasionally, and I did all the work. Overall, I think I got a good price on my car. I did my research and knew exactly what I wanted. I also lucked out that the dealer had exactly what I wanted as well!
Buying a car is not cheap. Car prices, especially used cars, have gone up in recent years. When most people go out to buy a car they tend only to think about the price of the actual car. They haggle on the price. Everyone wants to pay at or below factory invoice price. No one in their right mind should pay the MSRP on a new car.
A car salesman makes his profit on the difference between the MSRP and the factory invoice price. The factory invoice price is what the dealership paid for the car from the manufacturer. The MSRP price is what the manufacturer suggests the dealer sell the car for to make the maximum profit. Typically, the MSRP is between 10 and 15% higher than the invoice price.
When I was conducting my research on buying a new car, I used truecar.com to determine what the factory invoice for the cars I was interested in test driving and/or purchasing and what these cars were selling for in my area. Once you figure out the invoice price, offer 3-5% above the invoice price. That’s a fair offer. Car dealers generally get an incentive when they sell a car. The most common incentive is called a holdback. A holdback ranges from 2-3% of the vehicle’s MSRP and is offered by every manufacturer. You can read more about it HERE. Depending on the time of year as well, dealers will also received other incentives from manufacturers to sell a car.
What is the best time of year to buy a car? Most people say the end of a month or end of a year. Both are true. Late summer or early fall is also another good time to purchase a new car because dealers are trying to make room for the next year’s models that are arriving in the lot. I discovered through purchasing my car that late March is another perfect time to buy a car. It’s the end of the month, the end of a quarter, and the end of a fiscal year for most car manufacturers!
When negotiating a car’s price, the salesman will probably give you a monthly quote instead of the out-the-door cost of the car. My salesman did this to me and I didn’t like this. I asked for the total out-the-door cost. My biggest advice to someone looking to purchase a new car – KNOW AND STICK TO YOUR BUDGET! If you have $20,000 to purchase a new car, stick with it. It may be attempting to buy a more expensive car because you can stretch out your car payments and still stay within your monthly budget.
Additional Costs of Buying a New Car:
- Sales Tax – If you’re luckly to live in state with sales tax like Maine then be prepared for an additional $1000+ to be added to the price of the car. Sales tax is generally based off the price of the car before all incentives. For example, the price of my car was $15600 because of $2500 in incentives, but I was taxed 5.5% on about $18100. I ended up paying just over $1000 in sales tax.
- Documentation Fees – Documentation fees in Maine are $399. Elsewhere they are more or less. The “doc” fees are supposed to cover the dealers costs in filling out the paperwork for your new car including the labor of doing this process. But let’s face this, this fee is a mark-up and dealers make profit off of this so-called “fee.”
- Title Fee – Most dealers will charge you extra for the title. In Maine it’s $35. Plus you pay a couple of dollars for a temp plate.
- Excise Tax – The state of Maine has this wonderful tax (sarcasm) called excise tax that you have to pay when you register your car. The tax is a percent of the MSRP of your car when it was new. For example, if you purchased a 2014 car for $15,000 in 2014 then your excise tax is $315 (based off a theoretical 2.1% tax). In 2016, the same $15,000 car will be taxed at say a 1.5%. The tax does go down with age of the vehicle.
- Registration – Registration includes the plate fee ($35 for the standard Maine plate) and documentation fees if you register it in person.
- Gas – You can get a rough estimate of your yearly cost of fuel by calculating your average yearly miles and the estimated miles per gallon of the car. I estimate driving about 10,000 miles in 2014. My car gets about 35 mpg around town. By my calculations I will need about 286 gallons of gas in 2014. At roughly $4 a gallon, I will pay about $1143 in gas in 2014. Obviously, if you drive more or drive a gas guzzler then you’ll pay a hell of a lot more in gas.
- Insurance – I got insurance quotes prior to buying my car. I wanted an estimate of how much it will cost me to insurance my car for a year. The cost of insurance depends on a lot of factors, including commute to work mileage, your driving record, and what you buy for a car. If you buy a fancy sports car then don’t be surprised when you get an expensive bill!
- Repairs/Maintenance – Let’s face it. Cars need repairs. If you buy a new car then hopefully you won’t have any expensive repairs in the first few years of ownership. If you do, let’s hope that your warranty covers it. Oil changes, snow tires, tire rotations should all be considered as well.
As you can see, buying a new car is actually more expensive than just the price tag on the new car you’re eyeing to buy. Here is my biggest advice:
- Do your research even before setting foot on any dealers lot.
- Don’t feel pressured to buy the day you test drive.
- Know your budget.
- Don’t be fooled by the monthly payments. Ask for the out-the-door total cost of the vehicle.
- Call around to get insurance quotes before you buy the car.
- Consider the cost of gas for a year. Can you afford the gas?
- Be confident and show the dealer salesman that you know what you’re talking about!
Car buying is a stressful situation. But, if done right, you can drive away with a car you purchased at a good price. Do you have any car buying advice to share?