Back to GuidesBuying a new or used vehicle is often one of the more important purchases you'll make, but it doesn't have to be stressful if you make an informed decision.
Preparation is the best way to get informed, so here are the factors that a first-time car buyer should consider to avoid buyer's remorse. This article will prepare you to go car shopping with confidence.
What's Your Budget?
A realistic answer is important in this case. Most experts agree that you should never buy a car that costs more than 15% of your monthly income. Factor in the following expenses where applicable:
Mortgage or rent
Child expenses
Monthly bills for utilities
Groceries
Entertainment
Savings and retirement
The estimated cost to insure, fuel, maintain the vehicle (If this is your first car, these will all be new expenses you should figure in your new monthly budget).
Now that you have done some basic budgeting, subtract these expenses from your monthly income after taxes and benefits to determine how much your car payment can be per month. Leave some breathing room for unexpected costs. Don't spend every available penny on your monthly car payment.
Ways To Pay For Your Car
There are three ways to pay for a car for most people: cash, lease, or financing.
Cash:
Paying with cash has the advantage of not having to pay interest or obtain a car loan. However, that can be a challenging goal for most first-time buyers since it requires access to large amounts of cash.
But even if you have all the funds, it could still be a good idea to check out financing. If the interest rate is very low, it may make more sense to borrow money and invest the cash you have. However, a favorable rate is sometimes only possible with an outstanding credit score.
Financing:
When choosing to finance, note that virtually anyone can get financed for a car, but auto loan interest rates can be extremely high if you have poor credit. If this is the case, look for lenders that reach out to first-time car buyers and those who seek to provide forgivable rates to those with bad credit or no credit history at all. You can establish credit over time by doing things like getting a low-interest or secured credit card, paying all bills on time, and minimizing debt.
Accessing your credit report in advance will give you an idea of what loan terms and interest will be available to you. You may even be able to get pre-approval from your current bank or credit union. A person with little or no credit may need a co-signer to get a loan. That's generally someone with good credit who also promises that the loan payments will be made. It can be helpful for someone establishing credit, but be sure you fully understand the agreement before entering into a co-signed loan.
Suppose you decide to finance a car with a dealership. In that case, they may have several options available from banks or manufacturer finance companies, but they will try to sell you other packages once you are in the auto finance chair. Dealerships make money on cars but also on adding warranties and other products to the sale. It is rarely a good idea to include fees such as registration, extended warranties, and maintenance packages into your financing, as these fees will multiply at an astonishing speed due to the overall interest rate.
It is a good idea to focus on the monthly payment and interest rate and consider the total cost of the car. If you finance a vehicle over 72 or 80 months, understand the cost over the life of the loan. Loans that long can lower payments, but the interest adds up. Saving for a larger down payment is a way to lower your monthly payment without stretching out the loan term.
Leasing:
If you find that the vehicle you want is more expensive than you can afford when buying it or it requires a longer loan than you're comfortable with, consider leasing. That gets you more car for your monthly payment, and most leases are between 24 and 36 months long, so you're not stuck with a vehicle for an extended period. It's also helpful if you expect your vehicle needs to change in a short time.
The downside to leasing is that you don't build equity in the vehicle as you would if you had bought it. You can't get any money selling it, and there isn't any equity in the car to use as a trade-in on a new one down the road.
Leases also limit the number of miles you can drive annually and charge you for every mile over the limit (though you can negotiate this at the beginning of the lease if you're sure you'll go over). Leases usually require a down payment and can include other fees, which can make leasing expensive.
Deciding on the Right Car
Once the numbers are in place, now it's time to determine what you specifically need in a car.
Ask yourself how you'll use the vehicle. The key is to be realistic; maybe you think you need an all-wheel-drive car if you take the car on a ski trip, but is that something that you do often enough where it should dictate your entire purchase? One ski trip in six years of owning the car doesn't make the added cost of AWD and the extra fuel you'll use over those six years.
Consider the size of the vehicle. More room inside is nice for you, your passengers, pets, and cargo. But larger cars cost more, often use more gas, and are harder to park.
Also, ask yourself what features are important to you. A car is an expensive purchase that you'll likely own for years, so you want to make sure you don't short-change yourself and skip an amenity or element (style, color, brand) of the vehicle to save a little money, only to end up with a car for years that you don't love. Pick a few features that are must-haves, but understand your budget may not allow for every gadget. Ideally, get everything you need and not pay for things you don't.
Is the Price Right?
