Buy a New Car Without Haggling and Save

There’s a way to buy a new car without negotiating and get a price that might be better than what you could get from hours of old-fashioned haggling. Try purchasing your new car through the dealership’s Internet department.

Here’s the process. If you know what vehicle you want, contact the dealer by e-mail and describe what you’re interested in. If they have it in stock, they’ll get back to you. The prices they quote may be surprisingly low. Word has it that Internet departments are compensated based on the volume of vehicles they sell, rather than the markup on each sale. By contrast, the salesperson on the showroom floor is paid a commission, so the dealership will be less enthusiastic about discounting a vehicle you buy through the showroom floor.

If you want to try the Internet route, start by researching the makes and models you’re interested in. Consider features, capabilities, mileage, safety, insurance costs and resale value. Decide what you want, preferably in detail. Your chances of getting a good deal are better if you can specify the make, model, features, colors and even the frilly options. Okay, a DVD player for the second row seats isn’t a frill; it’s a necessity when you have hyperactive kids. But you know what we mean.

Then, research prices. Go to sites like Edmunds.com (free, with ads) or Consumer Reports (no ads, but you need to subscribe) to get an idea of the dealer’s costs and what other buyers have been paying for the same vehicle in your zip code. Be sure to research total costs of ownership as well as sales prices. (Total cost of ownership, sometimes called “true cost to own,” is a five-year tally of the major expenses of owning a car, like depreciation, financing costs, insurance premiums, maintenance and repair costs, taxes and fees, and fuel expenses.)

Next, go to the showroom. No, we’re not kidding. You should test drive all vehicles that you’re interested in. Another reason for going to the showroom floor is that you’ll be able to ask to any questions you have. You might even get an idea of the price the dealership would ask if you went the traditional haggling route.

Line up your financing before you start shopping. Trying to get financing through the dealer may not be the lowest cost option. If you arrange your financing in advance, you'll very possibly get a better deal. (Hint: try a credit union.)

Now, prioritize your choice of vehicles. Identify the dealers nearby that sell your top choice. Send them an e-mail describing in detail what you want. American manufacturers offer a large variety of options, so your description could get lengthy. Still, it’s better to be specific because you’ll be more likely to get what you want. Foreign manufacturers are more likely to offer a choice of styles with largely fixed options packages—although this is less flexible, it makes shopping by e-mail easier.

The dealers that have your preferred car in stock will get back to you quickly. You may be pleasantly surprised by the prices they quote. If you see a deal you want, call and let them know you’re coming.

Last September, we tried this. Not every dealer had our top choice in stock. The first dealer to respond offered a price that was 8% lower than the best price advertised in the local newspaper. The second dealer offered a price 10% lower than the best newspaper price. The second dealer made a sale about three hours later. When you consider that the average price of a new car is somewhere around $28,000, discounts like these can fund half your annual contribution to an IRA. (For more information about IRAs, read the discussion of retirement accounts in Uncle Leo's Den.)

Of course, the price advantage you might get would depend on supply and demand. If you want the hottest car in the market, the Internet department won’t be selling it. But if you want something that's in lower demand, perhaps at the end of the model year when the dealer hopes to clear out old inventory, you might pocket a fair amount of dinero. Can you haggle with the Internet department? It’s a free country and you can try. But if they’ve offered you a very good deal to begin with, they may not be able to do much more (or anything). Even so, you could still have a very good deal.

Not everything is improved when you buy through the Internet department. If you have a vehicle to trade in, you’ll end up dealing with the same old bluster, bluffing and snake oil nonsense that you wanted to avoid. But if you get a good price on the new car, this is more tolerable. Another annoyance is that if a dealer doesn’t have the make and model you want, they’ll probably try to interest you in something else they have in stock. But it’s up to you whether you follow up. Since you’re probably e-mailing from the comfort of your home, you’re only under the pressure you place on yourself. A third annoyance is that if you send an e-mail to a dealership, they’ll put you in their customer address book and e-mail you for months about every car you didn’t want to buy. Just remember that you control the delete button.

It’s harder to use the e-mail technique to buy a used car. One used car won’t be strictly comparable to another used car, and each needs to be individually researched and checked out. But if you’re in the market for a new car, think about buying through the Internet department.

Crime News: A caper with toilet paper. http://www.wtop.com/?nid=456&sid=1150769.

