Buying a car is a big investment, one you’ll be paying off for years to come. There are a number of steps that come with the purchase from finding the dealership, the car and the financing. Take your time to make sure you’ve made all the right choices before signing the paperwork
Start by determining how much you want to pay and the car models you’d like to look at. This makes comparing prices and features easier as you start to narrow down your search and come to a final decision.
1. Set a price limit
Ideally, your income and monthly budget determines the amount you spend on a car. According to Consumer Reports, the average car loan lasts about five and a half years, though you’ll save more money by keeping your loan term short.
Find a balance between your loan length and your monthly payments. You’ll pay less per month with a longer term, but interest will stack up, increasing the total cost of your car. If you’d like to pay as little as possible, a used car with a short term and a large down payment or trade-in will save you the most money.
A good rule of thumb is to spend no more than 10% to 15% of your annual income on your vehicles. This includes payments for all cars you have, insurance, gas and other car ownership expenses.
Your price limit for your next car should be calculated with these in mind. Say you’ve already dedicated 5% of your annual budget to your current vehicle. That leaves 5% to 10% for your new car payment and increased insurance premiums.
2. Narrow your options
Let’s face it: the number of models of cars out there can be overwhelming before you even get into the features. Do some car shopping online first to help you narrow down your options.
Start by determining the basics: How many seats do you need? Will you be driving in the city or in the country? Do you have a trusted car brand or style? Answer these question to narrow down your search.
Think about the features you want. The MPG, safety rating and price can play a large role in your final decision. If you’re visiting a dealership, it’s likely you’ll have your choice of color and most newer-model cars come Bluetooth-equipped. However, other features like sunroof, navigation systems and automatic start aren’t standard in every car and could make a difference in your choice.
3. Check it out in person
After you have an idea of what you’re looking for, visit an auto show or car lot to test-drive the vehicle you’re interested in. Not buying from a dealer? You can still benefit from experiencing how driving the car feels before you put down cash.
If you’re unsure and have the time, consider it for a few days and come back for another test-drive.
4. Get dealership quotes
Unless you’re buying a car from an individual, you might have some flexibility when it comes to the price of your new car. Research and compare what dealerships are asking for. Ask for a quote by sending the dealership an email or even over the phone.
Websites like truecar.com can also help you compare quotes from multiple dealerships at the same time.
5. Find financing
Chances are you won’t be able to front the whole cost of the car. Compare car loan providers to make sure you’re getting the best deal you’re eligible for.
Think about what’s important to you: Are you willing to pay a little extra more for speed and convenience or do you want to find the best deal. Also consider the down payment: Larger down payments mean you’ll pay less in the long run but more up front.
Generally, car loan providers either give you the funds up front or work directly with your dealership to get you the financing that you need. If you choose the financing offered a your dealership, you’ll apply for the loan while completing the paperwork.
6. Negotiate
Before you sign anything, see if the dealer is willing to budge on the price of your car. If you’re trading in your old vehicle, make sure your dealer is giving you your vehicle’s full value by checking out how much the dealer would make by reselling it online.
Make sure that you’re negotiating the full price of the car — not the monthly repayments — and write all important information down so the dealer can’t confuse into signing up for something less-than-favorable. Make sure to ask about fees and add-ons that you don’t need and be prepared to walk out if you can’t get a deal you think is fair.
7. Read and sign the contract
Some car dealers include unnecessary add-ons that you can either get cheaper elsewhere or flat-out don’t need in the contract. Make sure you understand everything before you sign it and know what red flags to watch for.
If you have any questions, ask your dealer to explain it to you or consult an expert.
Test drive a car near you
Get connected with dealerships in your area that offer upfront pricing.
Buying a vehicle is no small endeavor. Here are some tips to help you along the way:
Get a preapproval if you can. Try to get an auto loan preapproval with your credit union or bank before heading to a dealership. Oftentimes, a dealership will have you visit their lending specialist and the lender may offer a lower interest rate than your preapproval so you’ll finance with them instead.
