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Don’t let new-car purchase leave tire tracks on wallet

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The symptoms of this bug are easy to spot: The urge to go out and kick a few tires; the itch to take a demonstrator for a spin. But be warned. Catching a nasty case of new car fever this time of year can result in financial trauma later.

But if you're going to do it anyway, you might as well do it right.Doing it right means paying attention to your pocketbook as closely as you do the details of the deal. It means not confusing the loan you qualify for with the loan you can afford. It means considering all the hidden costs of new car ownership, including insurance.

"I don't think people realize what it costs to drive a car," says Mike Arnow, a certified financial planner and accountant in Milwaukee.

"The IRS reimbursement rate is 32.5 cents per mile. Does the IRS give you more than it's worth? I think not."

If you drive 12,000 miles in a year, that's $3,900, or $325 a month.

It's a manageable expense, you say. But if you own two cars, and you put that much mileage on each one, you're up to $650 a month. And if you buy a more expensive car or trade frequently, the cost per mile goes up.

"Hertz says the rate per mile is closer to 40 cents," says Arnow, who urges clients to explore late-model used cars taken in at the end of leases because the heaviest hits of depreciation (the big hidden cost) have passed during the vehicles' first two years.

Arnow advises clients to limit the shopping list to vehicles that represent no more than one-third of a year's salary.

"It fits well in the budget," he says, as long as you aren't putting on a ton of miles each year (buy a cheaper car if you do) and you are not trading in every year or two.

"My recommendation is based on holding a car four or five years," Arnow says. "If you plan to hold on to a car for 10 years, you can go for a more expensive car."

Buying too much car for your budget is the biggest pitfall in car purchases. But besides shopping sensibly, doing it right also means knowing how to negotiate a purchase by arming yourself with well-researched, accurate facts rather than cagey arguments.

"As anyone who's bought an in-demand import over the last several years knows, a fair profit in the opinion of the dealer and the salesperson is whatever you will tolerate paying," says Kathleen Wondolkowski, a consultant for Runzheimer International, a consulting firm.

Wondolkowski recommends doing your homework before you shop.

"The better prepared you are when you walk through the dealer's door," she says, "the more likely it is that your best offer on a car will be accepted. The dealer will be investing much less time and effort with you than with a shopper who needs to be cajoled into making a decision."

According to Edmund Publications, which publishes car-pricing data (including manufacturer's suggested list and dealer invoice), your goal should be to pay between 2 percent to 5 percent over dealer cost, "not the 8 percent to 10 percent the dealer wants you to pay."

Wondolkowski has assembled a list of tips over the years on how to buy a new car. Among them:

Deal separately on options. "Optional equipment represents a substantial profit to the dealer," she says. "The discount you receive off the base price can easily be recovered by the dealer through various add-ons."

Ask about option packages. They may combine some features you want at a discounted price.

Decide when it's to your advantage to order from the factory rather than from dealer stock. You can get a better deal on a factory-ordered car (since the dealer has no costs tied up in the car to recoup), says Wondolkowski.

However, when inventories are high or the dealer is eager to reduce overhead, she says, "buying a car off the showroom floor may be more price advantageous."

Also, the end of the month is a better time to shop because dealers may be more eager to meet their monthly quotas.

Leave the trade-in for last.