• Don't negotiate from the MSRP (Manufactured Suggested Retail Price). That is a bogus number. You should never negotiate from the top down.
  • Negotiate from the Dealership Cost, which is available at dozens of websites and the dealership itself. Negotiate from the bottom up.
  • Get pre-approved for your car loan before you go to purchase a car.
  • Always get the "out the door price" before you make a committment, so you know exactly how much the car cost.

Three questions will determine how much car you can afford. 

1. How much does the car cost?
2. How much of the cost are you going to borrow?
3. How much is the interest rate?
Once you have a checking account and a credit card, and presumably a job, the next step to becoming an adult is to buy a car. Perhaps you walked into a car lot and saw the most incredible 2009 Lexis Infinity with Sun Roof, GPS, Leather Seats and more bells and whistles than you can ring or blow. You fall in love. You want that car. You must have that car! 

The first thing you need to do is remember that the car cannot love you back. 

In fact, she will take up with whoever comes up with the cash. There’s a name for that.

Now we’re not trying to discourage you from owning a nice car. But this is your first car, so unless you have a ton of money, buying an expensive first car is a bad idea. For one thing, you will probably scratch it, dent it, wreck it or screw up the engine one way or the other. Sorry, but that’s a fact. So consider your first car to be a practice car, and set your sights a bit lower. When you move up in the world and manage your money well, you’ll be able to afford your Lexis in a few years. In the meantime, even a much less expensive car will probably require you to take out a car loan. 

The Car Price

If you are capable of reading this sentence, you are capable of doing a little car price spying. You want to find out, more or less, a reasonable price to pay. There are several websites you can go to where you enter the information about the car you want to buy, hit enter, and get a complete breakdown of how much the dealership paid for the car, and how much they will make on the sale. 

Remember that when the dealer shows you the invoice, it already includes a profit for the dealership, anywhere from a few hundred dollars to more than a thousand. When you negotiate your price, start from the dealer cost, not the MSRP. In other words, negotiate up from their cost, instead of down from the asking price. The asking price, or MSRP, is created by fiction writers to make it seem like you are getting a deal. You are not. When you go with information, you will be treated with respect and get a fair price, instead of being treated as an ignorant rube at a crooked carnival. 

As one dealership manager once told us, “the only way to make money in this business is to lop off a few heads.”  

If you love the car company, however, and wish to contribute to their bottom line, walk in blind, trust everything they say, and sign whatever papers they put in front of you. 


In the interest of keeping things simple, plan on coming up with 10% of the final cost of car as a down payment. If your credit is poor it could be more, and some cars require higher deposits, but this is a good rule of thumb.

Why, you ask, do the banks and credit unions require a deposit? Because a lot of people stop paying their monthly loan installments when they lose their jobs, get divorced, or just get sick and tired of paying every month. The financial institution has already paid the dealership the full price of the car, so they are stuck without a car and nobody paying them back for their generosity in loaning the money. They have two choices: break your knees or take back the car. In most cases the choose to take back the car. If the car is damaged, or driven too much, the bank may end up selling it for less than the amount they loaned out, thus losing money on the deal. Your down payment helps to reduce that loss, which is why a higher down payment often means a lower interest rate. 

All You Need to Know
About Car Loans
For Your Information
Quick Tips

Okay, so now that you know what kind of car you want, and how much it will cost, it’s time to shop for a car loan. Most people get the order wrong, and shop for a loan AFTER they shop for a car. If you do that, the car dealership will be happy to find a loan for you. They will invite you to sit down with their “Finance and Insurance (F&I)” guy, take your application, and make you a loan offer. It might be a good offer. It might not. How would you know? Just keep in mind that many car dealerships make more money from financing their cars than they make on the sale of the car. 

There are a number of online sites that allow you to shop for the lowest loan rate. This can be misleading, because without an actual application – and credit check – they can’t determine your rate.

Contact your local bank or credit union and ask them what their car rates are. They will give you a range, such as, "as low as 5%." That means that if you have great credit, you can get a 5% loan. However, if your credit is not perfect, you could pay a lot more. In order to find out exactly how much they would charge, you need to fill out a loan application.

Your loan is actually a three-headed creature, consisting of the:

1.Loan amount The higher the loan amount, the higher the monthly cost.

2.Interest Rate The higher the interest rate, the higher the monthly cost.

3.Payment Period They shorter the repayment period, the higher the monthly cost.

You can play with these numbers with a calculator, on the internet, or with the loan officer at the bank or credit union. It’s fun. The interest rate probably won’t change as you play with the loan amount and payment period, but you can adjust those two until you come up with a combination that works for you.

Getting Approved for the Loan

You must be 18 years old to legally sign a contract. So if you want to buy a car before you are 18, you need to find a co-signer, who will then become the ONLY ONE responsible for repaying the loan. If you stop paying for the loan, you will not only lose the car, but also the good will of somebody who thought enough of you to co-sign for a loan. Something to consider.

A good credit record will help you to get your car loan approved easily, at the lowest interest rate, and with more choices of how long to repay. 

You will also need a source of income.

The information in your credit report, along with your income, assigns you a score. If you don’t get an A or a B score, you will pay up the yin-yang. Every month. For the life of the loan.

Find out what information and documents the financial institution wants, such as proof of employment, and put it all together in a folder, or at least a paper clip. Bring it with you when you apply.

You can also apply for car loans online, in just a few minutes. If you’ve done some research, and the loan rate looks reasonable, go for it. 

Remember, loans rates can only be compared as APR – annual percentage rate. The APR is all that matters, because it takes into account any peculiarities that might show up in a particular loan. It is the only apples to apples comparison.

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