How We Happily Bought Our Latest Car

Marina's car's air conditioning broke, again! From an economic perspective we should have just fixed it but her car was crappy and life is to be enjoyed. So we decided to get her another car. We assumed it would be a used car but much to our mutual surprise we ended up buying a new car, mostly because the cost difference between a new and used car just wasn't all that great. Still, a car is a huge purchase and something that needs careful attention. Below I walk through the ten steps we used to figure out how much we were willing to pay, what cars made sense and how to get the best price.

Step 1 – How much should we spend on a car?

I asked Marina "How much would you be willing to pay, every day, in order to own a car you would really like?" I made it clear that I was just talking about the cost of the car and wasn't including taxes, insurance, fuel, maintenance, etc. Thinking of handing out money every single day somehow makes huge car prices more real and in fact Marina was quickly able to give me a very reasonable sounding number. My general assumption is that we want to keep a car for ten years so I took her answer, multiplied it by 365 days and then multiplied that by 10 years.1 We both realized that the resulting figure was way more then we wanted to spend and after discussing it we came up with a budget that was 32% less than our original calculation.

Step 2 – How do we pay for the car?

I think taking a loan out on a depreciating asset is lunacy2. Therefore, several years back, I made a blind guess as to how much we would want to spend on replacing Marina's car and saved up that much money. The amount we saved actually turned out to be more than we ended up spending. But in any case, the result was that we would buy the car in cash. And of course, now I'm starting a new savings pool for her next car a decade hence.

Step 3 – Putting Together a list of Used Car Options

Given how much money one typically loses driving a car off the lot it seemed to us to make more sense to buy a used car and let someone else get both that 'new car smell' and huge depreciation. So our first stop was Consumer Reports "Reliable Used Cars" article. The article lists the year, make and model of all of CR's most highly rated reliable used cars grouped by price. I discussed the list with our mechanic at Scott Sherman Automotive and he agreed that all the cars listed were very reliable but he pointed out that if something did go wrong parts for some cars were a lot cheaper than others. He specifically suggested staying away from all European cars as well as Nissans for this reason. His recommended brands, strictly from a cost of ownership perspective, were Toyota, Honda and their affiliated luxury brands Lexus and Acura.

Step 4 – Narrowing Down the List

Keeping his advice in mind Marina and I went through the list of cars and found that Marina's preferences fell into two categories – 4-6 year old 'fancy' sedans and 1-3 year old 'nice' sedans. Marina thought about it and decided that on balance she would rather have a car with less 'history' and thus less chance of problems so we looked at the newer 'nice' cars. In the end we picked three cars that looked good. Since we couldn't be sure what specific used cars we would find in the Seattle area it seemed useful to have multiple acceptable choices available. At this point I should have checked insurance rates but I sheepishly admit that I didn't. All the cars we looked at were super successful family sedans so I figured insurance rates would be o.k. In the end, for whatever it's worth, insuring the car we bought increased our premiums by 30%. That may sound high (and I certainly will be comparison shopping soon) but keep in mind that before insuring the new car we had no comprehensive or collision coverage because our existing cars just weren't worth enough to bother. For more information on how we pick our auto (and renters) insurance see my article here.

Step 5 – Checking Used Car Prices or How We Ended Up Wanting to buy a New Car

Both Kelly Blue Book and Edmunds provide used car prices broken down by feature, condition and area. So this gave us a ball park idea of how much the particular cars we were interested in would likely cost in Seattle. It was at this point I noticed something odd. The car we were most interested in was a Honda and the price difference between the 2004 and 2005 model we were interested in, according to Edmunds, was around 1.21% using their 'true market value' for dealer retail. Yes, I know, we could have saved a ton of cash buying a used car privately but the stress of dealing with title and other issues with a private individual was too much for our delicate constitutions, we knew we would only buy from a dealer. Out of curiosity I put together the following depreciation table for the car we were interested in.


