10 Things to Know When Shopping for a Car

There are 250 million registered passenger vehicles in the U.S. today — and just 115 million American households. According to government statistics, 57 percent of those households have two or more vehicles (9 percent have none).

It’s clear that for the vast majority of us, cars are essential tools that allow us to conduct our very busy and increasingly spread-out modern lives. They ferry us back and forth to work, they move our families from place to place, they help us complete our chores and purchases, and sometimes, they even let us get away from it all.

Before you decide on a car, you need to prioritize your needs and consider what kind of vehicle will help you best satisfy them. Here are 10 things you need to know before signing on the dotted line:

1. What You Want (and Need)

Know what you want, before you start looking. It will save you a lot of time and could save you from a very expensive mistake.

Take an inventory:

• What is the purpose of most of your driving?
• Are you looking for mileage, size, comfort and/or flexibility?
• How long do you expect to keep the vehicle?
• How often will you drive it?
• Will you be commuting?
• Will you be hauling your kids and their friends around?
• Is it a second car for shopping and errands?
• Are there very young or very old drivers in your household?
• Will you be taking it on long trips requiring a lot of luggage?
• Or is this the sporty model you’ve wanted for years?

Be honest about both your needs and your desires, and find the balance that is comfortable for you. You’ll also want to research different models, options and safety statistics.

2. Your Budget

While a car may be an essential tool, it’s also an expensive one. And unless you have stacks of cash — and even if you do — you need to figure out what you can afford to spend. After your mortgage or rent, your car payment is likely to be the next biggest item in your budget. So calculate carefully, and know what your finances will allow. You may need to cut other expenses to make room for a car loan.

Experts recommend you spend no more than 15 percent of your total monthly budget on all of your automotive expenses — including licenses, fees, taxes, insurance, maintenance and gasoline. The point is to make a realistic estimate before you buy.

» Learn More: Can I Make a Car Payment with a Credit Card

3. New or Used?

Almost 13 million new vehicles were sold in the U.S. in 2011, along with an untold number of used cars. So which path is right for you? It depends on how you answered Numbers 1 and 2 on this list.

Used cars make a lot of sense because, obviously, they are less expensive. In addition, automobiles are built better now than they were in the past, so used cars retain their value and durability a lot longer than they used to. Also, many used cars are returned to the dealer after a lease and are in great condition. They may even come “certified,” meaning their manufacturer will renew their warranties.

If you are considering a used car, don’t be afraid to check some of the used-car lots in your vicinity. There are approximately 120,000 used-car dealers in the U.S., doing $70 billion worth of business annually. In an attempt to stay competitive with dealerships, many have adopted modern sales methods like finance options and leasing. Check the accident and repair history on any car that interests you, via firms like CARFAX or Autocheck, before beginning any serious negotiations.

You may also want to check the Internet, newspapers or local bulletin boards. Millions of cars change hands every year in private sales, with the biggest advantage being the lower price. Of course, there are greater risks as well: The car’s quality may be questionable, and you have little recourse if something goes wrong with the vehicle. Be sure to ask the seller for all of the vehicle’s maintenance records, and have it checked out by a mechanic whom you hire.

However, if you can afford it, there’s nothing quite like the allure of a new car. The odometer has barely moved, the upholstery is spotless, and there are no dings, dents or rattles. You can customize it just the way you want it, and it comes with a factory warranty. But it will cost you — the average price of a new car sold in the U.S. is around $28,400.

4. Buy or Lease?

If you have decided on a new car, you may want to consider the pros and cons of leasing.

• Monthly payment is generally lower than a new car.
• Low, or no, down payment.
• New car every few years.
• Lower sales tax, registration and fees.
• Tax advantages, if used for business.

The disadvantages of leasing:

• Monthly car payment that is never paid off.
• Penalty if car is turned in before lease expires.
• Mileage limit.
• No equity in the vehicle.
• Major financial decision every time lease expires.

In financial terms, buying a car and owning it for seven to 10 years almost always costs less than leasing one.

