How Much Should You Pay? Incentives and Rebates

Car manufacturers use two kinds of incentive programs to spur car sales: factory-to-dealer incentives and customer rebates.

Factory-to-dealer incentives: These are essentially cash rebates from the manufacturer to the dealer, triggered by car sales. These programs are usually unadvertised to the public.

Dealers can pass the cash along to the customer if they choose, but don't hold your breath. So in negotiating with a dealer, you want to know whether the dealer has this ""secret"" cash available.

Customer rebates: Car makers sometimes offer rebates directly to the customer.
Ask the dealer to credit your rebate immediately to reduce the sales price of your car (and thus the amount of sales tax you'll pay), suggest the folks who publish CarDeals.

Links to current incentive program listings:

• CarDeals is a biweekly newsletter that details auto rebate and incentive programs offered by the major auto manufacturers. The CarDeals newsletter offers one of the most comprehensive listings of these incentive programs.
  
  

• Edmund's Consumer Information
  -- click on ""Incentives and Rebates.""
  
  
  

• Intellichoice, the largest publisher of consumer automobile reports in the United States, also publishes information about incentives.
  

Your Next Car: To Buy or Lease?

The boom in auto leasing has been nothing less than astonishing. In 1990, just 10 percent of the people who shopped for new cars opted to lease instead of to buy. Last year, it was 32 percent. Leasing began as an option for businesses and buyers of luxury cars. Now it's common across the board -- partly because it can cost less per month to lease a car than to purchase one with an auto loan.

There's no slam-dunk answer to the question of whether to buy or lease. It depends on how you'll use the car and what the car means to you: Is it part of your personality or simply a motorized mule? Do you bond with your car or love the excitement of something new?

Consider Buying If...

You expect to drive the car for at least five years or more. Once you pay off your auto loan, you'll have transportation without writing regular monthly checks.

You think you might drive the car for more than 18,000 to 20,000 miles a year. High mileage can be expensive on a lease.

You want to save money in the long run, and you are looking only at your cash costs. In theory, you could lease your car and invest the difference between the low lease payments and the higher payments you'd owe on an auto loan. In that case, leasing would be cheaper. But if you don't invest the difference, then buying is cheaper.

You're in the market for a used car. Thanks to the popularity of leasing, dealers are flush with cream-puff cars that were driven for two years and then turned in. Look for one that's "manufacturer-certified" as being in top shape.

Consider Leasing If...

You want a more expensive car than you could otherwise afford. Monthly payments on leases are generally lower than on comparable auto loans. Also, leases don't require big down payments.

You want to drive a new car every two to three years and don't mind having permanent monthly payments.

Six Ways to Minimize Leasing Costs

When you take a lease, your monthly payment is based primarily on the difference between the car's initial cost and its expected value when the lease is up. For example, if you lease a car with a sticker price of $20,000 that's expected to be worth $12,000 when you turn it in, you'll consume $8,000 in value over the life of the lease. To hold your lease costs down:

1. Don't start by discussing how much the lease will cost per month. First bargain down the price of the car, then use that price for figuring monthly costs. For example, you might negotiate that $20,000 car down to $18,000. You'd then be consuming only $6,000 in value over the life of the lease. That would reduce your monthly cost.

2. Look at several different leasing packages from one or two dealers. Some lessors charge lower fees than others.

3. Estimate how many miles you're likely to drive. The lease will typically cover the first 12,000 to 15,000 miles per year. You'll pay an extra 10 to 25 cents for every additional mile driven, when the lease is up. If you know you'll drive more than the basic amount, it's cheaper to pay for the excess miles in advance.

4. Check your credit union. Many offer cheap leases to members.

5. Keep the car for the full term of the lease. You'll pay a significant price for returning the car ahead of time. The disclosure statement you get from the dealer will tell you how the cost of breaking the lease is figured.

6. Drive carefully. There's a charge at the end of the lease for unusual wear and tear on the car.

Lease and Buy

When your lease is up, you can turn in the keys and lease another car. Or you might decide to buy the car you've been driving, usually at a price that was set in advance in your leasing contract.

