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Buying a new car
The best thing about buying a new car
is that you are going to get a car fresh from the manufacturer, with
no stories to tell. New cars are pristine and unmarked with no
hidden histories (usually). Before you begin shopping check prices
at cars.com
or
Edmunds You can compare quotes for free.
Advantages of buying new
Disadvantages of new cars
You will pay more for a new car, but it is not always a huge
difference. Especially if you compare prices to a current year
model used vehicle. I found one Honda dealer who had a used 2006
Altima EX with 9,000 miles on it. The price was $17,995. A brand new
one just like it, at the same dealership, was priced at $18,855.
For less than $900 difference the new car is definitely the
better buy. You will get a car with zero miles that is under the
full manufacturers warranty. You don’t have to be concerned with
whether the car has been crashed, or how hard it has been driven.
With a new car you may also find the interest rate is lower for your
car loan.
In most states the consumer protection laws are stronger on a new
car, too. Your State’s vehicle lemon law may not apply to a used car
purchase.
I have seen cases where the dealer was actually charging more for
the used car, and I have seen people pay it.
Why would anyone do this? Lots of people automatically assume
that a new car is going to cost more, so they only shop for a
used car and never check prices on a new one. Believe me, the
dealers know this, and if they get a chance to charge someone more
for a used car than an identical new one would cost, they will.
That's why it's important to use websites like cars.com
and
Edmunds
to compare prices.
You have to ask yourself, too, why someone would buy a car and
then get rid of it after only 9,000 miles. Did the car have
problems? Was it in a crash? That’s not a concern with a new car.
I’m not advocating that you buy a new car. In many cases a used
car can be a great deal. Just consider both sides of the argument
before making your decision, and be sure to read the Used Car
section.
Things you must know before buying a new car
Once you’ve decided which car to buy there are questions you must
know the answer to, or I guarantee you will lose money.
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What is the dealer’s invoice cost?
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How much holdback does the dealer
receive on this car?
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Are there any rebates or incentives?
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Are there any special finance rates?
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If you are trading a car, how much is
it really worth?
Invoice Cost A new car invoice is simply a billing statement
that the dealer receives from the manufacturer. It details the
vehicle, it’s optional equipment, and shipping charges. This is the
amount the dealer pays the automaker for the vehicle. Many dealers
will show you the invoice and ask you to pay them a small profit.
Don’t do it! The invoice doesn’t always reveal the dealer’s true
cost of the vehicle. Be sure to find out about the dealer’s
holdback, and any applicable rebates and incentives. Discover the
true cost at
Edmunds
Holdback This is a sneaky hidden kickback the dealer receives
from the automaker. Basically it works like this: The dealer buys
the car from the manufacturer for the invoice price. Then
periodically, once per month or once per quarter, the dealer
receives part of that money back from the manufacturer, essentially
lowering the dealer’s cost of the car. Why shouldn’t you get
credit for that savings? The holdback amount varies from brand
to brand, but typically is around 2% to 3%. With the average new car
now costing around $27,000 this can easily make over $800 difference
in the price of the car.
Rebates. Not every car has a rebate. Car makers will
typically put rebates on select vehicles within their model lineup
when sales of a particular model slows, or when unsold inventory
begins to build up in the manufacturer-to-dealer pipeline. Rebates
or incentives can range from a few hundred, up to several thousand
dollars. So be sure to find out what is available. A rebate is a
payment the carmaker makes directly to you when you buy the car.
Unlike other consumer rebates on items like computers and
electronics you don’t have to wait weeks for your to come back to
you. When you get a rebate on an auto purchase you can apply the
rebate right there on the spot. Just apply it to your down payment
if you’re financing the car, or deduct it form the purchase price if
you are paying cash. Never wait for a rebate. Always have it applied
at the time of purchase.
Incentives Also known as “Dealer Cash,” Incentives are
similar to rebates, except they are paid to the dealer instead of to
you. Therefore all consumers don’t always know about dealer
incentives. Be sure to find out if there are any incentives being
offered on the car you are buying.
Special Interest Rates Dealer’s have been pushing low finance
rates lately. Deals from 0% to 3.9% are pretty common right now.