If you have decided to lease a car, go to Number 5. Otherwise, skip ahead to Number 6.

5. How to Negotiate a Lease

When you buy milk or gasoline, there’s no room to negotiate the price. Not so in the world of automobiles, where almost everything is negotiable. But you need to understand the industry jargon and how to recognize a good deal from a bad one.

Your monthly lease payment is based on the difference between the vehicle’s selling price — its capitalized cost — and what its worth would be at the end of the lease term — its residual value. This amount will be financed at a particular rate of interest. The lease rate — or money factor — will be determined by your credit score. So there is no one-size-fits-all pricing for leasing a car; dealers expect you to haggle. You may be able to get a lower monthly payment for a higher down payment, or a lower down payment for a higher monthly cost.

Research a car’s true costs to the dealer and what people are paying to buy it at the end of a lease. Two of the leading car price authorities are the Edmunds Car Buying Guide and the Kelley Blue Book. Use this knowledge to help you negotiate your lease terms and payments. Always shop around at other dealers, and make them compete for your business.

6. Shop for Money before You Shop for the Car

If you plan to buy your car with a loan, first go to your local bank or credit union to check out their new-car and used-car loan rates and to get pre-approved for a loan. This not only will give you a good idea of the interest rate you’ll be paying, but it also will give you added confidence when negotiating the price for the car. Although you’re likely to get a better rate with a credit union than a bank or a dealer, always give the dealer the chance to beat the terms you get from your credit union or bank.

Once you get pre-approved for a loan, you have the luxury of time — usually about a month or more — to shop around, knowing your financing will be in place when you buy.

7. Your Target Price

The Internet has shifted the advantage to the buyer. Not long ago, car dealers had the upper hand because they had most of the information about car pricing, but today all of that data is available online. Both Edmunds and Kelley have websites where you can find the dealer’s cost for any vehicle, as well as rebates and incentives. Use this information to set a target price when you visit the dealership. It may not be what you wind up paying, but it gives you a realistic starting point.

Also, once you know your target price, it will give you the confidence you need to indicate to a dealer that you are a serious buyer and not one to be taken advantage of. Focus on the dealer’s invoice price and not the manufacturer’s suggested retail price (MSRP). Be ready for the dance of offers and counteroffers. If you are shopping with your spouse, make sure that the two of you speak with one voice and are willing to walk away if you don’t get a deal you can live with. Today, the buyer has a great advantage, as the recession has severely cut into car sales over the last few years.

8. Know the Value of Your Trade-In

The value of your current car will help you determine what you can afford to pay for a new one. You may decide to sell it yourself, or trade it in at the dealership. Again, do your homework and know what your old car is worth. You will almost always make more money by selling it to a private buyer, but that takes time and hassle. A dealer trade-in is more convenient, but don’t expect top dollar. Use your trade-in as another tool in your negotiating toolbox.

9. The Fine Print

You’ve closed the deal with the sales manager and agreed on price and terms. Now you have reams of paper to plow through for hidden extra costs. Know which fees are standard and which ones are there to benefit the dealer. Expect to pay sales tax, title, vehicle registration and delivery charges, but don’t be intimidated or rushed into signing your contract if you see something you don’t like. Be prepared to kill the deal if things like “dealer prep” fees or “rust proofing” are not taken off or reduced.

Also, don’t let a dealer talk you into buying an extended warranty. You can just as easily put the same amount in a dedicated savings account for maintenance. And remember, you likely have a few days to rescind any contract you sign.

10. Your Rights

The federal Magnuson-Moss Warranty Act, passed in 1975, governs warranties on consumer products, including automobiles. It stipulates the legal requirements of a warranty offer and gives consumers the right to elect a refund, repair or replacement of any product or component that contains a defect or malfunction.

In addition, every state has a “lemon law.” These are statutes that provide compensation when a vehicle fails to meet standards of quality and performance. State laws vary and may not cover used cars or leased cars, but will generally cover new cars that come with a warranty.