Do some research before you buy: Used-car prices are weak today. The contract might call for a higher price than the car is worth. You can find used-car prices in the Kelley Blue Book ($9.95, available in bookstores or by calling 800-258-3266; prices can also be found at www.kbb.com and www.edmunds.com).

If the car's market price does indeed turn out to be lower than the price in your leasing contract, you can often bargain the dealer down.

Finding the Cheapest Lease

Given two leases for the same car -- with identical down payments, mileage allowances, and other terms -- here's how to tell which one is best, according to Randall McCathren of Bank Lease Consultants in Nashville:

If you intend to keep the lease for the full term and then turn the car in, the best deal is the one with the lowest monthly payments.

If you intend to buy the car at the end of the lease, add up all the monthly payments plus the end-of-lease purchase price. The best deal is the car with the lowest total cost.

Auto Insurance Made Easy: the Basics

You have shopped, bargained and groveled to find a good car at a good price. But before you can zoom off the lot in your new wheels, there's one more tiny detail: insurance. Comprehensive or collision? Low or high deductible? And where can you find the best deals? It is enough to take the shine off your brand wheels, but don't let it. Buying car insurance just means mastering a few basics.

Every car insurance policy has a deductible, which is the amount you must pay toward any damage to your car before your insurance company will begin picking up the tab. Policies also have a limit, which is
the maximum amount your insurance company will pay in the event of an accident.

Insurance policies are classified according to how much your insurance company will pay per person and per accident. So if your policy has a $100,000/$300,000 limit, your insurance company will pay up to $100,000 to each person involved in the accident, with a $300,000 maximum for the entire accident. You can lower the cost of your policy by choosing a high deductible -- but then you'll have to pay more if you do have an accident.

The trick, then, is getting the lowest deductible and the highest coverage limits you can afford.

Most states require property damage liability, bodily injury liability and medical payment insurance. If an accident is your fault, property damage insurance covers damage to another car, and bodily injury liability covers injuries to passengers in your car and other cars involved.

Medical payment insurance covers you and your passengers, regardless of whether the accident was your fault. If your state requires it, find the highest coverage limits you can afford. If your state doesn't require it, don't just brush it off. Remember that if an accident is your fault and you're not fully insured, you may be stuck with a whopping bill.

Whoever financed your car loan will probably require you to get comprehensive and collision insurance; comprehensive covers you when your car is broken into or vandalized, and collision covers you -- really the car itself -- when you are in an accident.

Because insurance rates vary from company to company, it is worth shopping around before you buy. Keep these tips in mind:

• You can lower the cost of a policy if you insure more than one car, or if you have a renter's or homeowner's policy with the same company.
  
• Consider adding coverage to your policy to protect you if you're in an accident with an uninsured motorist.
  
• Reduce your rates by parking your car in a locked lot, or buying a car with such safety features as air bags and antilock brakes.
  
• Drive carefully; drivers with clean records can get lower rates.
  
• If you drive a limited number of miles, ask your company to lower your rates.
  

Shop the Web

For a list of sites through which you can easily access online auto insurance, click here. Then check out ultimate Car Buying Guide.

Understand Car Loans and Leases

"Bait and switch", "adjusted capitalized costs", "residual values", "money factors": in the car financing arena you'll face confusing jargon and the potential for misunderstanding. Knowledge is your best defense.

Financing versus Leasing: The Basics

When you finance the purchase of a car, you typically make a down payment and borrow the rest. As long as you make your payments, you are the rightful owner of the car. With a lease, you don't pay for 100 percent of the car; you only pay for what you use, as measured by depreciation. So you never actually own the car.

For example, if a $10,000 car will be valued at $6,000 at the end of four years (residual value = $6,000), the $4,000 difference represents the depreciation cost. In this example, $4,000 of value will be "used up" over four years. With a lease, you pay for the depreciation, certain fees, plus interest on the full value of the car. You never own the vehicle, the leasing company does, but you have the right to use the vehicle during the lease term. So at the end of the lease, if you'd like to own the vehicle, you'll need to pay off the residual value.