Cost as a % of 2005 Price

% loss of value from Previous Year
















Note that I was looking at TMV and not 'certified used car' prices and that I made sure the options were consistent across all the years, I required the cars to be in 'outstanding' shape (assuming I'd end up paying to get them into that shape one way or another) and allowed 10,000 miles per year.

Buying a 2002 Honda, for example, would cost us around 24% less than buying a 2005. It was also interesting to see how much value was lost each year. For example, a 2002 Honda cost 12.31% less than a 2003 Honda. It seems that the Honda we were looking at loses a fairly even amount of value each year.

Marina and I decided that the cost savings of buying a 2002 or 2003 didn't offset the uncertainties of buying a used car. And no, the 'certified' programs didn't give us much joy. Certified cars cost more than what's listed above and the warranties are fairly limited. If our goal was to maximize our car value per dollar then I suspect a 2002 or 2003 Honda would be the best choice (or better yet, fixing our existing car). But given our budget, given the happiness of owning a new car with a well understood history and given the differences in cost we decided to buy a new car.

Step 6 – Reducing the Cost of a new Car

Since knowledge is power I decided to power up:

Information Source



Consumer Reports New Car Price Service


Provides the wholesale price showing what the dealer actually paid for the car, the official invoice and the MSRP in addition to a ton of information about the features of the different trim lines. The really valuable data, in my opinion, is the wholesale price.

Edmunds Infopack


Provides the MSRP and Invoice along with "True Market Value" (TMV), Edmunds best guess as to what people are actually paying for the car.3 They provided tons of extra data but honestly, I already had that information via Consumer Report's website and New Car Price Service. I bought the Edmunds Infopack primarily for the TMV.

With the exception of CarsDirect the rest of the automotive Internet sites for new cars I could find just forwarded the pricing request to a local dealership. So I decided to skip the middleman and just call the dealerships myself. When asked what I wanted to pay (nothing?) I would give, per Consumer Report's suggestion, the wholesale price.


How They Handled My Phone Call

Honda of Seattle

Let's see, the 800 number on their website was wrong, the salesman tried to convince me that the car I wanted was almost non-existent and I would have to pay through the nose to get it and I could only see one if I waited a week and he refused to quote a price on the phone. Next!

Honda of Bellevue

I talked to their head of Internet sales and he quoted me the super special "Microsoft" price, a price higher than the TMV price from Edmunds and insisted that the car I wanted was rare and still very much in demand so he couldn't go lower.

Honda of Lynnwood

This dealership didn't have the exact color we wanted but they quoted us a price that was better than Bellevue's and in fact even better than the dealer's invoice, CarsDirect and Edmund's TMV price. I did give Bellevue another call to give them a chance to beat or match (especially since they had the color we wanted) but they said they wouldn't.

One foot note, every single salesman I talked to tried to get my number to call me back since they had to confirm the price they could offer with their manager. I'm lead to understand that one of the main reasons for wanting my number is that when sales are slow salesman are often told to go pound leads on the phone. Needless to say, I called everyone back myself.

Step 7 – Preparing to go to the Dealership

What We Did

Why We Did It

Print out the Consumer Reports Information

Walking in with a thick sheath of paper with a lot of background and price data tends to end a lot of arguments early. Of course we didn't bring the Edmunds data into the dealership since it showed a TMV higher than what the dealer quoted.

Research Kelly Blue Book and Edmunds prices for our trade in

We knew we could get more money selling our trade in ourselves but the extra profit wasn't worth the extra psychological and time pain so we wanted to know what the trade in should go for. Unfortunately we screwed up and didn't print out the reports, that mistake would cost us around $100.

Sit down and agree on our 'walk away' prices for the price of the new car and the price of the trade in

We aren't expert negotiators and the salesman has a lot more experience than us so trying to negotiate on the fly was likely to fail. By deciding on our 'walk away' prices before getting anywhere near the dealership we reduced the chance of getting 'taken' in the confusion of a sale.

