The low monthly payments and the big rebates are out in force again.  Dealerships are financing at low rates and/or giving out $2,000 to $5,000 rebates to entice you to come in and buy a new car.  Remember, their intention is to not actually give you something for free without getting something on the back-end.

Let’s review my top car buying tips:

(1)               Compare the benefits of the rebate versus the low interest rate

Dealerships will entice you with either a rock bottom low interest rate or a big fat rebate on the front-end.  It is never their intention to give you both (unless they can figure out another way to make up their “gift” to you.)  Evaluating the two is real easy.  If you didn’t follow my most important advice (see tip 2) and get pre-qualified before going into the dealership, you will depend on the finance department to arrange for a loan.

Compare the total cost of the car after paying it off with the normal interest rate plus the rebate versus the low interest rate and no rebate.  That will tell you which one is the better deal.

(2)               Get pre-qualified for financing before going to the dealership

To me, this is the most important car buying tip.  It has been my experience that you don’t get the best interest rate at the dealership.  There are too many people making money off of your interest rate.  Therefore the rate is higher.

My greatest loan source is the Pentagon Federal Credit Union (www.penfed.org).  You can get 4.99% up to 72 months on a new and used car loan (up to 60 months on used car).  Now take that rate into the dealership and the rebate.  That could be an awesome deal.

(3)               Look for a new car that is the prior year

This is one of the greatest ways to get a good deal.  If you were looking today for a car, look for an ‘07 instead of an ‘08.  If a car dealer still has an ‘07 on their lot, they are probably very motivated to get that car sold.  Better yet, if the model changed in any way in ‘08, that ‘07 becomes an even better deal.

(4)               Look for a demo

Demos are one of the best buys you can get.  The dealership takes the depreciation hit because of the miles.  Yes, you are buying a new car with some miles.  However, it is that initial depreciation hit that costs you so much money.  Plus, dealerships can get pretty motivated if they have a demo sitting on the lot that is not selling.

(5)               Research ahead of time

If you are taking my advice in #4, then go to www.autotrader.com and find comparable cars that you want with low miles.  This will tell you how the market is valuing the car and give you a baseline as to what is an acceptable deal.

(6)               Try buying at the end of the month

Car dealerships have a quota of cars that must be sold each month.  Hitting those numbers are very important.  When the end of the month comes and those numbers have not been achieved, dealerships get very motivated to sell cars.

We were buying a mini-van for my wife a few years ago and went to the dealership on the last day of the month.  It was a Friday night around 7 pm. This dealership had not hit their numbers.  They gave me more than I could have asked for on my trade-in.  As far as buying the car goes…The sales manager looked at me and said, “What do I have to do to get you to buy this car tonight?  It would be a huge help to get this on this month’s books.”

(7)               Be careful with long-term payment plans

Financing companies are writing loans as far out as 7 and even 8 years.  The benefit to one of these loans is the low payment.  If you can stretch it out over a long-term period, your loan payment will be much lower.  However, there is also an unintended consequence as the result of that long loan term.

You are not paying down the principle fast enough and risk being “under water.”  This occurs when the car is worth less that what you owe.  You really want to avoid that at all costs.  Plus, the interest rate is almost always going to be higher on the longer-term notes.

(8)               Buy Guaranteed Asset Protection Insurance (GAP)

In the process of buying a car, you get bombarded with so many different solicitations.  You can buy a lifetime warranty, a sealant for the paint, a plan to replace tires for the life of the vehicle, etc.  The one insurance I think you should buy is GAP insurance.

If you were to total your car, the insurance company is only going to pay you what they deem the car is worth.  More often than not, that value is a lot lower than what the person owes the loan.  Thus, the insurance settlement would not cover the entire loan.  With GAP insurance, you would be protected from that difference between what you receive and what you owe.  It is a no brainer.

(9)               Watch out for low price vehicles being marketed

You have seen the ads.  Buy this car for this low amount.  You see it and think, “WOW that is a good deal!!”  They use those ads to get you into the dealership. The reality is that it is a pretty stripped down model with hardly any options.  Once you add the options, the price really goes up.

(10)           Dealers are flooded with reposessions

Car and truck repossessions this year are headed for the highest level in at least a decade.  The used car market is getting flooded with these cars.  These cars can be bought for a real good deal.  In fact, I am starting to see many advertisements for big sales of cheap used cars.

(11)           Check out a used car thoroughly

If you are looking at a used car, there are two steps that you want to take.  First, take it to a quality mechanic and pay to have the car checked.  Second, go to www.carfax.com and purchase a full history of the car.  Then Carfax will tell you whether the car has been in a flood, an accident, and if the title of the car is in good shape.  It will also show you how many people have owned the car.

(12)           Be careful with the extended warranties

Dealerships are always selling expensive warranties and rolling the cost into the car.  Thoroughly read the warranties and make sure that is something that you want to do.  In many cases, the extended warranties are not worth it.

(13)           Don’t go overboard with extras

Do you really need that navigation kit?  Do you really need that IPOD hook-up?  OK, let’s say that you really want them.  Most of the add-ons are very enticing.  However, they really drive the price of the car up.  First, determine if you really need the add-ons and that it is just not an immediate gratification thing.  Second, check and see if you can get some of these add-ons outside of the dealership installed.  Many times you will save money getting them done yourself.

(14)           Understand the manufacturing warranty

Take the time and understand your vehicle warranty.  Oftentimes dealerships will have strict guidelines.  They want tires rotated after certain number of miles.  They want the oil changed a certain number of times.  They want the annual services performed.  If you skip some of these guidelines, you could be in a situation where they will not honor the warranty.

(15)           Don’t be in a hurry – shop around

So many times, people will just go to one dealership and buy a car.  Go to several dealerships and have them compete for your business.  This is a great negotiating tool.  Also when going through the negotiation process, don’t be afraid to just walk out.  Also don’t be afraid to ask for a low sales price.  Everyone in the process wants to deal to be done.  You have to start somewhere.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.