Don’t negotiate the monthly payment. Negotiate the price of the vehicle, not how much you want to pay each month. Often, if you want a smaller monthly payment, dealers may recommend extending the loan term instead of lowering the vehicle’s selling price, which costs you more in the long run.
Be serious about safety. The National Highway Traffic Safety Administration (NHTSA) safety ratings are no joke. These ratings determine how likely you are to be injured or killed in an accident. Cars with lower safety ratings can also mean higher insurance premiums.
Always, always, always test drive. Drive the vehicles(s) you’re considering. Be sure to drive without the radio on and keep conversation with the dealer limited if they go with you so you can really hear the vehicle on the road. And if you can, take the car on your daily commute so you’ll know how it will handle on familiar roads.
The internet is your friend. Do some research before heading to a dealership. Go online to look up safety ratings, average selling prices and compare vehicle values on reputable websites like Kelley Blue Book or the National Automobile Dealers Association (NADA). If you have a specific vehicle in mind and you have the VIN, you can also look up its vehicle history report for any red flags.
Where can I buy a car?
Many people choose to go to a dealership or buy through a private sale, but you have more options to explore.
Where to buy
How it works
What it’s good for
Dealership
Visit a car lot and shop for your next car
You can examine a large selection of vehicles, test drive a few and get advice from experts on your selection. Since there are both new and used dealerships, you should be able to find a car within your price range.
Online
Pick a model, secure financing and sign your contract from a car-buying website. Your car will be delivered to you.
Buying a car from the comfort of home — especially if you’re worried about social distancing during the coronavirus.
Private seller
Buy a used car directly from a private seller, typically the previous owner
If you’re after the best price possible, buying from private sellers is often the way to go. Make sure you know how to thoroughly check the car before purchasing.
Find a car the dealership uses for test drives and demos
This might be a good option if you want to buy almost-new car and want to get a good price on a recent make and model. However, the savings can vary and your options are limited. In addition, demo cars might be fitted with extras that you don’t necessarily want but will pay for anyway.
It’s safe to say that this will never be the cheapest option as it involves a range of additional taxes and expenses. However, sometimes it might be the only way to get a vehicle not available in the US.
This can be one of the most affordable ways of buying a car. In fact, car dealers often buy stock at auctions. The downside is that the quality of auctioned vehicles and the quality of their discounts vary, so research to find what that car is worth and inspect it to get a good price.
To find a good price on the car you want take your time to compare dealerships, private sellers and other options.
Decide whether you should shop online or visit a dealership
Once you decide on what kind of car you want, its features and the price, consider the loan and amount of insurance you’ll pay.
The price. Your price should reflect something you can afford either to pay for upfront, through your trade in or with monthly payments.
Secured vs. unsecured financing. Secured loans tend to cost less and have lower monthly payments because the lender uses your car as collateral. Unsecured loans can be more expensive, but you can often use it to cover other expenses.
Insurance rates. Car insurance is based on lots of factors and the features and car model will impact your premium. Find out if your new car’s safety features can lower your insurance rates.
Before you visit a dealership or contact a private seller do your research. First, look on sites like National Automobile Dealers Association (NADA) or Kelly Blue Book to see what the car you want is worth. You can search for make, model and year of a car and find the market rates.
Another way to be prepared is to apply for preapproval online. There are a number of lenders that offer preapprovals with competitive APRs and terms to bring into a dealership. If the dealer wants your business he’ll try to beat that deal.
There are a few financing options available and can depend on your financial situation. Often, deciding on your financing is just as important as deciding your car.
Pay for the car outright
You always have the option to dip into your savings and pay for the car without taking out a loan.
You’ll avoid interest charges since you won’t owe money to a lender.
It can be difficult for most people to save up enough money to buy a car, especially a new one from a dealership.
Dealership financing
This is when you get a loan from the car dealer. The dealer usually goes to a third party lender and acts as the middleman. Typically, both the dealer and the lender get paid through the interest.
It’s often convenient to get a loan when you buy your car.
