- Your budget
- The type of car you want
- The cost of the car
- The lifetime cost of the car
- Whether you’ll buy new or used
- Whether you’ll qualify for financing
- Finding the best deal
And then, of course, there’s the whole process of actually finding a car, securing financing if you need it, and signing the paperwork. It can be quite overwhelming!
Never fear! We’re here with the ultimate guide on how to buy your first car. We’ll start with preparing financially. Then, we’ll talk about how to choose a car that works well for you. Finally, we’ll talk you through the actual shopping and purchasing process.
It doesn’t take a rocket scientist to know that there are essentially two ways to buy a car: in cash and with financing. (Leasing is also an option, but that’s not really buying, so we’ll touch on it briefly at the end of this article.)
Because cars depreciate–lose their real value–very quickly, buying in cash is typically the best option. And if you’re looking to buy a beater that will just get you from point A to point B, cash may be your only option.
Lenders typically have limits on the age or mileage of used cars they’ll finance. So if you’re looking at $2,000, high-mileage options, you’ll need to plan to save up cash. Luckily since your price point is so much lower, you don’t have to save as much.
But what if you want or need a newer vehicle? Maybe you don’t want to pay $30,000 for a brand new model. But if you want your car to last several years, investing in a newer, lower-mileage option up front can be a wise decision.
In this case, it’s still a good idea to save up cash if possible. Those monthly car payments can quickly eat into your budget. With that said, most Americans who drive do finance their vehicles.
Sometimes you need a car sooner rather than later. So it’s fine to finance if you do it right. But when you’re financing, take these five tips, which we’ll tackle in order:
- Get your credit in order.
- Put as much money down as you can.
- Understand your budget.
- Shop around for the best financing deal.
- Plan to save up more cash for your next vehicle.
Before you start shopping for a car, it’s important to get your credit in order. We’ve written extensively about how to do this, so we’ll direct you to some other resources in a moment.
But, first, let’s understand why this is so important. With better credit, you’ll qualify for better financing. This means that you’ll get a lower interest rate. And that can save you tons of money over the life of your auto loan.
Let’s say you’re planning to get a $10,000 car loan. With a score of 630, you can qualify for 7 percent APR at today’s rates. With a score of 700, you can qualify for a 4 percent APR. (Note that these are just off-the-cuff examples for the sake of showing you the math.) You’ll plan on a four-year term.
According to our loan payment calculator, you’ll pay about $239 per month with the higher APR. With the lower APR, your payments will be $225 per month. Plus, you’ll pay much less interest over the life of the loan.
As you can see, it’s worth taking time, if at all possible, to get your credit score in order. Here are some steps you can take to do that:
- First, get a copy of your score so you know where you stand.
- Next, correct any mistakes on your credit report.
- Then, make all your payments on time from here on out.
- Consider asking for goodwill adjustments to existing missed payments.
- Pay down your credit cards to boost your credit utilization ratio.
As you’re working on improving your credit score, start socking away as much money as you can for your down payment.
Just like when you buy a home, when you buy a car, you’ll want to put money down. This is cash you’ve saved up that you can put towards the car purchase. It reduces the overall amount of financing you’ll need. And it’s a very good idea to have a high down payment whenever possible.
There are a couple of big reasons for this: depreciation and interest costs.
First, let’s talk about depreciation. Because cars are subject to lots of wear and tear, they lose their value really quickly.
This is especially true for newer vehicles. For instance, this infographic from Edmunds shows that as soon as you leave the lot, a brand new car loses around nine percent of its original value! After one year, the car will lose about 19 percent of its value, and it will have lost 31 percent of its value after just two years.
Actual depreciation rates vary by make and model. Cars that tend to last longer will hold their value better. But, still, the average car will be worth just 37 percent of what you paid for it at the dealership five years after your purchase.
So what does this mean for a car buyer? It means that you can get yourself into an upside down loan really quickly.
An upside down loan is when you owe more money on a piece of property than it’s worth. Say you do 100 percent financing a new car for $30,000. A year later, you decide to sell it to get something else. Now it’s only worth $24,300. Since you put no money down, you likely owe the bank more than the vehicle is worth. So you have to actually pay the bank money before you can sell the car.
This is not a good financial position to be in. It really restricts your ability to make choices with your car purchase in the future.
Luckily, you can mitigate these effects by making a good down payment on the vehicle. If you’re buying a used car, putting down 10 percent of the car’s purchase price is wise. If you’re buying new, bump that down payment up to 20 percent.
These down payment amounts will keep you ahead of depreciation so that you never wind up upside down on your loan. Of course, the larger your down payment, the smaller your loan. That means lower monthly payments, less interest over time, and an even smaller chance that you’ll wind up upside down on your loan.
Your budget will have a huge effect on how much car you’re able to buy. And there are two pieces to this puzzle: the overall auto loan, and the monthly payments.
First, you need to look at how much you can afford to spend per month on car payments. This means looking at your current budget, and determining how much you can comfortably allocate to this new expense.
Potential lenders will also have an opinion, here. For the most part, lenders don’t want you to dedicate more than a third–or slightly less–of your pay towards debt. So if you’re carrying a lot of credit card debt or an expensive mortgage payment, you may be more restricted in your monthly car payment.