These are rates that you won’t be able to touch at any bank or
credit union. However, special rates are not always a good deal for
you. That’s because you usually have to choose between getting a low
rate and getting a rebate. Remember: If you have to give up a $3,000
rebate to get 2.9% financing you are really paying an extra $3,000
to get that low interest rate. So are you really saving by taking a
special interest rate? In most cases, no. You will almost always
save money by taking the rebate instead of the special financing.
Before you sign anything learn more in Auto Financing.
How much is your trade worth? Be sure you know how much your
trade is worth before visiting a dealership. It does no good to
negotiate a great price on your new car, only to pay it all back by
accepting less than your car is worth on trade. You can learn more
in our negotiating
guide. Start by checking your car’s value
at
Edmunds and cars.com. Be realistic when you value your car. You have to
allow for excess mileage, and any repairs that are needed. Don’t
expect the dealer to give you full retail value, but you don’t have
to accept a lowball offer that may be hundreds or thousands below
what the car is really worth.
Once you determine the invoice price deduct dealer holdback and
any rebates or incentives. This is where your negotiations should
begin. Base your decision on how much over this figure you are
willing to pay, and not how much the dealer is willing to discount
the car.
So how do you find out about invoice prices, rebates, and special
incentives? Before going to a car dealership, first go online.
Research the car you want to buy at sites like Edmunds and Yahoo
Autos. You can find the true dealer cost of any vehicle, and you can
also get firm price quotes from multiple dealers.
For more on how to use the web in your favor be sure to read our
Negotiating Guide.
Resale Value. Even if you’re planning to buy a new car and
drive it for the next 10 years you should still consider the car’s
resale value when buying it. Your needs may change, and you may be
forced to sell. Or the car could be stolen or totaled in a crash.
The resale value will impact the amount you get from your insurance
company. Some car brands that have shown to hold their value better
are Toyota, Honda, Nissan, Lexus, Acura and BMW. Ford and Chevrolet
full size trucks also do well on resale value, as do specialty cars
like the Mustang GT and Corvette.
Develop your “Short List”
This is where you narrow down the different models you are
willing to consider. Do your due diligence with online research and
decide on a few vehicles you would be willing to buy. Ideally you
should have 2 to 3 vehicles on your Short List, but no more than 5.
If you already know the exact model you want that’s even better. Now
you are ready to visit the dealership.
Going to the dealership
I’m a big fan of stealth shopping. Go to the dealership when they
are closed and look over the cars you are interested in. Check out
he sticker prices and options. This is a great way to narrow your
choices without any outside influences form car salespeople.
Once you’re ready to visit the dealership, make it clear to the
salesperson up front that you are not there to buy today, and that
you are researching different cars. Do not sign anything, do not
fill out a credit application, and do not hand over any money,
checks or credit cards.
Evaluating the car
Thoroughly evaluate each car on your short list. Sit behind the
wheel. Does the car feel comfortable? Does it “fit” you? Operate the
controls. Do you get a quality feel? Sit in the back seat. Enough
room? Open the trunk. Enough room? Does the car have all the
features you want?
Take the car for a test drive. Drive each car for at least 20
minutes minimum. Drive on the freeway, and on a curvy road. Does the
car accelerate from a stop and shift gears smoothly? Does it have a
solid feel on the road? Pick a spot and park. Parallel park if
possible. Is it easy to park?
Does the car perform up to your expectations? Take notice of the
following:
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Is the noise level okay?
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Does it brake smoothly?
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Does the steering feel responsive?
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Is the acceleration okay?
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How does the overall comfort feel?
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Does the car handle curves and maneuvers okay?
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Is visibility good? Check the view from the windshield &
mirrors.
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Does the car have all the amenities you want? Sound system,
navigation, etc.
Once you have driven each car on your Short List you likely will
know which car you want. At this point price is likely going to be a
factor. Don’t try to get involved in price discussions while you are
still at the dealership. You’ll have more bargaining power, and more
control, if you wait.
Drive every car on your list before you start trying to negotiate
a price. You'll have more negotiating power if the salesperson knows
you are considering competing cars. Remember, the dealer knows that
buying a car is an emotional process. They will try to draw you into
a negotiation before you are ready. Stay calm and in control if you
want to win the price game. Only negotiate on your terms.
