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10 Tips on how to buy your new car smarter

10 Tips on how to buy your new car smarter
Autos
As you’d expect, automotive writers get asked a lot about prospective new car purchases friends and family are looking to make, and the most frustrating part of that might be when we ask them what price range they’re shopping in — and they reply by quoting a monthly payment.

That “$350 a month” you throw at us is not the price of a car. It’s your monthly stipend to finance said car. There is a difference.

But you’d be surprised how many car shoppers don’t have a clue what they’re really paying for their new vehicle. Transport and preparation fees are a mystery to many; some don’t know if they’re being charged dealer “administration fees” or not. Hell, some are unaware of the interest rate on their financing or leasing agreement.

It’s absurd. A one-per-cent difference on a five-year financing-term can represent a couple of thousands of dollars. Depending of your jurisdiction, it could equal the sales tax. The difference on seven- or eight-year terms would, of course, be even greater (and, yes, those everlasting type of automobile loans exist, now).

Buying a car is, for the vast majority of us, the second biggest expense in a lifetime, after buying a house. So it helps to know what you’re really negotiating for that vehicle you’re about to sign for.

You (hopefully) know the MSRP – manufacturer’s suggested retail price – of the new vehicle you’re shopping for because you saw it on the manufacturer’s website. And you know almost nobody pays that since it’s negotiable.

But when dealing with a sales representative, the discussion quickly pivots from MSRP to monthly payments. To be fair, that often is a number we understand, a quick way of mentally budgeting how much we can spend out of our paycheque. But you’re not buying a monthly payment, you’re buying a car, so try to get them to stick to the question: What is the total price of the car? With all the fees – hidden or otherwise – and taxes?

Search for this detailed total on the documents presented to you and analyze it thoroughly. You could be surprised how much of a bargain you’re not getting.

With that total price in-hand, you’re in a better position to decide if you want this or that feature or option. Presented as costing you “only $30 extra a month,” a package group may seem reasonable, but multiplying that amount by the number of payments might show you said package could add a hefty bump to your vehicle’s price.

Why fight tooth and nail to save a couple of hundreds of dollars but fork over $2,000 – 10 per cent of the cost of a $20,000 car – for a sunroof you’ll use less than half of the year?

Air conditioning, sunroofs and heated seats are all great, but we can’t recommend enough investing in safety features that might save you or your loved ones. Blind-spot monitoring; lane-departure warning and assist systems; rear and transverse alerts; automatic emergency braking; and the list goes on.

More and more manufacturers are making these advanced driver-assistance systems (ADAS, in automotive jargon) standard on their vehicles. Think Toyota Safety Sense, Honda Sensing, Mazda i-ActiveSense, Nissan Intelligent Safety Shield and Subaru EyeSight. That’s good news, but if it seems a lot to keep track of — well, it is.

Focusing on the monthly – or bi-weekly, or even weekly – payment diverts attention from perhaps the most important aspect of buying a new car — how much your loan will cost in interest. It’s frustrating how many buyers don’t have a clue, especially because it’s so simple. The higher the rate, the more interest you’ll pay. Even a percentage point can make a huge difference.

Use manufacturer websites, since they’re very effective at comparing different payment scenarios, changing the term financed, and looking at the difference between financing and leasing.

If you do, you might notice choosing a smaller model of car doesn’t make the payments that much smaller. That’s because manufacturers are not keen to offer good interest rates on cheaper models. In fact, rates on smaller, cheaper cars can be two or three times higher than for bigger – and more profitable for dealers – vehicles.

Ideally, no matter what the size of the vehicle, you’ll choose not only the lowest rate, but also the shortest loan period.

Lorraine Explains: Canadians need to smarten up when buying new cars

Let’s shop together for the most popular car in Canada, the Honda Civic. Let’s say you want an LX sedan with CVT transmission, for $22,260 (including all fees, excluding sales tax). And let’s say you choose the manufacturer’s five-year loan at 0.99 per cent; your monthly payment will be $415. You will have paid, after 60 months, $617 in interest.

Now let’s say you’re tempted by a lower monthly payment of $353, made possible by a six-year loan (72 months). Said loan is now paired with a 1.49-per-cent rate. That 0.5-per-cent bump over that extra year translates into twice as much interest — $1,118.

Tempted by the loan that stretches 84 months and its sweet $326 monthly payment? Crippled by a 3.49-per-cent rate, after seven years, this term will cost you $3,125 in interest — almost five times as much interest to save less than $100 a month compared with the five-year loan.

So, yes, it’s helping consumers amortize their cost — if they keep their cars that long. But the issue is when people sell their vehicle before the end of their loan. Thanks to depreciation – which is front-loaded toward’s a new car’s first years – they’ll find they owe more on their vehicle than they can sell it for used.

The gap, called “negative equity,” is something familiar to many owners. Almost 14 per cent of new-car buyers owe more on their existing car loan than the vehicle they’re trading in is worth. the amount you have to pony up before you even start negotiating your next new car. And then there’s the financing bubble.

That’s why, not surprisingly, money experts are not recommending those seven- or eight-year loans offered by some manufacturers like Fiat Chrysler and Hyundai, especially not for vehicles that depreciate quicker than the average. Who wants to make monthly payments on a vehicle for which the warranty’s run out?

That’s it, you’ve picked out your car — and your dealership is offering a very attractive financing rate on it. Maybe even zero per cent. Don’t get carried away yet; first, ask your dealership ‘If I pay cash, would I get a rebate?’ A properly sized incentive could make that low financing rate less of a draw, and you may even find it cheaper to opt for the cash purchase discount, taking the money from your credit line.

Consider a $30,000 SUV, financed over five years at 3.49 per cent. Say the same model, if bought outright, benefits from a $5,000 rebate. The rebate won’t be yours if the dealership is financing your purchase; subtract that five grand rebate from the calculation, and your effective interest rate is closer to 11.16 per cent. Yikes.

What’s been non-negotiable for years – decades, even – are transport and PDI fees. This “all-in” amount is determined by the manufacturer, who collects the first part for channeling the vehicle from its assembly location to its sales destination. The second part goes to the dealership for making your vehicle ready for delivery.

Sadly, those fees are going up much faster than inflation. When CAA-Quebec studied them in 2007, it lamented that while “they rarely crossed the $1,000 mark just a few years ago, they now average $1,200.” That was more than a decade ago. Today, we estimate the average is higher than $1,800, adding about 6 per cent to the average automobile transaction in Canada ($30,000).

When shopping for a new vehicle, consider its freight and PDI fees. You may find a $200 or $300 gap between two otherwise equal brands — anything under $1,600 is a bargain.

If you were shopping for a pair of jeans, liked the price, but got charged an “administration fee” once you got to the cashier, what would you do? Probably drop the jeans and leave the store. Well, dealerships are “authorized” by their manufacturers to charge administration fees. Unlike freight and PDI, though, these fees are negotiable, and can even be written off from the transaction altogether. Some dealerships don’t even think of charging them.

When you’re being shown the full pricing details before you purchase, negotiate hard on those administration fees — until they become a big fat $0.

Since you’ve, by now, got so good at negotiating with your dealership, don’t be shy to ask for some free oil changes or other maintenance benefits . Be aware your dealer is not making too money on the car it just sold to you — they’re planning to profit more when you’re back in the service department.

You would be surprised what your sales representative is willing to fork over if they know it means you’ll be bringing it to them for service.
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