The Completely Clueless Car Buyer's Guide to Buying a New Set of Wheels

I’ve been wondering for a while when I would actually feel like a grown up. I thought it might happen when I got my first real job, but it didn’t. Then I thought it might happen when I moved out of my parents’ house. Nope, not that either. Then last Sunday, I finally found it. It turns out I just needed to buy a car. I guess there’s just something about committing to spend thousands of dollars that feels grown up-ish.

I have to admit, I had no idea where to begin when it came to buying a car. I did a little poking around the internet, but ultimately called my dad and straight up asked him, “What’s the first concrete step in this process?” So I’m giving you my firsthand account and step by step process in painful detail so that those of you that are about to embark on the car buying journey will know just what you need to do.

Step 1: Decide on a Budget

My day job is related to affordable housing, so when it came to finding a place to live, I knew exactly what I could afford (less than 30% of my income). When it came to buying a car I looked all over the place, but couldn’t really find a definitive answer on how much of one’s income should go to a car payment. So I ran my numbers and decided what I would be comfortable with. Here’s how I did the math:

I took my monthly take home pay, subtracted my housing costs (estimating the variable things like water and electric), subtracted other variable costs like food and gas (which I knew would change), and then subtracted fixed costs like my gym membership. At that point I was left with basically two line items: savings and fun. So I determined what amount I wanted my savings to be, how much I would reasonably need for fun (I know my patterns), and then determined what amount I had for a car payment. I determined that I could do between $250 - $300/month on a car payment, but preferred to keep it at $250.

Simple Budget Equation:

Take home pay – rent – utilities – gas – food – gym – savings = car payment + fun*

*fun = reasonable amount and not pipe dream

Note that I was not too focused on the monthly car payment, but I had to use it basically to work backward and determine what a reasonable total amount would be for my budget. At that point, I still didn’t really know how much total I could spend without having an interest rate in mind. That’s when I went to my bank and found out that they were offering as low as 3.99% APR on used cars. I plugged my monthly target, the down payment I was thinking about, and the interest rate, and a projected 4 year loan into a few of the many auto loan calculators online (like this one on edmunds.com) and determined I could very reasonably afford a car under $16,000, but I could go up to $17,000 if it was really worth it.

Step 2: Research cars

Once I had a budget, I could more realistically look at potential car options. Many websites offered the same advice my dad had: make sure you give yourself options! You don’t want to get your heart set on a specific model because you’re going to have a much harder time getting a good deal that way. As I mentioned in my previous post, I was originally interested in the Rav4 and CRV, but found out through my research that they were a bit out of my set price range. I did research on hatchbacks on Edmunds.com, US News, and a few other websites that came up in a Google search. That’s how I decided that I liked the Fit, but also wanted to look at the Matrix, Mazda 3, and other comparable cars that were on the used lot.

Step 3: Get pre-approved for a loan

I was able to fill out a form online, get pre-approved for a loan, and pick up paper work all in under 4 hours. Frankly it was a little scary how easily the whole process went. I felt like they were handing loans out like candy. But I also know that my credit is spotless and a loan and interest rate are all just formula decisions.

When I applied for the loan online, I actually asked for about $3,000 more than I planned to use. The bank came back and actually approved me for $3,000 more than I asked for, and approved me at 4.29% for up to 5 years (I had asked for four). I didn’t get the advertised 3.99% (I’m assuming) because I don’t have any debt history outside of credit card payments. This is the one time that NOT having student loans comes back to bite me. I could select the original loan amount over the 4 years that I had requested, but I opted for the higher pre-approval amount and longer term, knowing that there was no penalty for not using the full amount or paying the car off in less than 5 years.  

Note that you don’t need to be pre-approved to get a car loan, but it is nice when you can walk into a car dealership with your own financing ready to go if you need to use it.

Step 4: Get out there and look

I felt the same way about the car buying process as I did about finding a place to rent: I had to get out and see a few things I knew I didn’t want in order to really know what I did want. To that end, last Thursday my dad and I went down to Woodbridge to see a few cars before everyone closed. First we went to Carmax. I wasn’t impressed. The problem with a “no haggle” sticker price is that the prices, at least in our area, were kind of unreasonable. I suppose by agreeing not to haggle you also forfeit the ability to haggle a good deal for yourself. Also, they really didn’t have much in stock. I heard the Carmax out by Dulles is bigger, so maybe it’s a different story there. But used car inventory is down, so who knows?

After we looked at Carmax we went over to Hendrick Honda. Looking back, I should have approached the first dealer differently. Instead of telling them that I wanted to look around at their used cars, I told them right away that I wanted to see the Fit. Rookie mistake. Once you tell a car dealer that you’re interested in a new car, you’re really going to have a tough time getting them back onto the used car lot. Honestly, you really just have to walk over there yourself and leave them following you. This process requires a certain tolerance for being assertive almost to the point of rude, but once you’ve done it a few times you feel a lot more comfortable having taken control of the process.