For more shopping ideas, visit the blog carnival of shopping: http://www.become.com/pocketchange/2007/06/carnival_of_shopping_16.html

The True Price of Affordable Loans

We all know it's a bad idea to let an eight-year old loose in a candy store. Temptation and self-restraint will be mismatched, and cavities, hyperactivity and weight gain will follow. Today's credit market is about the same.

The U.S. economy is awash in credit. Vast quantities of the stuff roam around in every direction, like the enormous herds of bison that swept across the prairies 150 years ago. The abundance of credit puffed up the real estate markets until they bubbled and popped. In the financial markets, the ready availability of credit has enabled hedge funds to accumulate vast investment portfolios funded by borrowed money, and more recently has financed a flurry of "private equity" deals, in which private investors and corporate managements buy up major public companies using credit that banks line up to provide. All this activity has pushed blue chip stocks to record levels. But are these prices sustainable? Only time will tell.

For consumers, there's no shortage of credit, either. Credit card offers in our daily mail kill entire forests. If you have any unused equity in your home, banks rush to offer home equity lines of credit to burn up that equity and convert it into debt payments for you. Car loans now have longer and longer terms in order to make them "affordable" (meaning small enough for you to pay each month). All of this comes at a price, and it isn't cheap.

Car loans illustrate the point. Back in the bad old days when grown men wore leisure suits, cars were usually sold with three-year loans. If you assume an interest rate of 6%, a three-year loan increases the dollar cost of the car by about 10%. For example, a $25,000 car ends up costing about $27,500.

Today, many car loans have terms of five to six years. A six year loan at 6.5% (rates on longer term loans are higher than rates on shorter term loans) will increase the total dollar cost of the car by about 20%. The same $25,000 car ends up costing in the range of $30,000. Of course, the monthly payment on the 6-year loan is much lower--maybe 40% lower (about $425 a month for the 6-year loan, versus approximately $750 a month for the 3-year loan). That's why people take out the longer loans. But they end up paying more for the same car.

A related problem comes up with real estate mortgages. Some mortgage lenders are now offering 40-year fixed rate mortgages as a way to qualify people to buy homes. Arithmetically speaking, a 40-year mortgage costs many more dollars than a 30-year mortgage (around 30% more; so if you're talking about a $200,000 mortgage, that's an extra $60,000 for the same house).

You don't plan to stay in the house for 40 years, so you ask why does it matter? Because the rate at which you build equity in the house is slower with a 40-year mortgage than with a shorter mortgage. The early payments in any mortgage are mostly used to pay interest charges. Only a small portion goes to reducing the principal balance of the loan. As you make more mortgage payments, the amount that goes to reducing the principal gradually increases and you begin to build equity in the house (equity being the value that is yours). A 40-year mortgage with an interest rate of 6% increases your equity in the house by about 8% of the amount of the mortgage loan after the first ten years (about $16,000 for a $200,000 mortgage). A 30-year mortgage with the same interest rate will increase your equity in the house by about 16% of the mortgage loan in the same time period (about $32,000 for a $200,000 mortgage). Given that housing prices are now flat or dropping in most areas, paying down the principal of the mortgage is pretty much your only way to build equity. The monthly payments on a 40-year mortgage might be about 8% or 9% lower than the monthly payments on the 30-year mortgage. But you pay a large price in terms of slower equity growth to get that reduction.

For more information about the risks of financing your home purchase with "affordable" mortgages, please read our May 10, 2007 blog, "How the Right Mortgage Loan Helps You Build Wealth" (http://blogger.uncleleosden.com/2007/05/how-right-mortgage-loan-helps-you-build.html).

Remember that you will get a finite amount of money in your lifetime--basically, what you earn, what you gain from investments, anything you inherit, and your lottery winnings (haha, just a joke for 99.9999% of us). The more of your finite lifetime income you spend on interest payments, the less you will have for steaks and champagne. This is a zero-sum game: either the banks get your money, or you get it.

The reason why banks crowd around throwing credit at you is because they stand to make big money lending to you. From your standpoint, the problem with that is the big money comes out of your pocket. Borrow if you must, and borrow for a good reason. Getting an education is a good reason. Buying a house is a good reason. Buying a car is a good reason. But not every loan is a good loan. Buy less house or less car if necessary to keep your borrowing under control. You can't borrow your way to a comfortable retirement. You can save your way to a comfortable retirement. See Uncle Leo's Den at http://www.uncleleosden.com/Introduction.html.

Celebrity News: Paula Abdul and the risks of owning a Chihuahua--http://www.nbc4.com/entertainment/13364020/detail.html.