Car buying pitfalls | Car buying | Financial Literacy | Khan Academy

What we're going to do in this video is think about some things that you should think about when you are buying a car. To help us with that, we have this fake invoice from a car dealership for a car I guess that I am buying. This looks like a used Honda Odyssey that I am buying. I'm sure this is a fake vehicle identification number as well, but we're going to use this to get a sense of the different costs and things you might want to look for.

What we're looking at right over here is a much simpler invoice than what you're likely to see at the car dealership. This is a simplified version, just for the sake of the video, but you're going to see similar information on whatever documents that you see at when you're about to buy your car.

Now, the first thing that most people focus on is the price, and the price is usually the bulk of what you are going to have to pay. Now, one tip, and this isn't always going to be the case: do a web search. You do a search on the internet, and you see the listings, and it seems like exactly the car you want. It seems like a great price, and then you drive over to the dealership; you know, you drive maybe 30 miles over to the dealership, and when you go there, they say, "Oh, that car was just sold, but we have another car." But that car has some of these other features that you might not be interested in, but it's not quite the same price.

So, one way to avoid that is to get things in writing. So, exchange emails with the car dealer. Make sure they can give you details about the car that they are talking about. Have them in writing; put down the price that they are offering you. Really verify things.

Now, another way to think about car price, beyond really validating it, you can look online and figure out what the manufacturer suggested retail price is, MSRP, which tends to be more than the invoice price. The invoice price is at least what the dealer pays for the car or what they have to pay to the car manufacturer for that car.

Now, the dealer will oftentimes have some incentives to move cars off the lot. So, if the car isn't in a lot of demand or if they have several of them on the lot, they might be willing to get close to invoice or even, in certain cases, even below invoice. But one of the really important things to think about in this video is that you are not done at the price of the car.

Now, it's important to know what these fees are and what these taxes are—things like sales tax, registration fee, and title fee. This is not the car dealership just making numbers up; these are things that they have to charge by law, and you really can't negotiate these things down. But it's good to know that they are coming when you think about how much in total you are going to pay.

Now, some of these other things you might see, and you'll sometimes see even more than this documentation fee; that's something that usually can be negotiated. This right over here is on the high side for that. You have to know what you're looking at, and in any negotiation, you have to be prepared to walk away.

Now, the last thing I will highlight is sometimes when they're throwing on these various fees, or they're saying, "Hey, why don't you want this extra feature or that extra feature?" and it looks like a lot of money—it’s $600, almost $500. They might say, "Hey, it's not a big deal if you finance this thing, and you pay it down over five years; it's only going to end up being another $5 a month or $10 a month."

Think about how much peace of mind you're going to have for that $10 a month, knowing that your undercarriage is protected. Resist this; you should go in ahead of time knowing what your budget is, either your budget for the total price of the car or what your monthly budget is. But not just your monthly budget, but the monthly budget and how quickly you want to pay it down and what your down payment is.