Taking a Spin: Do New Car Prices Leave You Dizzy?

We are very motivated sellers," the telephone message said. "This is a great opportunity to save on your new car!"

My friend had just gone on the Internet to shop for a car and now he sat in the comfort of his home as local auto dealers bid by phone for his business. Whether you have access to the Internet or not, his experience should help you drive a better bargain.

He had already visited a dealership where he'd bought several cars in the past. He knew exactly what make, model and accessories he wanted. But after they went for a spin, the sales rep must have thought my friend was dizzy. The price quoted was only 3% below the manufacturer's suggested retail price.

So this road warrior hit the Information Superhighway. He started by visiting one of the Internet's car shopping services to arm himself with more information. Then he sent his specifications by e-mail to four local dealers and waited for the phone to ring.

Within 24 hours, it was clear that he was in the driver's seat.

All the new quotes were at least 9% below the manufacturer's suggested retail price. In fact, the lowest bid was only 2% over the dealer's invoice (the wholesale price) for the car fully loaded with the options the buyer had specified.

About half of the discount on the manufacturer's suggested retail price came from factory incentives, which were not even offered by the first dealer. The rest of the savings came about as a result of smart shopping.

Surprisingly, the dealership that won the business belonged to the same chain that owned the first dealership. That chain's second outlet quoted a price $2,440 lower than the first one had offered. That's enough savings to fuel up a car for two years of normal driving.

As this story illustrates, there are several things every car buyer should know before entering a showroom.

1. Separate the test drive from the negotiations. Decide which make, model and options you want before you discuss price. See if the car has a less expensive look-alike. Many cars today share common platforms. Ask yourself whether you want a new car or a used car. Each year, millions of leased cars are returned to dealers, many of them in good shape with some of the manufacturer's warranty remaining.

2. When the sales rep brings up price, make clear you are shopping several dealers via the Internet and are looking for the best price. Don't mention the names of the other dealers.

3. Before making your final selection, use the Internet to gather more information. You can read reviews of car performance and safety, learn the car's list price, dealer price and the cost of options packages. You can also learn about rebates and allowances. My friend learned that by waiting two weeks to take delivery he could save an extra $500 on an Auto Show rebate.

If you don't have access to the Internet, use publications such as Consumer Reports Annual Buying Guide. It also has a telephone and fax service to provide pricing advice on your particular car.

4. Have a target price in mind. The Internet auto shopping services have online calculators you can use to determine what your monthly payments might be for principal, interest and insurance.

5. Negotiate any trade-in pricing separately.

Keep in mind that if you finance the purchase, the dealer's price won't be the price you pay down the road. For example, on a $25,000 car with $2,500 cash and a $2,500 trade-in, the interest charges at 10% over 48 months will add $4,343 to the price of the car. Since financing can add up to a big part of your cost, shop for a loan, too. Talk to your credit union or bank as well as to the auto dealer. Generally speaking, you're better off financing through a bank or credit union than the dealer. Take any rebates or allowances up front and combine them with your trade-in proceeds to lower your total cost, and finance the rest, if necessary.

Jim Larranaga is Executive Vice President of Priority Publications, a Minneapolis-based publisher of financial newsletters.

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