Whether leasing or taking out a car loan, you are creating a new financial obligation in your life. So if you are overburdened with other debts, consider driving a used vehicle rather than a new one. It's usually a much less expensive alternative.

Financing the right way:
Always try to prearrange financing through a bank or credit union before you visit a dealer to negotiate price. Arrange for financing based on the MSRP (full retail "sticker" price) of the car or type of car (midsize or subcompact, for example) you'd like. Should you ultimately buy the car for less, your car payments will drop accordingly.

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These online sites offer car loans and loan info:

CarFinance.com, brought to you by E-Loan; or call 1 800-598-3272

PeopleFirst.com offers good deals for people with excellent credit.

Microsoft Carpoint brings you advice on shopping for a loan.

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If you insist on financing the car through the dealer, or can't qualify elsewhere for a bank loan, do NOT share this personal information with the dealer until after you have established the purchase price. Should the dealer learn that you are desperate for a lease or a loan, your bargaining power will be severely damaged and you will overpay for the car.

Another dealer ploy: should you fail to first negotiate a set price, the dealer will sell you "affordable" monthly payments that will continue far longer than they should. And don't let the salesperson know your financing limit. According to Grady Cash, author of Conquer the 7 Deadly Money Mistakes, the salesperson will then try to price the car so as to hit that limit. If they ask about your financing limit, indicate that financing isn't a problem. Say, "Let's get back to discussing the purchase price."

If you have already secured a good financing deal from your bank or credit union, there's no harm in asking the dealer to try and beat the terms with a better offer. Be sure to get everything in writing, cautions Anderson and Palmer of Edmunds.com. Then either analyze the terms yourself or have an independent expert go over the terms, such as Fighting Chance's James Bragg.

Tips for Negotiating a Car's Price

Do you dread negotiating? Relax. You don't have to haggle if you don't want to. The idea is to find an approach you are comfortable with -- it may well be the no-haggle, take-it-or-leave-it approach that many buyers successfully employ.

But no matter how you decide to negotiate, never feel you must commit to a deal if you're uncomfortable. Walk away and give yourself time to think, free of any pressure. In fact, walking away from a deal can be a powerful way to get better terms.
Job number one is to establish a fair purchase price. Don't discuss financing at all, either via fax, over the phone or in person. Make it clear that you won't talk about payments or financing until after you settle on a fair price. Should the dealer learn that you are desperate for a lease or a loan, your bargaining power will be severely damaged, and you will overpay for the car. Should you fail to first negotiate a set price, the dealer will sell you "affordable" monthly payments that will continue far longer than they should.

In addition, don't let the salesperson know your financing limit. According to car-buying expert Grady Cash, author of Conquer the 7 Deadly Money Mistakes, the salesperson will try to price the car so as to hit that limit. If they ask about your financing limit, indicate that financing isn't a problem. Say, "Let's get back to discussing the purchase price."

In person:

Visit a dealer but don't make an offer, counsels Cash. Ask for the dealer's "out-the-door" price -- this is the price that includes sales tax plus all fees and charges. Compare it with other quotes you may have received, and the target price you've calculated. If necessary, continue the negotiation in person or, better yet, by fax or phone.

By phone

Negotiating by phone is "much easier than sitting through an hour of sales hype," according to Cash. Find area dealers in the phone book. Ask for the sales manager.

Cash recommends you say something like, I'm willing to pay $15,000 for that car and not a nickel more. If that's okay, I can be there in a half-hour with a certified check. "They'll either say yes, no or make a counteroffer," Cash says. "No matter what, you're in control." Another approach he suggests: Ask the dealer to beat the "no-haggle" (Web-based) price quote by $500, otherwise you'll buy from the "no-haggle" dealer.

By fax

Car-buying service Fighting Chance strongly recommends what they call the fax attack, in which you use the fax machine to pit numerous dealers against one another in a bidding contest for your business. Call area dealerships and ask each for the fax number and name of their sales manager. Fax the sales managers a description of the car model you want, and ask that they respond with their best price quote. Then fax the dealers again to see who will beat the lowest quote from round one. This can be an especially effective approach if you hate face-to-face negotiations or otherwise worry that you won't get the best available price.

