1. Setting Your Price

The most critical part of the car buying process is establishing the sales price. It is here where the greatest savings can be realized. It is important to understand the difference between the MSRP (Manufacturer's Suggested Retail Price, also known as the "Sticker Price") and the Factory Invoice Price, which is the price the dealer paid for the vehicle.
The invoice price is where you should start your negotiations, not the price on the window of the car. Negotiate from the Invoice Price up, not from MSRP down. Depending on the demand of the car you have selected and its availability, you should be able to pay no more than $100-$500 over the invoice price. If the vehicle is a hot selling model, you may wind up paying more, in some cases even more than MSRP.

Manufacturers may offer special incentives or rebates to increase the sales of certain models. Sometimes this is passed on from the manufacturer to the consumer in the form of customer cash, cash-back or financing at extremely low interest rates. Other times it is only passed on to the dealer as dealer cash. The dealer can keep a rebate or pass the savings on to you.

2. What To Do With Your Trade-In?

A dealer will rarely pay you what your trade-in is worth at retail. Retail is the "market" value for your car. The dealer might offer below retail because he may invest some money to recondition or repair the car and he may add a profit for himself. Most of the time you will get a better deal if you sell your old car yourself through a classified ad. Still, some shoppers like the ease of a single transaction. The dealership's used car manager will typically look your car over and take it for a ride to determine how much he will offer for your car. Dealers typically look to offer no more than $1,000 below the low wholesale value. Unless your trade-in needs to go straight to the scrap heap, the dealer will re-condition the vehicle and will turn around and sell it for a profit.

If you do not owe any money on your trade, you will realize the full offer price from the dealer as down payment on your new purchase. If what you owe is less than what the dealer offers, they may pay off your existing loan and apply the difference to you as down payment. Owing more on a trade-in vehicle than it is worth (also known as "being underwater" or "upside-down") weakens your negotiating ability, so it is even more important to establish your purchase price before discussing your trade-in.