Five steps to the best car deal

Whether you are buying new or used, you'll save money by doing your homework and having a strategy in mind when you go car shopping. Here are the five steps you need to know:

Look for a good value

Automakers are offering rebates, special pricing programs, low-interest financing, and other sales incentives on a wide array of new models. Such offers can save you hundreds or even thousands of dollars. But it's important to remember that the most attractive incentives are often on the slowest-selling models, and there are usually good reasons people aren't buying them.

Look for vehicles that give you the most for your money. See the Best new-car values for good all-around models that have relatively low owner costs, have done well in our testing, and have demonstrated a very good track record of reliability. If you can find a good incentive on one of those models, or on other models that Consumer Reports recommends, then you're on your way.

Also consider a used car. Late-model used vehicles, in particular, can be some of the best auto values you'll find. A car that's only three years old or so has already taken its biggest hit in depreciation, which makes it much less expensive than a comparable new model. Most new cars, for example, lose about 55 percent of their value in the first three years, compared with 20 percent over the next three. Plus, a late-model used car can have relatively low mileage and be equipped with modern safety features. Insurance costs and taxes will also be less, and the manufacturer's warranty might still be in effect.

Moreover, Consumer Reports' Annual Auto Surveys have shown that overall reliability has improved in recent years, making buying used much less risky than it once was. Rust and exhaust-system problems, for instance, have ceased to be major concerns for modern vehicles. Still, a car that hasn't been well maintained is a wild card. So to minimize your risk, always have a used car inspected by a qualified independent mechanic for hidden damage or needed repairs before buying.

Set a target price

For a new car

The price on a new car's window sticker is simply a suggested price set by the automaker. A buyer prepared with accurate pricing information can often get a vehicle for much less.

To get the lowest price, start with a figure that's based on the dealer's cost. To calculate that figure, you need the dealer-invoice price, any behind-the-scenes dealer sales incentives from the manufacturer, and the holdback (essentially a rebate to the dealer from the automaker). Dealer-invoice prices can be easily found on many Web sites and in pricing guides, but you'll have to do a little more digging to find the various incentives and holdbacks.

Consumer Reports New Car Price Reports ($14) are one option. Each report shows you all three factors: the invoice price, any national or regional dealer sales incentives, and any holdback. It also includes the Bottom Line Price, which factors all of those figures to give you a good place to begin your negotiating. Or you can look up current sales incentives and holdback amounts yourself at some of the auto-pricing Web sites.

A reasonable target price is about 2 to 4 percent over the Consumer Reports Bottom Line Price or dealer's cost, depending on the demand for the model.

It's helpful to check your target price against quotes provided by dealerships through auto-selling Web sites. They're free, and there's no obligation to buy. They tell you what price you can easily get, and if it's below your target price, it gives you more leverage in bargaining.

For a used car

The first step in determining a fair price for a used car is to look up its "book value," found at auto-pricing Web sites such as Edmunds.com and Kelley Blue Book (www.kbb.com) or in Consumer Reports' Used Car Price Reports ($12). The retail price approximates what you might expect to pay when buying from a dealer; the wholesale price shows how much you can expect to get for a car when trading it in. A private seller's price will probably be somewhere between the two. To get the most accurate estimate, be sure to factor in any options as well as the vehicle's mileage and condition.

To see what others are asking for similar cars, check out the ads in local newspapers and classified-ad publications and on online used-car selling sites, such as Autobytel.com, AutoTrader.com, or eBayMotors (www.motors.ebay.com). But remember that the listed prices are only the asking prices, not necessarily what people are paying. The exception is eBay, which shows the actual sale prices for completed auctions.

Find the best financing

It's critical to comparison shop and prequalify for an auto loan before buying. That allows you to keep the financial arrangements out of the price negotiations at the dealership. Otherwise, your choice of loans is restricted to what the dealership can offer you, and many dealers mark up the interest rate over what you actually qualify for. That "interest-rate bumping" can cost you hundreds or even thousands of dollars more over the term of the loan.

Compare interest rates at various financial institutions, such as banks, thrifts, and credit unions. Also, call car dealerships in advance to check for any special promotions.

The figure to focus on is the annual percentage rate (APR). For comparison, you can get a quick read on prevailing rates at Web sites such as Bankrate.com, E-Loan (www.eloan.com), and LendingTree (www.lendingtree.com).

Try to keep loan lengths as short as possible. A three-year loan costs you far less overall than a four- or five-year loan at the same interest rate. But you need to balance the total cost of the loan against a monthly payment you can afford.

Negotiate the lowest price

If you're buying from a dealer, the salesperson will probably want to focus on how much you can afford in monthly payments. Don't go down that road. It allows the dealer to lump everything together: the price of the car, trade-in allowance, and financing, if needed. By doing that, he can manipulate the numbers, giving you a good price in one area while overcharging you someplace else. In the end, that could cost you more overall. Instead, negotiate everything separately. First, focus on the price you'll pay for the new car.

The best way to get a great deal is to get several competitive bids from different dealerships. At each, start by stating your rock-bottom target price and tell the salesperson that you want the lowest markup over that price. Also tell him that you'll be doing the same with other dealerships so that he knows he must be competitive.

Never negotiate under pressure. A common tactic is for the salesperson to tell you that someone else is interested in the car you want, implying that you need to act quickly. Even if it's true, don't rush into a deal; there are always other cars out there. And don't let a sales incentive keep you from negotiating. The incentive comes from the automaker, not the dealer. So there's no reason you shouldn't get the incentive and a low price, too. Finally, double-check the final numbers and terms in the sales contract before you sign it.

If you're buying a used car from a private seller, use ads and published book values to show the seller that you know what the car is worth. Begin by offering slightly less than what you're willing to pay and move up from there. Bring up any cosmetic flaws or minor equipment problems to justify making your lower offer. If you've already had a mechanic inspect the car, point out the cost of any recommended repairs and use that as a bargaining chip.

Whether you're buying from a dealer or private seller, remember that you're in charge. Sometimes the most effective negotiating tactic is the willingness to head for the door.

Get the most for your trade-in

Before you go to the dealership, assess the value of your vehicle (see step 2), focusing on the used-car wholesale price. It also helps to take the car to a couple of used-car dealerships to see how much they'd be willing to pay for it in a direct sale.

Because appearance is important, it pays to spruce up your vehicle before you have it assessed by a dealer. Either give it a thorough cleaning yourself or take it to a professional detailer, where cleaning usually starts around $100. If your car needs repairs, get them taken care of before you trade it in. And it might make sense to get small dents and scratches fixed by an auto-body shop.

Once at the dealership, wait until you've settled on a price for the new car before discussing your trade-in. You should have printouts from several pricing sources to support the value you calculated. Tell the salesperson that you simply want what you know the car is worth and that the new-car deal isn't final unless you get a satisfactory allowance on your trade-in.

If you feel you're being lowballed, you can always sell it to a used-car dealer. Or you can sell the car yourself, which will probably get you a higher price. But if you need the trade-in to make your down payment, you'll have to sell your current car before you can purchase the new one.