If you want to learn how to get the best price on a new car
follow the instructions in our negotiating guide. A great place to
research cars is at
Edmunds
Invoice Pricing
Why you'll pay too much if you negotiate based on invoice pricing
alone. 5 secret ways car dealers make money, even when they sell a
car at invoice.
Holdback. Did you know that auto dealerships receive a
hidden kickback from automakers for each car purchased by the dealer
from the factory? The amount is typically around 2% to 3% of the
vehicles invoice price. With the average new car costing around
$27,000 that's an extra $500 to $800 per car. Suddenly paying $100
over invoice doesn't sound like as good a deal, does it?
Dealer cash. Rebates are one way that carmakers incentives
the sale of new cars. When you buy a car with a rebate the cash goes
directly to you. Did you know that there are also secret rebates,
known as dealer cash or dealer incentives, that go directly to the
dealer?
These secret incentives are meant to boost the sales of certain
models by giving car dealers extra cash. The theory is that dealers
will pass the savings on to consumers in the form of lower prices
and higher trade in values. It doesn't always work that way. Since
dealers aren't required to disclose the existence of dealer cash it
often results only in increased profits for car dealers.
Advertising assistance. Many automakers subsidize dealer
advertising costs by paying a dealer a flat fee in ad assistance for
each new car sold. The assistance amount is coded right into the
invoice and helps defray a portion of the overhead. Do you think
dealers pass this savings along to the car buyer?
Floor plan assistance. Auto dealers are able to maintain a
huge inventory of vehicles on their lot through a floor plan
arrangement with a commercial lender. When a dealer receives a new
car from the manufacturer the bank pays the manufacturer on behalf
of the dealer, and places the vehicle on the dealer's floor plan.
The dealer then pays a small interest charge on each vehicle until
it is sold. In order to encourage dealers to stock more vehicles
many manufacturers pay the dealer floor plan assistance in the form
of a cash incentive. The amount varies, but is typically around 1
month's interest. This effectively reduces the dealer's true cost
for the vehicle.
Retro bonuses. Limited term incentives that automakers
offer to dealerships for hitting specific sales quotas are often
known as retro bonuses or volume incentives. For example, a dealer
may be given a monthly sales objective of 50 vehicles. Upon hitting
their quota the dealer would be paid a set amount per vehicle sold,
retroactive to the first unit. The amount varies, and can be any
amount set by the manufacturer. Just another way the dealer makes
money that is not reflected in the invoice price.
So how do you protect yourself against these secret, hidden
incentives? There is no centralized database or public record for
most of this information. Your best defense is a strong offense.
Compare prices form multiple dealers using multiple sources. Get
quotes online from Edmunds and Yahoo Autos. It's important to know
how much a dealer paid for a car, but don't stop there. Use that as
a starting basis and find the best deal possible. If you just walk
into a car dealership expecting to haggle for a great deal you will
pay too much.
Exactly what is a car dealership? How does the business
work, and what is the relationship between the dealer and the
factory? Car dealership's are not owned by auto manufacturers. In
fact, most states have laws prohibiting such ownership. Most auto
dealerships are locally owned businesses operated by independent
businessmen. There are a few major chains that control groups of
auto dealerships across the country. Some of the major dealership
groups are Auto Nation, Sonic Automotive and CARMAX.
Dealers are chosen by the factory and given franchise rights to
sell that brand in their area. The dealer owns or leases the
building and sales lot. Dealers buy cars directly from the
manufacturer and resell them to consumers. This business model
worked for years until the advent of the internet. Automakers today
would like to be able to sell cars directly to consumers while
bypassing the local dealers. However years of political influence
have resulted in powerful franchise laws protecting dealers and
preventing automakers from selling directly to consumers online. If
that ever happens we may see a drop in prices. Until then you can
still use the web as a powerful tool for car shopping and saving
money by researching your car purchase, getting competitive price
quotes, trade in values, and even arranging financing.
Trading a car that you're upside down in. If you want to
buy a new car but you owe more on your old car than it is worth then
you are upside down. Also known as negative equity. You can trade
your old car even if you owe more than it's worth, as long as you
are not in a severe negative equity situation.
