shouldn’t exceed 38% of your gross monthly income, or 33% if you have a mortgage. Then add in the cost of insurance, maintenance and repairs. Even if you’re leasing, these elements determine what kind of car you can afford–you just don’t have as much of a down payment (generally 20% of the price).
Now’s also a good time to get a preapproved loan by your bank or credit union. Even if you opt for dealer financing, you still have the flexibility and room to negotiate a “cash” deal price. The dealer makes its money on financing the car purchase.
Narrow your options to a few makes or models. Warning: Decide with your head, not just your heart, unless you’re flush with cash. “It’s not wrong to buy a vehicle that makes you happy. Just be able to put a value on that ownership satisfaction,” cautions BE automotive writer Jay Koblenz. Ask yourself what size and type of vehicle best suits your needs. Consider several different makes and models, then narrow your choices to three or four.
Get the 411 on your selections before setting foot in the showroom. Start gathering information on your selections first. Check out carbuying guides, buff books and magazines for reviews of the vehicle. Consumer Reports does its annual auto issue every April; it includes sticker price, style and a depreciation ranking. In general, however, cars lose up to $5,000 of their value as soon as they’re driven off the lot!
Establish the “real” cost of the vehicle. Shop for the dealer invoice. On average, dealers pay 90% of the sticker price, also known as the manufacturer’s suggested retail price. Some of the buyers guides, a.k.a. blue books, will give you this price and/or the used care resale value of that particular make and model. Set up a pricing worksheet for each make you’re considering. Decide on the basic elements you need or want your car to have, such as manual vs. automatic; four-cylinder engine vs. a more powerful six-cylinder. Then make a list of the options you want: AM/FM stereo, air conditioning, power windows, moonroof and even the color. But a word to the wise: some options have no “residual value.” Translation: you may like them–the gold trim package or CD player–but someone else buying the car used might not. They’ll do nothing to help the car retain its value, and you’ll probably pay a higher car note-adding them into the purchase price instead of adding them later. Experts also suggest that you bargain $300-$500 over the dealer invoice.
Another good way to find out how a model retains its value is to go shopping for a used one, whether through a dealer, guidebook or online. That way, you’ll know what your model could fetch in a few years. It’s also a way to avoid getting into an “upside down” deal, where you owe more on the car than it is worth.
Establish a trade-in value for your old car before heading to the dealer. “Books don’t buy cars, people