EV Buying & Leasing
Car Buying Basics
Car Buying Basics

Car Buying Basics

Car buying is tough. It's a process that few of us ever take the time to fully understand, and it can be overwhelming all on its own without having to worry about adopting a new technology. It can be one of the biggest financial decisions we make in our lives, and it's easy to feel like we're being taken advantage of every step of the way.

So let's take some time to review car buying basics. Some of us will be familiar enough with the car buying process that this section may not be necessary - but if you're not fully comfortable walking into a dealer, let's review some of the fundamentals so you can shop with more confidence.

Shopping for a loan

If you want to buy a car but do not plan on paying cash in full, you’ll need a loan. Auto loans are typically between 24 to 84 months in length, and will charge you interest. Longer loans will offer lower payments, but will cost more overall thanks to more interest. The interest rate that you qualify for will depend on the length of the loan and the strength of your credit score.

Dealers would be more than happy to find a loan for you. They typically work with their automaker’s financing division as well as multiple banking partners to find you one. It’s very common for people to walk into a showroom and receive financing before they leave. This is popular, but it may not be the best value.

When you take out a loan at the dealership, they’re typically making money on that transaction. Dealerships regularly receive some sort of financial incentive when they refer you to one of their financing partners. That can cost you money, because there's an extra person making money between you and the financing partner. Because the dealer can make money on this, it can be hard to tell if you’re getting matched with the loan that’s best for you, or the loan that’s best for them.

By shopping around, you can often find loans with better interest rates than what the dealership will offer. If you already have a good relationship with a bank or credit union, that’s a great place to start. You can also browse others to see who is offering the lowest rates, as many banks and credit unions will list their auto loan rates right on their website. Credit unions are a particularly good option for low loan rates because they are non-profit institutions.

MSRP vs. Invoice Price

MSRP or "Manufacturer’s Suggested Retail Price", is the price that the automaker says the vehicle should be sold for. That’s not necessarily (or even typically) what you’ll pay.

The invoice price is the amount of money that the dealer pays for the car. As you’re negotiating a deal, knowing that the dealer paid for the car is an important piece of puzzle.

The dealer has a few different ways to make money, even if selling a car at or below invoice price. They can charge fees, get a kickback from the bank on a financing transaction, sell an extended warranty, service package, or sell accessories. There is also something called Holdback, which is a payment that the automaker makes to the dealer for selling the vehicle. Some dealers get bonuses for selling a large volume of cars, and so they can afford to discount a little deeper than other dealers. It can be hard to know which dealers operate this way, so getting many quotes from different dealers is worthwhile.

Savvy car buyers understand that a dealership has to make money. The trick is understanding how the dealer is making their money, and knowing how much they're making, so we as car buyers can negotiate to a number that we feel good about.

Trade-in vs. Private Sale

When it comes to your old vehicle (if there is one), is it better to trade it into the dealer, or sell it yourself privately?

You’ll almost always get more money for your vehicle by selling it yourself. The problem is, this takes time and effort to take photos, list the car on used car websites, meet with potential buyers, etc. Your time is worth money, too, so there's a personal decision to be made about how much time you're willing to invest to save a few hundred or a few thousand dollars.

One advantage of trading a vehicle into a dealership can be a savings on sales tax. Most states offer a tax credit on sales tax when you trade-in your old car. If you buy a $30,000 car, but receive $10,000 for your trade-in, you’ll only be charged sales tax on the remaining $20,000. If sales tax is 5%, that’s a $500 savings, which brings you a little closer to the value you might have sold it for yourself. The states that do NOT offer a tax credit for trading in your old car are California, Hawaii, Kentucky, Michigan, Montana, Virginia and Washington D.C.

The other option is to sell your car to an online used car store. This means it's easier than ever to shop your trade around, get values from several companies and sell your car to whomever offers you the most for it. These online used car superstores have all gained popularity in the past few years, and each are in the business of buying vehicles to be resold on their websites. Sometimes these stores will interpret the value of your trade differently, and offer more than the dealership you're otherwise working with. For this reason, they’re worth checking in with to receive a quote for your trade before you make a final decision. Keep in mind however, if you sell your car to a company that's different from the dealer you're buying your new car from, you will lose out on any sales tax savings that you might receive from trading your vehicle in.

Taxes & Fees

When buying a new car, you’ll be on the hook for some taxes and fees. Taxes are unavoidable. Some fees will be required, but others are fair game for negotiation. Here's a review of the most common.


For taxes on personal vehicles, you’ll likely just owe your state’s sales tax. You can choose to add this into the total loan amount and pay it off over time (with interest) or pay for sales tax up front. Depending on where you live, you may also owe excise tax or use tax with your municipality, charged annually and usually not until after you've registered the car. Taxes are, perhaps obviously, non-negotiable.

Destination fee

Destination fee is a fee for delivering the car from the factory to the dealership. This is not a fee that the dealer typically makes money on, and it's a valid fee that must be paid. Some car prices already include destination, while others do not - so be sure to check. The dealer is not likely to negotiate this fee.

Delivery fee

Delivery fee may sound a lot like Destination fee, and that's because they're basically the same thing. If there is an extra Delivery Fee on top of the Destination Fee, this is the dealer trying to make some extra money on that process. This fee is fair game to negotiate.

Documentation Fee

Also called “Doc fee”, this is paying for the time that the dealership spends preparing paperwork like registration, etc. This is money that the dealer is making in this process, and so this fee is negotiable, but dealers may try to stand firm on this one.

Registration / Title Fee

Your car needs to be registered with your state, and if your dealer is handling this they will pass these fees through to you. If you’re buying a car in a different state from where you reside, the dealer may hire a third party company to handle the registration process, and they may charge a fee for their services above and beyond those mandated by the state. The registration and title fees are not negotiable, but additional processing fees by the dealer or third party may be.