4 ways out of negative equity
If you have excellent, well established credit you can expect to
get a new loan for up to 130% of MSRP. The window sticker
price shows MSRP, or Manufacturer's Suggested Retail Price. If the
dealer has any type of add on or supplemental sticker, which is a
small sticker next to the original window sticker just ignore it.
The figure that counts is on the main factory sticker. If the
vehicle has an MSRP of $20,000 you may be able to finance as much as
130%, or $26,000. Essentially what you are doing is refinancing your
negative equity in your new loan. This is an expensive way to buy a
car, but it can be done if you are in a situation where you need to
get rid of your old car and buy a new one.
If the new car has a rebate or incentive that can be used to
overcome negative equity, too. A rebate is considered cash down, so
you are getting a free down payment by buying a car with a rebate.
The best way to overcome negative equity is with cash down. By
using cash to buy yourself out of an upside down situation you are
saving money. Why roll finance charges from your old car over to
your new one? If you have the cash available this is your best way
out of negative equity.
If you can get more for your car by selling it yourself then do
it. Just because a dealer thinks you owe more on your car than it is
really worth doesn't mean someone else will. Try listing it on eBay
or Cars.com first. Just be sure that you have realistic
expectations. If Edmunds shows your cars value is $8,000 don't
expect to get $12,000 just because that's how much you owe.
Watch out for added fees. Always insist on an out the door price
including all fees and taxes. This way you can easily compare offers
from competing dealers.
Some common added fees
Destination & Handling. This is a bogus charge if it is
added to the price after the fact. Some dealers will try to con you
by charging you twice for destination and handling or freight. The
MSRP price on the window already includes a fee for destination and
handling. Some dealers will try to scam you by adding an extra
charge to the final price for destination charges. Don't pay it.
DOC Fees. Another bogus charge. Most car dealers have a
charge pre-printed on their sales forms for DOC fees. Also called
documentation fees, dealer services, or acquisition fees, a DOC fee
is an added charge that goes directly to the dealership. If you ask
what the DOC Fee covers you'll usually get a vague answer about
paperwork, processing, notary requirements, records retention,
overnight mail and the like. The fact is that the DOC Fee is simply
additional profit for the dealership. Not all dealers charge a DOC
Fee, but some charge up to $500. That's why you should always insist
on out the door pricing.
Title & license. These are legitimate fees added to the
final sales price. These fees go to your local & state authorities
for registering the car, issuing a certificate of title, & buying
license plates. Dealers are prohibited by law from marking up these
fees. You should only pay the exact amount mandated by your local
laws.
Sales tax. What can I say? You have to pay taxes. Just
make sure you are only being charged tax at the rate set by your
local government. Some states impose sales tax on the total sales
amount, while others charge tax only on the trade difference. That
is, the net amount after subtracting your trade in. Make sure you
know how the tax is calculated in your area.
Emissions Fee. If you live in an area that requires
emissions testing you may have to pay a fee for that.
That should cover any added fees. If anything else is added to
the price after the fact it's probably bogus.
Locating a specific car
With all the research info available online you may know the
exact car you want to buy before you ever visit a dealership. Even
down to the exact model, trim and options. What do you do if the
dealer doesn’t have the exact car?
Your options:
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Locate car yourself online.
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Have the dealer locate a car for you.
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Wait on a unit in transit
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Place an order for future delivery
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Choose a different car.
If the dealer doesn’t have the exact car you want your best
option is to locate one yourself using the web. Sites like Edmunds
and Yahoo Autos have powerful search engines that allow you to
quickly contact other dealers in your surrounding area to find that
exact car. Simply decide how far you are willing to travel to get
the exact car you want, then enter the specific car with options and
color combinations you want. Your request goes out instantly. This
is by far the best and easiest way to locate a specific car.
You can always just let the dealer locate the car for you.
Dealers transfer inventory with other dealers all the time. Say you
want a black 2006 Camry, but your local dealer only has white and
silver in stock. The local dealer can find a dealer who has a black
one in stock and trade the silver one for it. The only problem is
the other dealer isn’t going to give up the black one unless it
benefits him. Is the car you’re getting distressed merchandise? Most
dealers will only trade cars that they are having trouble selling,
or one that has had problems. The car you are getting may have been
damaged in shipping, or it could have several hundred miles on it
already. That’s why I don’t recommend allowing one dealer to locate
a car for you at another dealership
The salesman is probably going to pressure you into buying a car
that is in stock, since that means a sure sale right away.
