If you’re interested in buying a new car, you’re probably considering the buy versus lease debate — and that’s usually what we spend a lot of time discussing when clients ask for help to understand which is the best option for their financial life.

What we don’t usually dig into, however, is how to manage the actual negotiation of a car-buying process.

That process, just like the one of selecting a financial advisor, can be loaded with confusing jargon that makes it impossible to know if you’re getting a fair price on the deal. Through my work as an advisor, I know how critical a good system for making financial decisions is — so I reached out to my friend Dan Mori to see if he could help explain the best way to get a fair deal on a car.

Today, Dan owns his own business and shares his knowledge and skills by coaching other entrepreneurs. But in the past, he worked as a sales manager for a car dealership for 2 and a half years.

Dan believes that when it comes to buying a car, the goal is to get the best value at a fair price. But the best deal isn’t always the cheapest deal, and trying to strongarm the dealership down to the lowest possible price can actually backfire.

Dan agreed to sit down with me to share what he knows about the car-buying process from his experience working in a dealership, because he understands how important it is to get this right.

After all, it’s probably the second-largest financial transaction most people make after a house… and it’s also what you purchase that will depreciate the most so getting a good deal is critical.

Here’s how you can make a good buying decision.

Know the Process

Here’s what not to do when it comes to buying a new car: don’t just think “I want this car” and go to one dealership that’s probably the closest or most convenient to you and look for a deal, and then try to negotiate from there.

That sets you up to fail because you’re going to fall into their process. Most dealers know they have the power the moment you set foot on their lot, so it’s important to prepare ahead of time.

Dealers and car salespeople are trained on sales and negotiation, and they know how to do it on the spot. Remember, this is their job; they do this all day, every day.

Buyers, on the other hand, may only deal with this transaction every 3, 5, or 10 years — so most of us don’t have these skills (or at the very least, we’re not using them every day).

You need to first understand the structure of the buying and sales process, and then you need to do your research before you ever set foot on a dealer’s lot.

Use These Resources to Target a Fair Price for the Car You Want

When Dan looks for the best price for a car, he uses three resources. These are ranked in order by how accurate their data is, so you should work your way down the list from 1 to 3:

1. TrueCar: They’re direct-dealer service, meaning they contract with dealers and then advertise car prices. TrueCar puts together information about the market in your area based on all the data they have for the cars they’re advertising on behalf of dealerships.

The dealership has to report the data when they make a sale through the site, so that’s why it’s quite accurate and a reliable source for pricing data. Start here to do your research about what the market is doing.

2. Edmonds: Dan says the strength of Edmonds is that they have great data on the MSRP versus the invoice price of vehicles. They do a good job of breaking down the details of what goes into these different numbers, including dealer holdbacks.

Dan does caution against expecting to eat into the dealer holdback money. He says you absolutely should negotiate down to the invoice price, but points out that the dealership is a legit business. As such, they do need to make some profit in order to survive and pay employees.

3. Kelly Blue Book: KBB has decent data on market size and can be fairly accurate with invoice pricing. But use this as a backup, not as a starting point; the other two sites are more accurate.

Dan mentioned it doesn’t hurt to look at places like AutoTrader, too, for the purpose of seeing what various dealerships are selling the same car for at the time you’re looking to buy.

Once you do all your research, you can determine what your target price looks like. What seems to be a good price based on all the data you can gather from these sources?

That’s where you start in terms of what you want to pay — and never start from the sticker price, because it’s only a suggested retail price. The dealership didn’t come up with that price, so ignore it when you head down to buy your car.

Know the Buying Process (and Think of It as Multiple Transactions, Not Just One)

When you’re ready to go to the dealership, know that there are 3 transactions that will happen when you buy a vehicle. You should think of each of these as separate processes:

1. You buy their vehicle. You want to negotiate the best possible price you can get on that vehicle, and you only need to negotiate this price. Ignore anything else for now.
2. You trade in (sell) your car to the dealership. Assuming you have a trade-in, this is the second transaction. You’re selling your vehicle to them. A lot of dealerships will try to lump this in with buying the new car. What you want to know is the “actual cash value” of your vehicle to the dealership, whether you buy a car from them or not.
3. You take out a loan for the new vehicle. If you’re financing, know that the interest rate on a loan is a transaction in and of itself. A lot of people don’t realize that the dealership will try to present a payment to you with a rate that’s higher than what can offer. Their goal is to get you to negotiate on the payment, not the price of the car.

You should always handle these three things as separate transactions — and if the dealership refuses to break them out this way? Dan suggests telling them, “okay… I’m just not going to trade in my car. Let’s just look at buying a new one.”

That doesn’t mean you now can’t do your trade-in. You can always go back to the trade later, after you lock in a price on the car you want to buy.

Negotiating Your Trade-In

If you have a car to trade in, Dan says you want to reverse engineer the process because in this transaction, you’re selling instead of buying.

Start with KBB as your resource here, because they mainly appraise vehicles and determine values. That being said, don’t evaluate your own car at “excellent condition.” A used car will almost never meet that standard. It’s likely to be good or above average.

For the dealership, your trade-in will fall into one of two categories: the dealership will either buy it as inventory to put on their lot and sell it to make money, or they’ll wholesale it. Smaller private dealers come and buy the car, fix it up, and then sell to make money on their lot.

Either way, those dealerships have to make money. That means you’re not going to get the retail value for your trade-in. No matter what, the dealership has to do something to make a profit.

As an example, Dan says if your used car has a $18,000 retail value, then you can realistically expect the actual cash value to be somewhere in the $14,000 to $16,000 range depending on its condition.

Never Negotiate on Payment!

This is the part of the process where most people make huge, costly mistakes. The dealership will try to get you to negotiate for the car you want to buy based on the payment — but keep in mind, the payment is just a result of other variables.

You can actually get a better rate than what the dealership might present to you. Always compare factory financing to your own bank or credit union… and never buy the payment. You want to lock in a specific price instead (based on the research you do before you get to the dealership).

Be educated and understand what incentives are for your particular deal when it comes time to determine your financing options. Are there rebates? Special interest rates?

Based on this you will have some financial decisions to make. This is where you might need to do some math to figure out the best deal on your specific transaction.

If you do take an incentive interest rate, then your transaction is finalized because that’s the promotion you accepted. If you take the rebate instead, then you get to the third transaction in the process… and again, this is where most people get into trouble.

The monthly payment is just the end result of a transaction that includes many variables, including the price of the car you buy, the trade-in value of your old car, the interest rate you’re paying, and any add-ons (like a service package, warranty, etc).

All of this will get rolled up into a monthly payment if you finance the car. So as part of your pre-dealership research, use an online calculator to determine what your payment should be based on your target price for the car and a reasonable interest rate you expect based on your credit score.

Dan says that if the dealership presents you with a payment that’s higher than your estimate (but the car price and interest rate are the same), you know there’s something else they’re selling you included in that payment. Don’t buy it!

Go back and ask for the best APR the dealer can give you. Dan says he’s not afraid to get direct at this point of the negotiation. He says you can say something like, “You have one chance to present this number to me. I already have quotes for financing from another dealership, a bank, and my credit union so I know where your rate is going to be compared to that… so I need your best offer now.”

Dan also mentioned that you need to be very careful if someone shows you a screen to “prove” they’re making their best offer to you. Those might not be the dealer-facing numbers. If someone isn’t straightforward with you, don’t be afraid to walk.

You’re the one with the power, so never be afraid to question a payment — especially if you’ve done your research and understand how the buying process really works. With this article and Dan’s advice in mind, you should be well-positioned to get a fair deal on the car you want.