There's one golden rule when it comes to negotiating for a new car: Buying a new car, financing it, and trading in your old car may all occur at the same time, but these are three separate transactions and should be negotiated separately.

Imagine this scenario: A salesman is negotiating with a customer about the price of a new car. Negotiations have come to a standstill because the customer says he cannot afford a penny more than $13,000 for a particular car that is priced at $13,200. The dialogue might sound like this:

"What are your current monthly payments?" asks the salesman.

"$275 a month," the customer replies, "and I only have two payments left."

"How about this," says the salesman. "If I can get you into that new car for $275 a month, have we got a deal?"

"That sounds reasonable," answers the customer.

The salesman smiles. "Do you want to trade your car in? I could probably get your monthly payments even lower."

"Well, sure. I'll trade it in if you can give me a good deal," says the customer.

The salesman checks out the customer's car and says, "How about this: I will buy out the balance of your loan, give you a $2,000 check on top of that to use as a down payment on the new car, and then I'll finance the rest for 60 months at a monthly payment of only $250 - that's $25 lower than you're currently paying. Now, doesn't that sound terrific?"

Unfortunately, it isn't so terrific. In fact, the customer is going to pay more for his new car than he initially wanted to. The salesman has confused him. $250 a month has the illusion of a good deal because it is less than the customer's current payments. However, upon closer examination we can see what is really happening.

First of all, the salesman offered the customer $2,000 in addition to "buying out" his current loan on the old car. That means the customer receives a total value of $2,550 for his car. $550 will be paid to the title holder of the old car (for the last two payments) and the $2,000 will be applied as a down payment for the new car. If we then calculate the present value of $250 dollars per month over a 60-month term at 11% interest, it works out to be about $11,600. Combining all this together, we find that the customer has agreed to pay the equivalent of $13,600 for his car: $2,000 from the trade-in and $11,600 from the loan. This is $600 more than the customer originally said he'd pay. To add insult to injury, the customer is without a doubt going to get less on his trade-in than if he sells the car himself.

Even though this is just an example, situations like this happen every day. Salespeople are experts at this tactic and employ it every chance they get. It is no secret that most salespeople at the dealership want you to focus on the monthly payment so they can move other facets of the deal around to achieve this single focal point. Even if you know all your facts, it is still easy to get confused. It can be difficult enough trying to negotiate a single transaction with a salesman, but when you try to do all three at once, you are stacking the deck in his favor.

In order to keep these three transactions separate, the recommended strategy is to approach the deal in this order:

1. Negotiate and agree on the price of the new vehicle independent of financing or trade-in. Just say, “I’m thinking about paying cash” to the salesperson and negotiate that transaction first - focusing on the price of the vehicle and not the monthly payment. Write down the price you have agreed to on a pad of paper in front of the salesperson. Be prepared for the salesperson to press you about your preference for financing, or if you have a trade-in. Tell him you will only discuss that after you have agreed on a price for the specific car you plan to buy.
2. If you are interested in financing you can ask what interest rates are available through the dealer - or better yet, come to the dealership with a pre-approval from your bank or credit union. Tell the salesperson he is welcome to beat the rate it if he can. If leasing, do your homework ahead of time to find out if there are any special lease programs on the car you are interested in, and what the terms are, before you come to the dealership. You may also try to get pre-approval (or at least the current rates) from an independent leasing company based on your credit range.
3. When you're comfortable with the other two transactions, you can mention that you might be willing to trade in your existing vehicle depending on what the dealer can offer. Again, knowing the market value (Kelley Blue Book’s trade-in value for example) prior to visiting the dealership will help you assess whether the dealer is trying to lowball you or is offering a fair price. Keep in mind that you always have the option of selling the car yourself, or striking a straight-purchase deal from another dealer.