Beware of locator fees. If a dealer tries to charge you an
extra $100 to $300 to locate a car they’re gouging you. Car dealers
are on a national network, and it doesn’t cost them anything to
locate a car. The only additional fee to the dealer would be
transporting the car back to the dealership. This is something most
dealers do at no charge in order to make a sale.
When you let the dealer locate the car you are buying a car
sight-unseen. It’s better to locate the car yourself. Even if it
means driving to another dealership to get the car you want. Your
local dealer may not have the car you want, but another dealership
may have 3. If you go in person you can pick the nicest of the 3. If
you let your local dealer trade inventory with another dealer do you
think you’ll get the nicest one?
Try to find out where the car is coming from. You can always just
go to the dealer that has the car and buy it there.
If you can wait ask the dealer if there is a car in transit or
being shipped soon like the one you want. Dealers won’t always be
forthcoming with this information because they want to make a sale
right away. You have to ask; sometimes more than once. You may find
there is a car equipped exactly like you want that is expected
within a few days.
You can always have a dealer special order the exact car you
want, but this takes time. Be prepared to wait 2 to 3 months. This
way you can get the exact options and color you want, and you’re
getting a factory-fresh car with no miles.
You can always choose a different car, but that’s a decision
you’ll have to make. Car salesman will try to steer you in this
direction anyway. They know that you are more likely to buy from
them if you buy a car that is there in stock. Watch out for
criticism of the model or color you want, especially if it’s not in
stock. The story changes depending on what’s available for sale.
If you’re looking for a car that is in high demand and limited
supply your best option is to locate one yourself. Competing dealers
won’t trade inventory on hot-selling cars, and ordering a high
demand car can prove futile. You may get promises only to find your
car never arrives.
If you do decide to have one dealer locate a car and transfer it
from another dealer follow these rules.
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Make sure any deposit required is refundable.
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Don’t sign anything until you see the exact car.
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Inspect the car before you buy it.
If a dealer is transferring a car for you from another dealer
you’ll normally have to pay a small good-faith deposit up front.
This is standard practice. A reasonable deposit is no more than
$500. This shows the dealer that you are committed to buy the car if
they go to the time and effort to get it.
Just make sure that your deposit is refundable if the car arrives
damaged, or is not as you requested.
Make sure your deposit is credited to the sales price or refunded
to you when you finalize the deal.
Don’t sign anything until your car arrives and you inspect it.
Some dealers will try to get you to sign a loan contract before they
locate a car for you. If you sign a contract you’ve bought the car.
Leave a deposit, but never sign a contract until you see the car.
9 ways dealers make money on a new car sale
With all these revenue streams it’s auto dealers are making huge
profits. Not every sale will include all 9 revenue streams, but a
dealer can make thousands just off 1 or 2. Here’s how to protect
yourself and keep your own money. Find the new car you want on Be
sure to take advantage of cars.com
and
Edmunds
to help get the best price,
You must know what dealer cost is on the car you buy.
Don't stop there. Find out how much holdback the dealer gets and
whether there are any rebates or secret incentives that lower the
dealer's true cost of the vehicle.
Get competitive new car pricing from multiple sources in
order to negotiate the lowest price possible. Car dealers are
entitled to a reasonable profit, but if you let a dealer make
$2,000, $3,000 or $4,000 on you they will.
You have to know the real value of your trade. A salesman
may offer you$2,000 below wholesale book value for your car hoping
you'll want to negotiate based on trade allowance. Car salesmen will
make an extremely low initial offer for your trade knowing
that you will never consider this price. They just want to draw you
into a negotiation to arrive at a price you should have received to
begin with.
Financing is a huge profit center for auto dealers. Did you know
that a dealer can easily make $2,000 just on your car loan.
Dealers receive a kickback from financial institutions on your car
loan based on the interest rate charged. The bank sets the rate, and
anything the dealer charges above that is pure profit. For instance,
if the going rate for your car loan is 5.9% APR the dealer is free
to increase the rate to 8.9%. The dealer gets to keep the
difference. That can easily add $2,000 to $3,000 to the cost of your
loan.