Researching the typical purchasing price is an important step; you don't want to find out you could have paid less after you've already bought the car. Autolist, Kelley Blue Book, Edmunds, TrueCar, and J.D. Power/NADA Guides can all give you an unbiased look at vehicle pricing in your area. Having a well-defined price range for the make and model you want to buy before entering the dealership will give you an advantage.
Does This Car Feel Right?
After researching the vehicle and reading reviews, both by automotive magazines and websites and consumer reviews, a test drive is crucial in the decision-making process.
Drive a prospective car for at least 30 minutes in various environments, in traffic, on the highway, around town. Maneuver around tight parking lots to see if you could live with it daily. If you buy a used car, getting a pre-purchase inspection from a trusted mechanic is a good idea.
Be sure to familiarize yourself with the entire dashboard and instrument panel, particularly the infotainment screen. The electronics in new vehicles are becoming increasingly complicated, and many consumers find out they hate the way a tech-based feature works a little too late.
Should I Buy a New or Used Car?
New cars come with both a warranty and that new car smell. Although new vehicles depreciate dramatically in the first years, these cars typically will not need many repairs initially.
New cars are usually the most advanced in essential areas such as fuel economy and safety technologies. Finally, new vehicles are often financed with a lower interest rate to save on the overall loan.
The main advantage of buying used is that they can have lower monthly payments and an overall lower cost than a new car. Used cars allow you to bypass the depreciation stage, so you stand a better chance of recouping more of your money when it's time to sell.
Insurance rates are also typically lower on a used car (since they cost less), saving you even more money overall. The obvious downside of insuring a used car is that because they're older and have more miles on them, it is more likely they will need repairs, and it will be essential to stay on top of regular maintenance.
Certified pre-owned (CPO) cars can split the difference. They must be thoroughly inspected by the service department using specific parameters from the manufacturer and come with a separate warranty — but they're still used cars. Remember that CPO vehicles do cost more than the equivalent vehicle that isn't certified, too.
Once prepared, it's time to make your purchase. Here are a few tips for when you're at the dealership:
- Question All Charges
Go ahead and question processing and convenience fees. They may not be necessary or can be used when negotiating the final price. Ask for detailed information about the benefits of the gap insurance and service contracts offered by the finance department to determine if it is a necessity. These add-ons can be highly profitable for dealerships, so they may try to sell you things you don't need.
- The Negotiation Process
It can be the most intimidating part for a first-time car buyer (or even an experienced buyer), but it's the most important. It helps to know, however, that the power is essentially in your hands at this time. The salesperson wants to sell you a car, and she loses if you walk away.
- Preparing for Negotiation
Inquire about the same car, with the same options and fees included, with multiple dealerships before going into your local store. Try to get them to match competing offers if you have a lower offer.
- Ignore the Sticker
Start with the dealer's invoice instead of the MSRP, but don't stop there. Dealers can typically go even lower without losing money because they're often paid bonuses and incentives by the automaker that don't show up on the invoice.
- Don't Show Your Hand
Focus on the price of the car instead of the most you can pay a month. Once your monthly payment limit is disclosed, a dealer can very well match that but make up their difference by adjusting loan lengths or interest rates so that you ultimately end up paying more than you should. It may be advantageous not to disclose how you will be paying for the car at this point.
Once you tell them how much you want to pay, be firm and don't let them pressure you to change your mind. And remember, you don't have to give any personal information like your Social Security number while settling on the price.
- Be Fair
Negotiation does not have to be a battleground; both you and the car dealer can get a fair deal in car sales. Many dealers can't sell a car at a lowball price because the sale may not cover any costs they've sunk into having the vehicle on their lot.
Hot-selling models will likely have fewer incentives, and pricing may be adjusted above MSRP. If your dream car is a new model, you may end up paying more than on a competing model. It could pay to wait a few months or a year for prices to better adjust with demand.
Also, fees such as delivery fees, sales tax, and licensing fees are unavoidable, so don't get suspicious when they show up on the invoice.
- Leave or Put it in Writing
Don't be afraid to leave if the dealer cannot provide you with the offer that you think is fair. They may contact you in a few days, willing to sign the deal you wanted. Once you do agree on a price that you're happy with, get it in writing. Include specifics about the make, model, year, trim level, color, and VIN, so there is no confusion or discrepancies later.
Seal the Deal
Ask the dealer to email you all of the paperwork (purchase price, financing options, warranty, etc.) and look it over one last time away from the dealership. Once everything matches up, you can feel secure signing the final paperwork with a car-buying victory under your belt!
Sign the paperwork, grab the keys, and go for a drive; you have just made your first car purchase.