I test drove a Honda Fit on Thursday night, and that’s when I realized that I wasn’t totally prepared for the negotiating process. It was also almost 9 pm, and I had hardly seen any other cars. I knew I wasn’t ready to buy. So we took the salesman’s card and went home. No love lost. It was valuable going out and looking at cars. It really prepped me to zero in on what I was most interested in and begin to think about what I should aim to pay on each various model.

Step 5: Determine what the dealer paid for each car and how much you should offer

When calculating what you should offer on a new car, you first want to figure out about how much the dealer probably paid for the car. Edmunds.com lists MSRP, invoice, and “true market value”. MSRP is what the factory is suggesting the dealer should charge for the car. Invoice is theoretically what the dealer paid for the car (although often the car cost less). True market value is about what you can expect to actually pay for the car and falls somewhere between invoice and MSRP.

The prices on the Honda fit were:

Invoice: $15,340

MSRP: $15,900

True Market Value: $15,701

You may have noticed that I mentioned that a car doesn’t actually cost the dealer the “invoice” price on the car. The dealer may have had rebates from the factory that knocked $100-$300 or more off of the cost of the car. They also have this thing called “holdback”, which is basically a rebate that the dealer will get something like quarterly, so that it looks like they paid more for the car, but they’re actually getting money back on it eventually. I read online that for Honda, holdback is about 2% (about $300 on the Fit). So while the dealer invoice price is $15,340, a dealership may end up paying less than $15,000 on a Fit Base.

Once you determine about what a dealer paid, you have to start adding expensive crap back into the equation. Once of the most expensive things is the freight fee, something I’m a little ashamed to say I knew nothing about when I started this process. Freight on Hondas appears to be $770 across the board. I still think it’s a little silly that the price a dealer pays to get a car to the dealership is considered an extra fee, but oh well.

Then you have to add in profit. I know, I know, those scummy car dealers don’t need profit! They’re scamming you already! OK, let’s be reasonable. This is still a money-making venture so you really do have to factor profit into the equation. I read that 3-5% is reasonable, so I added about $500 to the price.

Once you have the purchase price that includes profit and freight, you have to think about tax, tags, and fees. Tax is about 3% on cars in Virginia, tags run about $100, and many dealers charge $350-$400 in document fees. Once you add all this in, you have your “out the door” price.

In my mind, the “out the door” price is the only one that really matters to me. It’s the amount that I have to come up with between loans and a down payment—how it breaks down between the purchase price and fees is really the dealer’s problem, not mine.

If you’re following my math, you probably realized that we’re up to about $17,000, which was way too high for me to really consider. I determined along with my dad that I really wanted to be out the door at $16,500, and we used that number in our negotiating process.

The math on a used car is slightly different (and less complicated). Basically you go to Kelly Blue Book and Edmunds.com and use their tools to determine how much the car in front of you is worth. Both have apps for iphone and Droid, so definitely download those and charge up your phone for use on the car lot. Once you know what the car is worth you can determine whether the price on the car is completely unreasonable or right on target. Based on that information, you can make an offer targeting to pay about, or slightly under what that car is worth. Keep in mind that you won’t (or rather shouldn’t) pay freight, but taxes, tags and doc fees will still apply.

Step 6: Get quotes

I read on a discussion board that one buyer gathered quotes from a bunch of dealers via email, and then used the quotes they each gave her to negotiate the best deal. I figured it wouldn’t hurt, so I went to a bunch of different Honda dealers and requested a quick quote on their 2011 Honda Fit Base. Warning: when you request quotes online from dealers, you are letting the lions loose. They will hunt you down, email you auto emails, personal emails, and call you twice in one day and leave you two messages. They want your business. What they will not all do is give you a quote. With the exception of Hendrick Honda in Woodbridge, any dealer that gave me a quote pretty much quoted MSRP, some with freight included and some without. From what I could tell, they wanted me to talk to them really badly, but they didn’t want to give me a number. This is hilarious to me because I could’ve sold THEM the Fit at this point, I liked it enough. All I really cared about was the price they would give me and whether they had any Fit Bases in stock.

I had one dealer email me and say “many dealers will probably quote you a price that doesn’t include fees, so it will look artificially low.” Um, excuse me, but no shiznit, Sherlock. I asked you for a quick quote online, you think I didn’t read all about the pricing on these things? Sure, some of them quoted me under $16,000, but I could tell when the price of freight was included and when it wasn’t. Also, this was a dealer that avoided giving me a quote via email.

Sorry, I’ll stop venting. The only thing that getting the online quote really did for me was help me determine 1) who actually had the Fit Base in stock and 2) just how high some of these dealers wanted to start. It did not really get me anywhere in terms of haggling a price down, but it did help me determine where everyone was starting. It also gave me a contact to email at each dealer when I finally did get an offer from another dealer. It was good practice and prepared me for the aggression that comes at you when you walk through the doors onto the lot of a dealership.