Markups on extended warranties are another major source of
profits for your dealer. The warranty may only cost $500, but the
dealer is free to charge whatever you are willing to pay. Why pay
$1,500 to $2,000 for a $500 warranty just to enrich car dealers.
Watch out for credit life and disability insurance. The finance
manager will push this on you, and try to make you feel guilty for
not buying it. Most people will never use it. If you really need it
you can get it much cheaper from your own insurance agent.
Gap insurance is a special policy that will pay off your loan if
your car is declared a total loss. If your car is stolen or totaled
your insurance will only pay book value for your car. You still owe
the balance of the loan. Gap insurance will pay off the balance of
your loan. If you're making a large down payment, or trading in a
car that is paid for you may not need gap insurance. The only time
gap helps you is when you owe more than your car is worth, and you
have a total loss claim. Ask your car insurance agent if you need
gap, and compare their price to your dealer's.
Does your dealer charge a DOC fee? This is just pure
profit for the dealer, and many charge $300 to $500 per car. You get
zero value for it! Most dealers have a DOC fee pre-printed on their
sales forms. Most consumers never question it, or even realize they
are paying it. They just assume it is an official government fee.
It’s not. Always insist on an out the door price so that you are not
gouged by a DOC fee at the last minute.
How rebates work
Rebates may help you get car financing, and they may some money
on your initial purchase. But a rebate will not save you any money
over the life of the car. Cars with rebates depreciate faster than
cars without rebates.
Compare the overall cost of different cars with the cars resale
value and reputation for quality. Don’t make a buying decision
solely on the rebate.
A rebate can save you money, but buying a car with a rebate is
not always the best deal. Carmakers put huge rebates on cars they
are having a hard time selling. If a car has a $5,000 rebate, then
you have to ask what is wrong with this car?
Hondas have been one of the top selling cars for the past 20
years, and Honda has never had a rebate. What does this say for the
quality of the brand, and their ability to sell cars?
At the same time Honda has maintained it’s status as being among
the best cars for resale value. When a car carries a huge rebate
it’s resale value will fall the minute the rebate goes into effect.
Some other brands that seldom or never have rebates are Toyota,
Lexus, BMW, Acura and Mercedes.
Rebates will help you if you’re trading in a car that you have
negative equity in. Banks treat a rebate like cash down for
financing purposes.
Avoid buyer’s remorse
When you buy a new car the last thing you want to do is wake up
the next day and feel like you’ve made a huge mistake. Car
dealerships are not like other retailers. You can’t just return a
car if you don’t like it. Dealers are governed by specific laws
regarding new car sales. Once a car has been sold as new once, it
can not be sold as new again. Even if it has only been driven around
the block and returned immediately. The law states the car is now a
used car, and has to be sold as used. That’s why a car depreciates
as soon as you drive it off the lot. That’s also why you can’t just
return a car the next day.
It’s important to research your new car purchase carefully. Be
100% sure of your decision before you sign anything. If you make a
mistake and buy the wrong car it will be an expensive mistake to
correct.
If you find out the next day you could have bought an identical
car for $2,000 less it’s too late. When you buy a car you sign a
binding, legally enforceable contract that will stand up in court.
The time to do research and price comparisons is before you buy, not
after.
No 3 day rule
According to the
Federal Trade Commission, there is no cooling off period when
you buy a new car.
I’ve encountered many people who think there is some kind of law
that gives you 3 days to return a car, cancel the sale, and get your
money back. This law does not apply to 99% of all car sales.
In fact, there are only 2 specific circumstances that would allow
you to invoke the 3 day rule.
If the salesman comes to your home to close the sale and finalize
the paperwork then the sale falls under door-to-door sales which are
governed by the 3 day rule. That’s why most car dealers will insist
that you come to the showroom to finalize the deal.
If you buy a car at a tent sale, car show, or any other location
away from the dealer’s main place of business the 3 day rule does
apply.
These are the only 2 instances where you do have 3 days to return
a car. If you go to the dealership, buy a car, and sign the papers
the deal is done. There is no 3 day cooling off period.
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