Step 8 – Buying the Car

I kept expecting some kind of trick when we got to the dealership but the car was exactly what was promised for exactly the price we were promised. We checked the car out, took it for a test drive, etc. and it completely fit the bill. We even decided that we liked the color. I made it clear up front that we would pay cash so that let us skip a lot of financing nonsense (one of the easiest places to pump up the price). The salesman tried to include the trade-in as part of the price discussion but I made it absolutely clear that we would first nail the car price and then discuss other issues. Since we already had agreed on the price the first step was to get a complete cost statement including fees and tax. I kept waiting for the infamous 'advertising fee' or similar charge. But the final total he showed us had around $170 in fees4 and a bunch in taxes. The fees actually seemed reasonable so I didn't argue.

Step 9 – Losing $100 (at least) on the Trade In

When the time came to discuss the trade in the salesman said, with a definite resigned air "well, I know you have all the paperwork, show me the Kelley Blue Book and we'll settle the price." Unfortunately, idiot that I am, I didn't print out the Kelly Blue Book price!!!! To make matters more complicated the car did have a dent and the air conditioning, of course, didn't work. So the salesman drove the car and came back later with his own Kelley Blue Book print out. A print out that showed our car being worth several hundred dollars less than what we had calculated at home. I took a careful look at his print out and noticed that he had turned the automatic into a manual, neglected the fact that the car had a cassette player and skipped the fact that the car had an air conditioner (the fact that it didn't work meant that the car moved from 'good' to 'fair' condition, not that you got to take it off the price list). We insisted he fix all of this, which he did and came back with a price that was a few hundred dollars higher but still a good $200 lower than what we had gotten at home. I wasn't sure how he got the lower number (just edit the print out?) but I admitted defeat and said "bump it up by $100 and we're done." He immediately agreed (which of course meant I should have asked for A LOT more, I know, I know, I'm a lousy negotiator) and that was it.

Step 10 – Happiness

I'm told there is an old saying in poker that goes "if you look around the table and can't tell who the sucker is, it's you." I sincerely doubt we took advantage of the salesman so I'm guessing we're the ones who lost on this deal. But for the life of me I can't figure out how. The price I got for the new car was 1.7% higher than the wholesale price, they did nail me for $32 in stupid fees and the price I got for the trade in was $100 under what both Kelly and Edmunds thought it was worth. Sure, if we were willing to do a private sale on our used car we could literally double what we got in trade in but that still wasn't enough money to put up with the pain of handling a sale ourselves. So near as I can tell we might have lost around $132 on this sale assuming that the price we paid for the car was just 'fair' rather than a great deal. I don't know, this looks like a pretty clean getaway to me and we absolutely love the car. So I'm going to declare this experience a success for everyone involved.

1Anyone with a financial background is now screaming "But you have to adjust for present value!" To be fair, if you're going to adjust for present value then you also need to adjust for future inflation so that the daily payment amount stays constant in real terms. If you take the current 3 month t-bill rate (3.51%) as being the effective daily risk rate and subtract a typical inflation rate of say 3% then you have a real daily interest rate of 0.51%. Plugging that into the present value of an annuity due (and remembering that i = 0.0051/365 and n = 365*10) I get a present value that is only 2.51% less than the non-discounted value. One could argue that interest rates are currently depressed so let's instead take the 5 year TIPS rate which is currently yielding 1.81%, in that case I get a 8.53% discount which still isn't much.

2To be fair getting a car loan isn't always a bad option, in some cases it is a real investment. For example, getting a reliable car allowed my father, when he came to the U.S., to both hold down a full time job and go to college. That wouldn't have been possible if he had to rely on LA's public transport system.

3The Edmunds infopack also came with a 45 page article entitled "Confessions of a Car Salesman". Although I already knew most of the information from other sources, such as "The Power of Persuasion", nevertheless it was a useful refresher and helped me to clarify my own thinking in how to approach negotiating a price at the dealer.

4At the very end of the day while we were signing 10,000 sheets of paper I finally saw a break down of the fees. Most of it really were various required fees. The only rip off I could see was a Documentary Service Fee for $35. Under Washington State House Bill 2215 from 2003 this fee is legal although it is not mandatory, e.g. the dealer can choose not to charge it, and it can't be more than $35.

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