No-haggle

Web-based dealer referral services and true no-haggle dealerships such as Saturn and Daewoo eliminate the anxiety associated with dithering over price, but in exchange for a "stress-free" buying experience, you will pay more than you need to for a car -- full sticker price for a Saturn, for example.

Most of the car-buying Websites bill themselves as "no-haggle" sites, and simply arrange for an affiliated dealer in your area to contact you with a "no haggle" price quote -- convenient, yes, but not necessarily the best possible price. (Truth is, you can often negotiate with those dealers!)

Another approach if you really hate haggling or don't care to take on the dealers yourself: consider one of the consumer-friendly car buying services.

TIP: YOUR TIME IS MONEY, so figure it in: if you're worth $20 an hour after taxes, and it'll take 15 hours of extra pricing research, dealer visits and negotiations, a no-haggle approach could be worth $300 to you.

How Much Should You Pay? Options

Optional equipment is either factory installed, or installed at the dealership by the service department. Mark Eskeldson, author of What Car Dealers Don't Want You to Know, founder of the consumer-friendly Website CarInfo.com, and a former dealership auto mechanic, says many people are paying as much as $3,000 more than necessary for a new car, thanks in large part to overpriced, sometimes unnecessary options.

Retail markups on dealer installed optional equipment tend to be large -- as much as 25 to 65 percent (compared with 12 to 15 percent on factory installed options). Though less convenient, for certain features like car stereos and security systems, you may be able to do better by having an independent ""after-market"" installer do the job, rather than the dealer.

Fortunately, you don't have to accept dealer-installed options that you don't want. On the other hand, to get the factory-installed options you do want, you may be forced to buy others, since factory options are often grouped together into different ""trim"" packages.

These trim pachages help limit the number of available options (less complexity reduces manufacturing costs), so you probably ""won't be able to go through a long list of features and cherry-pick the ones you want,"" says Rick Popely on Cars.com. So carefully weigh features you want against what you really need; don't spend $3,000 for a bunch of factory-installed features when you only want the anti-lock brakes. You may even need to consider a different model to get what you want without paying for things you don't want.

Dealer-installed options can be difficult to price, even when you know the dealer invoice prices, largely because labor charges vary widely, depending upon where you live. Honda, for example, doesn't even divulge invoice prices of dealer-installed options.

So how do you know whether you are getting a square deal on dealer-installed options?
If an option is available from an independent after-market installer, call for a price quote (look in the Yellow Pages). Otherwise, get ready to play detective. Try calling the parts and repair department of another dealer that sells the model you want. Ask how much they would charge to install that particular option, with a breakdown between the parts and labor. You might also check out the price for the same option on a competitive car model. For example, price Toyota Corolla options to get a better idea about corresponding options for a Honda Civic.

More on options at Cars.com.

How Much Should You Pay? Costs You Can Avoid

When buying a car there are always those extra charges that jack up the cost of your new wheels. The good news is that some of these costs are avoidable. The not so good news is that you can't avoid 'em all.

You probably can't avoid the following costs, but you can make sure they're reasonable.

• Sales tax (varies by state)
  

• Licensing & registration fees (call your state's department of motor vehicles for the right dollar amount)
  

• Destination charge (usually $400 to $450)
  

  
  

• Documentation fee: reasonable amount is $50. $250 is not, according to experts Greg Anderson and Ingrid Loeffler Palmer at Edmunds.com.
  

• Advertising fee: This is a legitimate fee, according to Fighting Chance founder James Bragg.
  

  Dealers must chip in to pay for regional television ads, so they pass the cost on to the buyer. However, the experts at Edmunds suggest you not pay more than one percent of MSRP, or $200, whichever is less. Certainly don't pay more than two percent.
  

• Emission fees (About $100 retail)
  

Try to avoid the following costs. You shouldn't pay for:

• Extended warranties: Buy a car with a good service history. In many cases, filing a claim and receiving reimbursement or payment is just too much of a hassle. See the FTC article on extended warranties.
  

• Dealer prep: The car dealer is already getting paid a fixed amount by the factory to prepare the vehicle for sale, according to Mark Eskeldson, author of What Car Dealers Don't Want You to Know.
  