Step 7: Get out there and mean business

There are various tips online that say the best time to shop is on a weekday, or at the end of a month when the dealer is trying to meet a quota or earn a bonus and therefore has a greater incentive to sell you a car. Well, I went on a weekend at the beginning of the month and still got a good deal. Granted, it was Labor Day weekend and car dealers are clearing their lots for 2012 inventory. But more than anything, getting a good deal is all about knowing how much the car is really worth on the market, and being willing to walk away. So it’s alright to get out there and shop at the internet-determined non-optimal time. As long as you know your stuff, you should be fine.

Last Saturday afternoon my Dad came over and we headed out car shopping. I decided to hit up Honda of Tyson’s Corner because they were supposed to be getting 5 Fit Bases in that day, and it was close to other dealerships. Before I stopped there, I went over to Koons Tyson’s Toyota so that I could look at their inventory of used cars. I actually found a 2008 Toyota Certified Used Matrix there with about 39,000 miles on it for about $15,000. I liked it, but I wanted to get a firm price on the Fit as a basis of comparison, so we went across the street to the Honda dealer.

Having learned from my experience Thursday night, when I arrived at the Honda dealer I started on the used car lot to see if they had any options. When I determined that they didn’t, I mentioned to the salesmen that I had been looking at the Honda Fit. They had literally just received a shipment of them, so I actually went into a garage and saw the car before it was prepped for the lot. I knew then that I definitely wanted the Fit and I was ready to make it happen if I could, so we started the deal negotiating process.

Step 8: Negotiate a deal

Because I haven’t mention it enough already, getting a good deal is all about knowing what price you should reasonably expect from a dealer. Don’t expect to be able to negotiate a good deal without doing your homework first.

The salesmen at Tyson’s Honda could tell we liked the Fit in the garage, but this was the part in the process that felt most awkward to me: throwing out a number. So I stood there looking at it for an awkward minute or two. Thankfully my dad stepped in and threw out my number, which I suspect made the offer sound more credible. He told him that I wanted to be out the door at $16,400. The salesman looked a little shocked and told us the usual “we don’t make much of a profit on these units” but went inside to talk to the general manager to see what he could do. The manager offered me $16,887 on the car, about $400 more than my high goal. I told him sorry, no can do, I had to draw my bottom line somewhere. He told me it was a great value and I told him I respected that, but ultimately I have to keep my finances in mind and look at significantly less expensive used options. So I walked away, just as I had been prepared to do all day. I took the writing in offer and the salesman’s business card and went on my merry way. On to the next, on on the next one.

Step 9: Make a freaking decision

Next, I went over to another Honda dealer near my house. I did the same thing: looked at their used cars, saw a few Matrixes (Matrices?) that were more expensive than the new Fit. I could probably have knocked at least $1,000 off of them according to Kelly Blue Book, but they still would’ve been a little pricey.

Then I went over to the new lot where, I’m sorry to say, a nice but painfully awkward young car salesman attempted to sell me on a car I already knew everything about. In fact, he didn’t even believe me when I told him the car has 10 cup holders. He told me he thought I was confusing it with a different vehicle. Here’s a tip for you, car salesman trying to bond with me over our mutual attendance of UVa: Someone who graduated from that fine University probably doesn’t enjoy being told she’s wrong about something that she appears to have studied more than you did. I know I sound mean, but dealing with these guys all day was like fighting off piranhas. Only there was way more awkward silence involved.

All that aside, Bill Page couldn’t offer even close to what I was willing to pay and what Tyson’s had offered me. When I told them I wanted to be out the door at $16,500, they brought me back an offer that was still well over $17,000. Having my other offer in hand, I considered this laughable. Also, I didn’t really want a black or bright blue car, and that was all they had, so I didn’t feel bad walking out on that either.

At this point, I didn’t quite know what to do. $16,887 seemed high, but it was so far my only option on the Fit. And according to the math I’d done earlier, it wasn’t completely unreasonable. My dad and I decided to come back to my place to run the numbers on my options. My only other real option was the 2008 Toyota Matrix I had seen at Koons Tyson’s Toyota. This is where the kind of cooler (yep, I’m a dork) decision making came into play.

We looked at Kelly Blue Book and determined we probably couldn’t knock much off the price of the Matrix. So we estimated that I would be lucky to get out the door with $15,500 on that car. There also weren’t any financing deals on it, so I would be using my preapproved 4.29% loan to finance it.

Although the Fit was over $1,000 more expensive, it was being offered with a .9% financing deal. Once I calculated how much I would save in interest over both 4 years with the lower financing rate, the difference between the Fit and the Matrix was only about $400. Keep in mind the Fit was brand new and the Matrix had nearly 40,000 miles on it.