You’ll also want to consider how much total debt you’re willing to take on. If you’re trying to become debt-free, less is better. Really, less debt is pretty much always better.
Regardless of these numbers, you’ll want to set hard limits for both the monthly payment and the total amount of debt you’re considering. This will help you stay in control when you’re on the lot with a dealer who is trying to upsell you.
Many first-time buyers are tempted to go to a dealer and take whatever financing they offer. But this is not a good idea. For one thing, dealer financing tends to have less favorable terms. And you’ll get a better deal if you take time to shop around.
To do this, you just need to get pre-qualified for an auto loan with two or three different lenders. It’s always a good idea to check with your own bank or credit union. And if you’re not a member of a credit union, you might become one just for auto financing. They tend to offer the best terms, and they’re more likely to work with you if you don’t have excellent credit. If you do have good credit, you can even check out crowdfunding sites like Lending Club or Prosper for more options.
The key is to compare terms from a few different lenders so that you get the best possible deal. You’re looking for a loan with few, if any fees, and the lowest possible interest rate. You might also ask about different loan terms. Sometimes a shorter term will come with a lower interest rate, so the payment may not be that much higher.
And don’t worry that shopping around will negatively affect your credit score. Putting in too many credit applications can ding your score. But scoring algorithms like FICO’s give you time to shop around for large loans like this.
FICO gives you between 14 and 45 days to shop around. All of your inquiries for the same type of loan within that period will be treated as a single inquiry. This is a good thing! Since you don’t know which scoring model a potential lender will pull, it’s best to stick with the 14-day rule. Do all of your prequalification shopping within a two-week period before you purchase your car.
As you’re shopping around, your goal is to find the best financing deal you can get. It’s a good idea to ask for financing that matches your maximum car-buying budget. If you end up in a cheaper vehicle, all the better.
Having a preapproved loan makes it easier for you to negotiate, whether at a dealership or with an individual. The person with whom you’re negotiating knows that you have financing in place, so they’ll see you as a serious potential buyer.
Once you’re pre-approved, you’ll get an offer statement from the lender. This might be in the form of a blank check with a limit set, a certificate, or a letter. These days, you’re likely to get a code for activating your loan online.
This doesn’t mean you’re using the money. It just means the money is available.
While we’re talking about buying your first car, let’s also consider how to make the experience even better next time. If possible, you should aim to have only one car loan in your life. After this first vehicle, you can use the equity in the car plus any money you’ve saved to pay cash for your next vehicle.
To do this, try to leave more wiggle room in your budget so you can save more for your next car. For example, say you can comfortably afford a $300/month car payment. Instead of taking up that full amount, try to wind up with a $225/month payment. Then, save the extra $75 per month. Just consider that part of your car payment.
That doesn’t seem like a lot. But let’s say your car loan is paid off in three years. You’ll have some equity in your car, plus $2,700 saved for your next vehicle. After your car is paid off, you can save the whole $300/month you’ve been allocating for a car. At the end of that period, you’ll have $6,300 in cash plus your car’s equity. So you can likely move into your next car completely debt-free!
Now that you’ve got the financial piece of this process figured out, it’s time to figure out what type of car you want to buy. You’ll need to prioritize your wants and needs for a vehicle, and then look at different types of cars that will suit. Then, you’ll need to shop around to find the car that will best suit.
You already have some idea of what kind of car you can afford. So that will help limit the field right off the bat. But there are probably still a wide variety of vehicles available that meet your budget.
So now it’s time to decide what you really need in a vehicle, and then a few things you might want.
I’ll use my family as an example. We’re actually planning to car shop sometime in the next six to twelve months. Here’s what we actually need:
- A car that will last at least five years
- Enough seating for six or more people–enough for our family plus two or more
- Decent in-town gas mileage–because my husband is all over our city for his job
There’s really not a lot on our needs list. But there is a lot on our wants list, including:
- Automatic sliding doors
- Back-seat heating and air that is controlled separately
- Leather upholstery–because kids
- MP3 and phone charging jacks
- Under-seat build-in storage
- A good-sized trunk
- And our five-year-old would love to have TV screens in the back
I’d also like to have a limo-style roll-up window between the kids and the adults. But, alas, I think the chances of that are slim.
So what does your needs and wants list look like? Chances are it’ll be balanced a bit like ours. You’ll have a few things you truly need from a car, but many things you’d like to have.
Now that you know what you want and need from a vehicle, find a few makes and models that will suit. The broader your search, the easier it will be to shop around for a car.
When you’re researching, you want to look at several different things, including:
- The mileage you can expect from that make/model in your price range
- The actual five-year cost to own the vehicle, which you can find here
- Consumer ratings on the vehicle
- Information about how long the vehicle is likely to last
- General availability of the vehicle in your price range and your area
It’s important not to just pick a make and model that seems to have what you need and fits your budget. This is especially true if you’re buying used and want to own the vehicle for another five years or more. In this case, do your due diligence to ensure that your vehicle will last long enough to meet your needs.