  

• Credit insurance (to pay off your car loan should you die.) ""You don't need it if you have life insurance,"" says Jean Ann Fox, director of consumer protection at the Consumer Federation of America.
  

Moreover, Edmunds experts Greg Anderson and Ingrid Loeffler Palmer strongly suggest you also avoid:

• Delivery and handling charges (D&H) -- "nothing more than added dealer profit"


• Fabric coating -- "Do your own with a $5 bottle of Scotchgard"


• Teflon coating -- "No longer needed because of clearcoat paint used on cars today"


• Rustproofing -- "It is unnecessary and can harm your car. You're adding weight, which increases gas mileage, and it can void your warranty in some cases."

How Much Should You Pay? Five Steps to a Fair Price

To get a fair deal, you need to first figure out how much the car you want should cost -- establish this price before mentioning a trade-in or financing to the dealer. (Should you fail to first negotiate a set price, the dealer will sell you "affordable" monthly payments that will continue longer than they should.)

So how do you figure out a fair price?
Try this five-step approach:

1. Start with the dealer base invoice price for the model you want.

2. Subtract any dealer incentive.

3. Add 4 or 5 percent back so the dealer can make a living (This "markup" represents dealer profit. Edmund's suggests adding back just 3 percent; Kiplinger's recommends 4.5 percent). The average dealer markup on autos actually sold is around 7 percent.

What kind of markup exists on the no-hassle, no-haggle cars?
(Many auto Websites offer referrals to ""no-haggle"" dealers, but they really aren't.) Saturn's non-negotiable markup is about 11 percent; Daewoo, the other true no-haggle dealer, marks their Lanos model up around 17 percent.

4. Try not to pay full retail price for options.

Add in the dealer invoice cost of factory-installed options, plus a reasonable markup -- not more than 5 percent or so. (If you only have access to the retail price for an option, add in 90 to 95 percent of retail.) dealer-installed options are another story.

5. Add in other unavoidable costs, such as destination charges, licensing and registration, sales tax, etc., to get a final "out the dealer's door" price (the price you pay to drive the car off the lot). Make sure you don't pay for avoidable charges.

Note that this price is before any trade-in allowance and before any customer rebate. Again, you don't even want to mention a trade-in or financing until after you reach an agreement on the purchase price.

Helpful Car Pricing Links

Here are some of the best online resources to further help you determine a fair price.

Fighting Chance car-buying service.

Edmunds pricing information (click on make and model in New Car Prices)

Kiplinger Car Finder: If you know you won't be making the calculations yourself, this tool automatically calculates a suggested maximum target price (excluding optional equipment). Unfortunately, pricing is not available for all car models.

Choosing a Used Car: Reviews and Reliability Ratings

Here are some sites that can help you narrow down your choices, save money and find a reliable used car.

• Best overall value winners (search by model year and vehicle class) from Intellichoice.
  
  

  
  

• Most dependable used cars: Click on "long-term dependability" at Cars.com.
  
  

  
  

• Consumer Reports good bets and models to avoid. ($2.95 a month to subscribe)
  

Used-Car Reviews and Reliability Ratings

Use some caution regarding used car reviews: for older models, many online sites only have the original new car reviews in their archives, rather than up-to-date used car information.

For genuine used car reviews and unbiased reliability ratings, check out these Websites:

• Consumer Reports online discusses reliable used cars within various price ranges -- or, you can search by model (members only, $2.95 a month).



• At Edmunds online you pick a manufacturer, then a model and year, and get scores (0 to 10) for safety, reliability, performance, comfort and value.

Choosing a Used Car: How to Avoid a Lemon

When shopping for a new car, if you stick with the top makers, there is little chance you will wind up with a lemon. The tougher task is to get a fair price. With used cars, you still want a fair price, but your risk of overpaying is probably lower than with a new car. Top priority is to avoid a lemon. We'll show you some ways to improve your odds.

This year, for each new car or truck that gets sold, about three used vehicles will be resold -- all told, about 45 million used cars and trucks
will be sold in 1999, according to industry experts.
Used-vehicle sales will be about equally split among new-car dealers, independent used-car lots and private transactions (classified ads).