Vehicle Preparation Fee

Some dealers try to charge for preparing the vehicle for you (cleaning, removing plastics, etc), but this should really be part of the destination fee and fair game to negotiate.

Other fees

Dealers may try to add all sorts of fees under different names. Advertising fees, administration fees, floor plan fees, these are all negotiable and you as a buyer should make all attempts to reduce or remove them.

Depreciation & Resale Value

Cars are depreciating assets, which is to say that they lose their value over time.

Understanding depreciation is important, because knowing how it works and what kind of value your car is likely to hold can save you a lot of money in the end.

Depreciation is measured as a percentage of a car's original value. For example, a $20,000 car that loses $5,000 in its first year has depreciated by 25%. That $20,000 car now has a resale value of $15,000.

Resale Value is important for two reasons. The first is flexibility. If you take a loan out on your car, it's a good idea to make sure that the payments you're making every month are keeping pace with or exceeding the amount of value that the car is losing over that same amount of time. If the car loses value faster than you're able to pay for it, you could quickly find yourself "upside down" on the loan, meaning you owe more than the car is worth. If you owe more on your car than it's worth, you'll be stuck with that car and that loan until you can come up with the extra money to pay the difference between what you can sell if for and what you still owe the bank.

The second reason resale value is important is that you walk away from a car with more money in your pocket - money that can go back into your bank account or be used toward your next car, leading to an even nicer ride.

In 2021, the EV that depreciates the least will lose about 53% of its value after 5 years. Compare that to the EV that depreciates the most, losing approximately 74% of its value. Let's assume that these two EVs cost the same when new, at a price of $40,000. If you had bought the car with the least amount of depreciation, you would have $8,400 MORE in your pocket after selling that car 5 years from now. That's a pretty compelling reason to consider depreciation and resale value from the very start.

Gap Insurance

On the previous page, we talked about a scenario where a car could depreciate faster than you're making payments on it, leading to a situation where you owe more money on a car than it's actually worth. If that's the case and the car gets stolen or totaled in an accident, insurance will only pay you for the value of the car, NOT what you owe on it - meaning you would have some amount extra to pay before you can pay off your remaining auto loan. This can lead to a sticky situation where the bank wants to be paid back for a car that no longer exists, and you didn't receive enough money from insurance to pay them. You would have to come up with the difference.

That’s where Gap Insurance comes in. It closes the gap between what the car is worth and what you still owe, allowing you to pay off your loan if something happens to the car.

Gap Insurance can be a good idea for loans that have no down payment, or loans that have a long repayment schedule like 72-84 months. In these cases, it’s more likely that you could be find yourself “upside-down” on the loan. As car prices get more and more expensive, these scenarios will unfortunately become more common.

It’s always a good idea, if possible, to buy a car with a payment schedule that (at a minimum) keeps pace with the car’s depreciation. You can check your car’s approximate value anytime using tools like Kelly Blue Book (kbb.com)

Buying Direct

It used to be that all new cars were sold through a dealership, which is an independent 3rd party between you and the auto manufacturer. A few new EV companies have been challenging this model, and offering sales direct from the manufacturer with no dealership in between.

When you buy a car direct, you place an order for the exact car that you want, and take delivery at one of these automaker’s delivery centers a few weeks (or months) later. There are some advantages to direct sales, and some disadvantages. We're just going to focus on how this new model of direct sales affects you as a consumer.

Exactly the car you want

Part of the direct sales model is that manufacturers don't need to keep large inventories of cars sitting around in vast parking lots. Instead, they can rent storefronts in a mall or relatively small plots of land. With virtually no inventory to choose from, you as the buyer must instead configure exactly the car you want, and the automaker will send that specification to production once the order is placed.

No haggling

With a direct sales model, there typically isn't any negotiation on price - the car costs what it costs, and there are no discounts. In our experience there are some exceptions to this, but it's hard to predict and more about being in the right place at the right time for weird circumstances like if a buyer falls through and the showroom has a car that they suddenly need to sell.

No weird fees

When buying direct, there's no middle man and no opportunity for a third party to insert unfamiliar fees that vary from one showroom to the next. You pretty much know that whatever you're paying is the same as everyone else nationally.

Not so fast

The other side of the coin when ordering exactly the car you want is that you're going to have to wait for it. Since there's very little inventory kept on-hand, you may not find a car to buy on short notice. Even used inventory, which does exist, is often stored off-site. You'd generally buy these used cars online and take delivery in a few days instead of weeks or more.

Test drives are... tougher

While manufacturers who sell direct do keep a few cars on hand in their showrooms for test drives, they may not always have the specific model or configuration you're looking to buy available to try out. These test drives tend to book up as well, so it's a good idea to call your local showroom in advance and make an appointment for a test drive, instead of just showing up.

Not legal in all states

Some states do not allow automakers to sell directly to consumers without a dealership. If you live in one of these states, you may need to travel to a different state to order or take delivery of the car that you have ordered. At time of writing, the states that prohibit direct sales include New Mexico, Alabama, South Carolina, Louisiana, Texas, Connecticut, West Virginia, Wisconsin, Nebraska and Oklahoma. Some states allow direct sales, but place limitations on the practice, like how many storefronts can exist in the state. These states include Virginia, Ohio, New Jersey, Maryland, Pennsylvania, New York, Georgia and North Carolina.

Automakers who wish to sell direct (these tend to be EV manufacturers) continue to fight for the right to sell cars in more states. They’ve won many battles already but clearly, there is more work to be done.

Did you find this page helpful?
Was this page helpful? Confusing? Did you learn something new? Let us know what you liked, what we can improve, or any questions you may still have. We appreciate your feedback!
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.