Dealer financing might not be the most cost-effective choice. Dealers have an incentive to charge more interest, and you’ll be taking out a loan in a high-pressure sales environment so you won’t be able to compare your options.
Car loan from a bank or alternate lender
A car dealer might offer you a loan on behalf of a bank or lender, but you might want to go directly to the lender and cut out the middleman.
There’s a wide range of options available, and you can consider the loan terms at your own pace rather than at the car dealership.
Make sure your loan matches your vehicle type. Sometimes there are conditions around the types of vehicle you can get.
Car loan brokers
Or go through a broker that will find financing for you from one of its affiliated lenders.
A broker can compare suitable options on your behalf to help find something to meet your needs, especially if you don’t have the best credit and need help finding a loan.
Brokers charge additional fees for their services, and you’ll need to check the terms and conditions of their services before you apply.
Preapproved car loans
This is when you get approval from a lender for a specific amount, and find the right car after.
It helps you know where you stand financially and how much you can borrow. Preapproval lets you know your price range, and might give you an edge when negotiating with dealers.
The amount you qualify for doesn’t necessarily include all expenses and other taxes, so it’s important to make sure you aren’t caught short when you make you final purchase.
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The sticker price of the car is the main expense, but not the only one. When deciding whether to buy a car, make sure you have enough to cover all related expenses — both during and after the purchase.
Sales tax. A percentage of the cost of your car. How much sales tax you pay depends on where you live.
Documentation fee. The fee that the dealership charges for filing your contract, which also varies by state.
Registration fee. A fee you pay to have the dealership register your car. You can often get an estimate of your sales tax and fees by visiting your state’s DMV website.
Extras and modifications: The price you get at the dealer will depend largely on which features and extras are thrown in. This can turn the price thousands of dollars either way. If you don’t care about the modifications, skip them and avoid overpaying for something you won’t use.
Increased insurance premiums: When you add a new car to your policy, you should be prepared to pay more on your insurance each year. Contact your provider before you purchase a car to see how much the make and model might impact your premiums.
Registration: For new cars you’ll have to pay a fee to register it. And if you’re buying used, you’ll need to pay a fee for the transfer of registration/ownership. The cost of renewing your registration or registering a new car depends on your state, whether you can get any concessions and other factors.
Maintenance and fuel: It’s worth planning for operating costs. The cost of fuel and routine car maintenance depends on the type of car and how much you drive.
Car loan repayments: If you’re not careful these might become a major headache. You should know how much the repayments costs before taking on a car loan.
Extended warranties: New vehicles typically have a warranty of three years or 36,000 miles (often whichever comes first), but if you plan on having the car for a while, you drive frequently or you’re buying a used car, an extended warranty may be worth considering. It may cost anywhere from $40 to $200 per month, depending on the vehicle. Most manufacturers offer extended warranties, as well as third-party companies that work through dealerships and financing companies.
While there is a federal cooling-off period for many purchases, cars aren’t covered. This means that when you buy a new car and drive off the lot, you’re stuck with the deal you’ve made.
If you do get cold feet and want to return a used car, you may have more luck. Depending on the dealer, you may be able to return your car. Each lender is different, so if you research this aspect before you finalize your purchase.
Bottom line
Getting behind the wheel of a new car is a long process that can be stressful and confusing — especially if you’re a first-time buyer. But make it more simple knowing what type of car you want beforehand and learning about your financing options.
Frequently asked questions
Read on for even more answers to common questions about how to buy a car.
How much should I save for a down payment?
Usually at least 20%, but having more will lower the amount you need to borrow. You could potentially save in interest payments by having 25% to 30% of the cost of the car as a down payment.
What credit score should I have?
There are car loans for people with every type of credit, but lower interest rates are typically reserved for people with high scores and solid payment histories. If you’re worried about not getting a loan because of past credit problems, consider going through a car loan broker instead.
Kellye Guinan is a freelance editor and writer, specializing in consumer lending. Her writing and analysis has been featured on Bankrate, MSN and MediaFeed. She holds degrees in anthropology and German language and literature from Middle Tennessee State University.
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