According to Oregon-based CNW Marketing/Research, the average private car will be sold for $4,300; the average sale on an independent used-car lot will be for $7,300; and the average used car at a new-car dealer will go for $12,200. These prices reflect the average age of the vehicles being sold, with many of the used cars sold by new-car dealers having just come off lease.

• When considering a used car, choose models with good service histories: check independent used car reliability ratings.
  
  

• Find yourself a good mechanic (ask car-savvy friends or acquaintances for referrals) and ask him to check out your prospective purchase. Have him check for the specific problems most cited for that particular model in the reviews. Also have the emissions tested before you buy.
  
  
  

• Buy a car that still has warranty protection, such as fleet cars, demos, executive trade-ins and off-lease vehicles.
  
  

• When you buy a "factory-certified" used car, you can expect to get extra warranty protection. Factory-certified cars are generally high-end models coming off lease. They typically come with a one-year factory warranty.
  
  

• Check your local classified listings; the used car market is so local, Kelley Blue Book values are not always fully reflective of local differences, says Fighting Chance's James Bragg.
  
  

• Avoid used cars coming from rental agencies; they've had countless drivers, and you can bet some of them drove the car pretty hard.
  
  

Choosing a New Car

In your search for a new car, this Buyer's Guide is your homebase. So bookmark the page, and keep coming back whenever you are ready to take the next step in the car buying process. We're with you every step of the way.

As you move from site to site, following our links to independent online reviews, have a ballpark idea of what you are looking to spend ($20,000 to $25,000, for example), and identify two or three different models that you think you'd be happy with. But don't just go by what you read, test-drive prospective models before you buy; you can make an appointment for a test drive over the phone.

If you can't seem to get a good deal on your first choice, move on to your next. But if you have your heart set on one particular car model, that's okay too.

TIP: Don't forget to consider insurance costs when choosing among models. Call your insurance agent for rates or check out these online auto insurance resources.

The following links and tools can help you narrow down your search:

1. Browsing for a Model

Just enter your criteria, and Kiplinger's Car Finder spits out suggested models.

Browse cars by category in Microsoft's Carpoint.

Find unique rankings, including most fuel-efficient cars, most likely to be stolen models, even best-selling colors, at Cars.com.

2. Best and Worst Lists

J.D. Power and Associates best initial quality listings

Consumer Reports online($2.95 a month to subscribe -- and worth it) talks up ""good bets"" as well as lemons.

Intellichoice best overall value winners. (you can select model year and vehicle class; also best cars over and under $20,000 and best truck over and under $18,000)

3. New-Car Reviews and Road-Test Reports

Kelley Blue Book also has highly respected, independent reviews.

Consumer Reports' graphical comparisons show you at a glance how car models stack up against their competitors, plus new car reviews and new car reliability forecasts ($3.95 a month)

Buy it New! How Much Can You Afford?

For most families, only housing costs exceed transportation costs. Unlike most homes, however, brand new automobiles don't appreciate, they depreciate -- as you use 'em up, their value drops. Expect it to cost at least $6,000 per year to drive a new car, according to Wisconsin-based consulting firm Runzheimer International (this figure includes insurance, depreciation expense, maintenance and other typical costs over the first four years or 60,000 miles).

If you are well on your way to a secure financial future, go ahead and splurge on a new car. But if you would use a credit card to make the down payment, as would nearly half of those polled recently by Autoweb.com, you may want to click here to find out about a tried-and-true way to save $2,000 per year on car costs.

Lenders like to see no more than 28 percent of your gross income go toward housing. And they want you to limit total debt payments (credit cards, mortgage, student loans, car payments, etc.) to around 36 percent of gross income. Keep in mind that mortgage interest is tax-deductible, which effectively lowers your housing costs. So if you earn $50,000 and you're paying $1,000 per month on a mortgage, that leaves about $500 per month for all other debts -- including car payments.

Remember that even if lenders think you can afford a new car, that doesn't mean you can buy that new car and put money away to secure your future. Lenders look to get paid back -- they don't particularly care whether you are saving for retirement.