10 Steps to Buying a New Car: Part 2

finding the right car

Looking to buy a new car, or more importantly, make smart decisions when you're purchasing a new car? This continuing series from Kelley Blue Book looks at how you can do it, in ten steps.

Read part 1 of this series (steps 1-3)

Step 4: Do Your Research Online

What makes a new car the best new car for you? With the incredible amount of data available, what specifically should you research? There are pricing and equipment options to consider, but what else should be of concern? Other important facts to discover include information about safety, quality and five-year cost of ownership. These ratings can help you achieve some needed peace-of-mind. Then, follow up by researching owner opinions and expert reviews.

There are two aspects of safety. One is called "passive safety," which concerns itself primarily with protection of the occupants in the event of a crash. For the most part, passive safety is the job of the car, although the occupants have the responsibility to use the seat belts. Features associated with passive safety include airbags, energy-absorbing crumple zones, seat-belt pretensioners, head-protection devices and the like. The other aspect is called "active safety," which concerns itself primarily with not having the crash in the first place. For the most part, active safety is the job of the driver, but certain important features on the car can help the driver avoid a crash. These features include such things as antilock brakes, traction control and stability control. For driving in bad weather or on slippery surfaces, all-wheel drive or four-wheel drive can also be considered as having a positive effect on active safety.

The relative importance of these features may vary based upon your driving style and where you drive. You can also check the National Highway Traffic Safety Administration's (NHTSA) Government 5-Star Safety ratings. These ratings will give you an idea of the relative performance levels of various cars and trucks in crashes, and an indication of how your prospective vehicle's safety features compare to those of others. In 2010, NHTSA will release updated, more rigorous safety standards and in 2011, NHTSA will begin promoting crash avoidance technologies as standard features as part of the new Government 5-Star Safety ratings. You can learn more about crash avoidance technologies on NHTSA's website.

An online analysis of how your favorite vehicles rate in quality can be a true eye-opener. Years ago, quality referred only to the absence of defects in a car. Now, research organizations, such as J.D. Power, have expanded their research analysis to cover positive aspects of new cars.

This valuable information is provided in the form of J.D. Power Circle Ratings. On the absence-of-defects side, sometimes described as "things gone wrong," you can find out how the car rates in mechanical, feature and accessory quality and the quality of the body and interior. For positive aspects of quality, known as "things gone right," you'll find ratings for performance, creature comforts and style. There's also a score for the dealership experience based on the J. D. Power "Customer Service Index."

Five-Year Cost of Ownership
The next best thing to owning a functioning crystal ball is to research the cost of ownership of your new vehicle. This tool provides a monetary figure based on the average cost of operating your car over a five-year period. The experts at IntelliChoice have created a system that factors depreciation, financing, insurance, state fees, repairs, maintenance and other applicable fees to calculate the total cost to own the vehicle over a five-year period.

Expert Opinions
Another way to gain confidence in your purchase is to spend some time reading what the experts have to say about your new vehicle. Reading the opinion of experts before the test drive serves many purposes: You can discover the strengths of the car's performance, see how the vehicle compares in its class and learn how the vehicle rides and performs on longer trips, or what it's like to drive around town.

Owner Opinions
The opinion of owners is also a valuable resource. With this tool you can discover how owners rate their new cars. A visit to the consumer review section of each vehicle pricing report on kbb.com will give you access to personal ratings and comments. After you purchase your car, you can submit a review of your own to help others make informed decisions.

Side-By-Side Comparisons
Finally, don't forget to run a side-by-side comparison of the vehicles you are considering and you will get another level of insight. Seeing horsepower, mileage, seating capacity, headroom, legroom and other specifications side-by-side helps you quickly identify which vehicles meet your specific needs.

Step 5: Know When the Price Is Right

Once you know the car you want and select the model, options and color, it's time to get serious about price. One key to success in negotiating for a new vehicle is in collecting as much information as possible before making the deal.

Today's savvy car buyer has the internet to thank for helping to take some of the mystery out of vehicle pricing. The online community has provided plenty of fast, free and factual information. These values are provided in new car pricing, and include invoice, MSRP and Fair Purchase Price.

Invoice Price
Probably the most helpful thing about obtaining the dealer's invoice price is to help determine the lowest level a dealer can go and still make a gross profit on the sale. Dealer invoice is the dealer's cost for the vehicle only and doesn't include any of the dealer's costs for advertising, selling, preparing, displaying or financing the vehicle.

When all is said and done, knowing the dealer invoice price can be an extremely helpful bargaining tool. However, it does not always tell the entire story. Incentives and manufacturer-to-dealer cash could actually reduce the price below invoice in some cases. On the other hand, the average dealer mark-up over invoice cost on most high-volume vehicles is less than 10 percent. Compare this to any other industry and you'll find it to be quite low. The truth is, contrary to popular mythology, dealers actually don't make a lot of money on new cars, which is why they have less room to negotiate on prices of new cars than those of used cars. Dealers make most of their money on used cars and parts and service.

The MSRP (Manufacturer's Suggested Retail Price) is actually set by the manufacturer and means just what it implies -- a "suggested" price. By law, this price is displayed on every vehicle sold in America.

So who pays the MSRP? In some instances where demand is higher than supply, customers actually have been known to pay above the MRSP. For instance, during their respective launches, the Mazda Miata, Volkswagen Beetle, Chrysler PT Cruiser and Honda Odyssey demanded prices well above MSRP.