After I calculated the difference with the interest rate, I went on Edmunds.com again and used their “True Cost to Own” tool, which factors in and compares the money you’ll lose in depreciation, and how much you’ll pay for insurance, gas, repairs, etc. over the course of 5 years on different vehicles. The price to own the 2008 Matrix was definitely more than the 2011 Fit, but a lot of that was depreciation on the Matrix over the first 2 years. I didn’t have to worry about as much because the car was already almost 4 years old. What I did notice was that the Matrix was estimated to cost about $2,000 more in gas over the 5 year period than the Honda Fit. With math like that, it was clear that while the Matrix would save me $1,000 up front, the Fit was a better value. The Fit also got higher ratings from many different sources, and has more cargo space.

With my value information in hand, I decided to call my guy Guillermo Murillo at Hendrick Honda and see if they could improve on the deal that Tyson’s had given me. “G” said he thought he could, but they weren’t going to get any more Fit Bases in stock until this week. He really did seem like a nice guy and I would’ve liked to work with him. I was willing to wait on the car for about a week, but the .9% financing, an American Honda deal and not a dealer deal, was ending on Monday night. So even though they could potentially bring my price closer to the $16,500 I wanted, I could end up spending more than $200 in interest if I ended up with a higher rate. Even Guillermo said I should take the deal from Tyson’s, which I definitely appreciated.

So I called up my salesman at Honda of Tyson’s Corner to tell him I was still interested in the deal and asked him if he still had any in stock. He did, so we arranged to meet as soon as they opened Sunday morning so that I could buy the car.

As a last ditch effort, I emailed a bunch of other dealers to see if they could give a better price. Had I not been so exhausted from car shopping I would’ve probably called them, but I couldn’t bear the thought of fighting off another salesman. Instead, I sent them all emails that said, “Thanks for following up with me on the 2011 Honda Fit Base. I actually have an offer in writing from Honda of Tyson’s Corner for $16,887 out the door. If you can do better, I’d love to do business with you.” Short, sweet, and to the point.

I heard back from a few of them that said they couldn’t match the price. Rosenthal Honda of Landmark told me that they had sold out of all their Fit Bases with the average price a little over $18,000. One dealer even sent me the following email on Monday, which made me feel great about my purchase:

I did hear back from someone at Pohanka Honda of Fredericksburg on Tuesday, and he said he could knock a couple hundred dollars of the quote I had too. But, the financing deal was over, so it didn’t make much of a difference anyway. It was interesting to note, however, that the two best quotes I got were from dealers somewhat significantly south of DC and right off I-95. I plan to keep this in mind when I have to buy another car.

Step 10: Arrange insurance

You have to give proof of insurance to the dealer so that they can register the car on your behalf and let you drive it off the lot. I needed to get new insurance for this car that was now in my name, so I got online quotes for that too. Esurance and Nationwide both quoted me over $100 a month, but Geico, using my discount as a Navy Federal Credit Union member, quoted me less than $900 for the year. This was definitely the lowest quote I got, and I was able to set it up over the phone with an agent so that when I got to the dealer I could call with my new car’s VIN number and get the car insurance on the spot.

Step 11: Purchase your glorious new set of wheels

My dad didn’t think I needed his help when I went to buy the car, so I was prepared Sunday morning to go alone. Then I realized that because they knew I was coming the night before, they would have the car prepped for me and perhaps ready to drive off the lot. I obviously couldn’t do that if I drove a car there, so the boy was nice enough to come with me. I was really happy he went because it was nice to have someone else “on my side” during the buying process. He was actually the perfect person to accompany me because he was just as foreign to the process as I was, and he just sat there and let me do my thing (which he is always quite good at). I think that had my dad been there, I would’ve been tempted to take a back seat to the process, and I imagine that the men in the dealership would’ve talked to him more than me. Oh yes, Kyle also provided plenty of entertainment and company for me while I was there, which was great because buying a car is not a quick process.

I carefully signed all my paperwork and managed to get out of there without signing up for an extended warranty (which I had discussed with my dad beforehand). Shout out to my car salesman Shabir Baba, who was really nice and helpful and followed up with me today to make sure everything is going fine with the car.

Step 12: Revel in your grownupness and badasschick self

The car buying process is stressful and there are plenty of places to screw it up. I didn’t quite realize it until I went out to dinner Saturday night and, still in car buying mode, was ready to fight off the waiter and see if he’d throw in dessert for free. But this process was amazingly empowering too. In less than a week I got preapproved for a loan bigger than I’ve ever had in my life, determined what car I wanted,  negotiated a great deal, and bought a brand new car pretty much all by myself. I couldn’t be happier with my decision and I’m so pumped about my new car. You better believe I celebrated with a few dranks and dancing Sunday night. Cheers!