How to Negotiate the Price of a Car

1. Nail Down Your Budget

Before you even step foot in a dealership, it's important to know how much you can afford to pay. You'll want to consider your monthly payment budget, what you can afford as a down payment and how much you want to pay for the car in total (including loan interest, that is). Having all three of these factors in mind can help you enter the negotiation process with more clarity.

Keep in mind that dealers can sometimes manipulate the monthly payment by offering longer repayment terms. A lower monthly payment may be a better fit for your budget, but you'll end up paying more in interest over the life of the loan.

If you're not sure how to determine your car budget, use an auto loan payment calculator to get an idea of how much you can afford to pay each month and in total based on your financial situation.

You may also consider seeking preapproval with a few lenders to get a clear picture of what you can afford. With a number in mind, you can start researching different car models to get an idea of what they cost and what types of features they have.

2. Come to the Negotiation Prepared

With a new car, it's important to know the vehicle's MSRP (manufacturer's suggested retail price) and push back or look elsewhere when a dealership is adding on a seemingly unreasonable markup. Another thing to know is the vehicle's invoice price, which is what the dealership paid for the car. The invoice price can serve as the ground floor for your negotiations.

When negotiating the price of a used vehicle, look up its value on Edmunds, Kelley Blue Book or NADAguides. These websites can give you a ballpark range of values based on the vehicle's make, model, year, mileage and condition.

Note that if you're working with a dealer, you'll be negotiating based on the retail value of the car. If you're buying from a private seller, you'll use the private-party value. And if you're thinking about trading in your car during the process, you'll use the trade-in value for that vehicle. Typically, the retail value of your vehicle is going to be the highest, then private-party, followed by trade-in value.

With new and used vehicles, you'll also want to look up other dealers in your area and see if they offer the same model with similar features, mileage and other factors. With a few comparable cars, you may be able to leverage that information to secure a better deal.

If you're not comfortable with negotiating in person—maybe you don't feel like you're quick on your feet or you're concerned about getting flustered—you can go through the process online. Dealers typically have internet salespeople you can chat or email with instead of talking in person.

3. Leverage Your Trade-In

If you're thinking about trading in your vehicle, you'll want to know its value so you can maximize your savings. The difference between what the dealer offers and how much you owe on the vehicle will directly reduce how much you have to pay for the new car.

To help with your negotiations, make sure the car is clean and detailed and that you fix minor issues. Having a history of regular maintenance will also help improve its trade-in value.

If you want to get the most for your current vehicle, though, you'd be better off selling it in a private-party transaction. Dealers typically offer less—sometimes thousands of dollars less—because they need to make a profit when they turn around and sell the car.

4. Negotiate New vs. Used Car Prices Differently

If you're thinking about buying a new car, your primary goal is to pay less than the MSRP, or the sticker price that's featured on the car's window. The MSRP may differ from the sticker price because it's determined by the manufacturer, while the sticker price is determined by the dealership and could include additional costs.

You may not have a lot of flexibility to go much lower than the MSRP, but you could potentially negotiate a lower interest rate—some manufacturers even offer 0% financing to buyers with excellent credit.

With used cars, dealers may have more flexibility to lower their price if the car has been on the lot for a long time. In some cases, they may be willing to sell the car at cost just to get it off the lot to make room for more inventory or to meet a sales quota.

5. Know When to Walk Away

Before you enter the negotiation for a car, it's important to know both your ideal price and the maximum amount you're willing to pay. If the dealer isn't willing to offer something within your range or displays aggressive sales tactics, don't be afraid to walk away.

In some situations, even suggesting that you'll walk away may be enough to get the dealer to work with you. But if not, you can go to another dealer in your area.

Note that this is easier said than done if you're on a tight deadline to buy a new car. As such, it's best to avoid waiting until you absolutely need a new vehicle before you begin the process of buying one.