Unlike most other business categories, the automotive industry gives the retailers the ability to offer the customer a discount while still making a profit.

Fair Purchase Price
Updated weekly, the Fair Purchase Price is the industry's most reliable new vehicle pricing tool. The price you receive online specifically reflects the price consumers are paying for new vehicles on a current market basis. Down to the specific make and model, Fair Purchase Price pricing reports offer a new car's typical selling price, its typical range of selling prices and the market conditions affecting those sales.

Sample Market Condition: Mazda RX8 -- This vehicle is popular and dealers do not have a sufficient supply. It is currently selling at MSRP or above.

The Fair Purchase Price is not a number influenced by dealers or manufacturers -- it is actual transaction data representing a range of what people actually paid for specific vehicles. This pricing knowledge will benefit you greatly as you decide what you are comfortable paying for your next car.

Optional Equipment
The price of your next car will depend greatly upon the options you desire. Trends in the industry have moved toward car manufacturers putting packages together rather than simply including options as separate add-ons. This makes pricing those vehicles much easier. For example, the popular Honda Civic Sedan comes in three separate versions, the DX, LX and EX. A quick check on the new car pricing report for the Honda Civic demonstrates that the standard options simply increase with each model -- as does the price -- and the company offers very few non-standard options as a result.

To remain competitive with the high-volume best sellers, many manufacturers offer packages with groups of options, such as power windows, alloy wheels and CD players, while keeping the total price lower than it might be otherwise. This can be a pleasant surprise when you're comparing similar vehicles from different manufacturers side-by-side. The most efficient way to discover how optional equipment will affect the bottom line is to build a car online. This handy tool will automatically add the cost of each option available on your vehicle and give you a new total reflecting the additional cost factors.

The Market Drives the Deal
One thing you can count on is that car prices change as popularity, supply and other factors change. In other words, if you are buying a popular car in short supply, when it first comes to market, you can expect to pay more.

Other people would never dream of paying a premium for anything. For the true bargain-hunter, here are some helpful car-buying tips that might position you to get the deal you want:
  • Buy out-of-season vehicles -- like a convertible in cold weather or the winter season
  • Buy a model late in the year before the body-style change
  • Buy an overstocked or mass-market vehicle with a customer cash incentive -- incentives are typically higher in the summer and winter months
  • Buy around the last day of the month -- dealers have monthly sales quotas
  • Buy at the end of the year -- some dealers will clear out inventory for tax reasons

The research you've done so far will give you a comfort level on what the right price of your next vehicle should be. A knowledgeable and reputable dealer will be able to negotiate a fair deal with you and try its best to convert you into a loyal return customer. Today, you don't have to arrive at the dealership with both barrels loaded; all you need is some very basic information to confidently transact your new car purchase.

Step 6: Leasing vs. Buying

With rising car prices, creative financing has come to the forefront, tempting us with promises of zero or minimal down payments and low monthly payments. In all finance scenarios, however, some sort of fee is attached -- the question is, which financial approach best meets your needs?

Lower monthly payments and less money down can make leasing seem like a great deal. The truth is that leasing offers a lot of convenience, but only if you are willing to put up with restrictions, which can include lower mileage limits -- typically only 12,000 miles per year, sometimes 10,000 miles per year -- diligent upkeep and care of the vehicle and, in some cases, penalties for early termination.

After a lease deal is offered to you, be sure to pay close attention to the negotiated purchase price of the vehicle and any additional fees outside the lease rate, and never sign a lease contract unless the residual value or optional purchase price at the end of the lease is clearly shown.

You are a good candidate for leasing if you prefer to have a new car every few years, put limited miles on your car and/or can write off your car lease as a business expense. A quick way to find out if leasing is right for you is to take a short quizto determine your "lease friendliness."

If you are using a lease simply to reduce the amount of your monthly payment, it may very well be that you are considering a car that, if you were to purchase it, would be outside your realistic capability to make the payments. If that's the case, you should give serious thought to selecting a less-expensive vehicle. If you abuse the opportunity the lease offers, you will pay for it in the future.

Before considering the purchase of a new car, it is wise to establish the amount you are willing to spend, or to calculate the monthly loan payment. Don't forget that, after negotiating the final price of the car, you will need to allow some extra cash to cover tax, title and in some states, registration.

Next up, arrange your financing. You may choose to obtain a loan with the dealership or go with the manufacturer's financing. But there are options. You can obtain online financing. You may be able to arrange for pre-approval of a loan from your credit union. When you do some of these things, you may not have a specific vehicle in mind, just a general price range, and when you make the deal you write the dealership a check for the total amount. Some institutions will give you a lower interest rate if you have direct deposit and an electronic loan payment, so be sure to ask about it.

Remember to check for incentives on your vehicle of choice. From zero percent financing to customer-cash rebates, manufacturers are constantly competing for your business by making their vehicles and financing more affordable.

Quick Glance: Lease vs. Buy




Negotiate Price



Mileage Limits



Down Payment



Purchase Price/Lease Initial Value Taxable*



Monthly Payment taxable*



Higher Insurance Coverage Required



Can Modify the Vehicle



Own at End of Term



* varies state by state

[To be concluded in part 3.] Story Continues