Money tip: Avoid the alluring pitfalls of buying a new car

Car buyers often focus on haggling down a dealer's offer toward invoice price. That's OK, but often that's not where the real money is, says a former car dealer in his new book.

Instead of the purchase price, consumers should focus on other components of the deal, especially loans, trade-ins and their desire to buy more car than they can afford, said Mark Ragsdale, author of "Car Wreck: How You Got Rear-Ended, Run Over & Crushed by the U.S. Auto Industry."

"You'd be better off paying MSRP and paying attention to the big stuff," Ragsdale said. "But dealer profitability gets the lion's share of consumer focus and attention."

Here, Ragsdale said, are a few things to consider other than price:

That upside-down feeling: Negative equity is when you owe more on your car than it's worth.

This is true of most who drive a financed new car off the lot. The vehicle can lose a quarter of its value as soon as the rear wheels hit the street.

But even many people who have owned their cars for years are upside-down. It's typical to own a car three or four years before your car is worth what you owe on it.

This depreciation snowballs as consumers get car fever before they have equity in their vehicle. Dealers and auto lenders can accommodate these people by essentially rolling that negative equity into their next car loan — often keeping the payments reasonable by extending the loan.

Customers trade in their cars every 39 months on average, but finance them for an average of 64 months, Ragsdale said. That leaves many upside-down by an average of $4,700, online auto site Edmunds.com said. The lesson? Don't buy a new vehicle until you pay off your current one.

Trade-in value: Many factors affect trade-in value, including a massive recall such as the one Toyota is experiencing.

Among the best resources for finding the value of your car are online car-buying sites, Ragsdale said. Edmunds.com, KBB.com and your insurance agent can provide used-car prices, too, but they might not be as "real-time" as prices on cars for sale at this moment, he said.

Rule of 78s: This method of calculating loans is essentially a prepayment penalty because it front-loads the interest. You will be on the hook for most of the interest, even if you pay the loan off early or trade in the car.

The figure 78 comes from the sum of the digits one through 12 — the number of months in a year — and from a time when most loans were for 12 months. You want a simple-interest auto loan.

Simple math: When you see an advertised payment of less than $400 a month, ask yourself how reasonable that is. Simple math tells you that a $25,000 car paid over 48 months costs $521 per month — before interest, taxes, fees and negative equity.

A good way to buy a car is to pay cash for a slightly used car and drive it for a decade. If you have caviar taste on a fish-sticks budget, buy used or lease a vehicle. Leasing is more expensive than buying and holding, but it doesn't put you thousands of dollars upside-down.