You may already have a good idea of what type of car you want. If not, this is the next step. Getting a great price on a car isn’t so great if it’s not the right car for you. Cars are broken down into the following categories: subcompacts and compacts, family sedans and station wagons, luxury sedans, sports cars, minivans, sport-utility vehicles (SUVs), pickup trucks, and vans. The decision will depend primarily on your budget, who will be using the car (e.g. family size), and for what purpose (business, travel, etc).
Once you know the category of vehicle you want, it’s time to narrow down the field of contenders to just a few. Make two lists, your ideal car and the bare minimum you can get along with. The car you end up with will probably fall somewhere in between these two extremes. Rank the various features in terms of importance, so that you’ll be able to make the best choice when faced with tradeoffs. If you are planning to sell the car at some point, also consider what the next owner will want the car to have. For example, if you don’t get air conditioning or an automatic transmission, it will reduce the car’s resale value. In addition to the information that you can get from a dealer or manufacturer, also collect information from third-party sources, such as crash-test data, lifetime cost data, and other information.
You’ll also need to have a good estimate of what you should expect to pay for the car. In the past, auto dealers had a significant advantage in negotiations because the consumer had very little pricing information. But the internet has changed that. You can determine almost exactly what the dealer’s cost was for any given car, and whether any price rebates or other discounts apply. This enables you to comparison shop between models without having to step foot in any showrooms.
One point about dealer cost is in order. Most people think that the price the dealer paid is called the invoice price. In actuality, the dealer often pays less than the invoice price. The amount of the difference is called the holdback. The holdback will usually be 3-4% of the invoice price. Although manufacturers and dealers would argue that the holdback serves a purpose, its effect is to enable dealers to appear to have one cost while really paying another, lower cost. It’s important to know this because it may make the dealer more inclined to offer you a better deal, perhaps even at or below the invoice price. Manufacturers sometimes also offer dealers rebates (called dealer incentives), that also give the dealer an extra incentive to offer you a better deal.