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.