This is different depending on whether you’re buying a new or a used car. If you’re buying a brand new car (which isn’t the best idea, by the way!), you’ll just need to find a couple of dealers who offer that make and model. If you’re buying used, you’ll want to shop around online for listings of that vehicle.
When you’re shopping around for a used vehicle, consider buying directly from an individual. With the right due diligence, this can be a safe process that will save you potentially thousands of dollars. You can buy from an individual seller even if you’re financing the vehicle. Here’s a list of sites to consider when shopping around for a vehicle.
If you’re buying from a dealer, ask if they offer any sort of warranty on the vehicle for any amount of time. If not, you might try another dealer.
When buying from an individual, it’s important that you have the car inspected before you buy. This is an additional expense in the car buying process, but it’s well worth your while. Check out this article to get the lowdown on how and where to have a vehicle inspected before you buy.
You can and should negotiate when buying a car regardless of whether you’re buying at the dealership or from an individual. In either case, you should always negotiate on the price.
With a dealer, you may be able to get an additional discount for paying cash–even if that cash is through your pre-approved loan offer. You can also ask the dealer about dealer-based financing. Don’t tell them first what your offer in hand is. They may undercut the original lender’s interest rates in this case! You can get more tips for negotiating with a dealer here.
When negotiating with a private seller, you can also negotiate the price. Most sellers are ready to get rid of their car as soon as possible, so they’ll likely come down on their first asking price. You could also negotiate to leave the car at the same price if the seller will pay for the inspection and any essential repairs that pop up during the inspection.
The actual purchasing process will vary, depending on where you’re purchasing the car–from a dealer or an individual. Here are some tips for both situations:
When you purchase from the dealer, you’ll sign the paperwork in the seller’s offices. When you decide to do dealer financing (which is fine if they offer a better deal than your pre-approved offer), you’ll sign for both the financing and the sale in the office.
This process is fairly straightforward. Just be sure you’re looking at all the paperwork, and ask about any additional fees that pop up. Dealers will often rush you through the paperwork, and you could end up owing more than you bargained for if you’re not careful. Just go slowly, and take your time when needed.
Buying from a private party can be a little different. This is especially true if the car is still finances, and the seller doesn’t have the title in hand. It’s fine to buy a car with a lien on it, but it does make the process a little more complicated.
First, you’ll need to check with the bank that owns the lien. They’ll turn over the title to you or the new lienholder at the time of sale. This can delay the sale, though. You can negate this time some by doing the deal at the bank that owns the lien. When the seller uses the proceeds to pay off the balance of the loan, they can sign the title over to you or your lender, as needed.
When buying from a private party, you’ll also need to make sure that you fill out a transfer-of-ownership document. This should come with the title. It’ll include information like how many miles are on the car at the time of transfer and how much the vehicle is being sold for.
Also, make sure that the registration on the car is up to date. If it isn’t, you could be on the hook for any late fees associated with it. In fact, it’s a good idea to get proof of this before your scheduled sale date. That way the seller can take care of this issue if they are, in fact, behind on paying the registration.
Now that you’ve actually purchased your first car, what do you do after the fact? You actually have to take a few steps. Here’s what you need to do:
Actually, if this is the very first car that you’ll own, you need to get insurance before you buy the car. A dealer won’t let you drive off the lot without car insurance, and you shouldn’t drive a privately sold vehicle with no insurance, either.
Driving a car with no liability insurance is illegal in most states. And if your car is financed, the lender will usually require complete insurance coverage that will cover their investment in the case of a total loss.
If you’re already on someone else’s car insurance policy, like your parents’, you can transfer or add insurance to your vehicle at the time of sale. But if you don’t currently have car insurance, you may want to shop around before you buy. You can purchase a policy that will begin on the day you purchase the vehicle.
Again, you’ll need proof of this insurance to drive off the lot at a dealership. And you may need it for your lender to finance any sale, including a private vehicle sale.
Many times, dealers will offer you gap insurance. This is especially true if you’re not making a big down payment on a car.
Remember earlier when we talked about depreciation? As soon as you drive your car off the lot, it will be worth less than it is now. So if you make a small or no down payment, you may be automatically upside down. If you wreck your car while it’s still upside down, your regular auto insurance will pay what the car was worth at the time of the accident. This could be less than the total balance left on your auto loan!
In this case, gap insurance can be a reasonable additional expense.
Gap insurance is an additional insurance type that will pay that “gap” between the value of the car and the total left on your loan should you total the vehicle. If you’re making a small down payment, buying a car with low resale value, or putting miles on your car quickly, gap insurance may make sense.
Gap insurance also makes sense if you’re taking out a longer-term car loan. The longer your term, the more slowly you’ll pay down the loan’s principal. That means you could be upside down for longer. (Of course, if you have to finance your car for more than three or four years, you should question the original purchase price, in the first place!)
Often, dealers will offer gap insurance when you close on the vehicle. But you can also shop for gap insurance independently, either through your regular auto insurance company or as an additional policy.
You’ve probably seen cars from the dealer’s lot driving around with paper license plates. They always have a prominent date on them. This is the last day that the dealer-issued registration is valid. After that date, the new owner must have their own registration complete with the state to legally drive the car.
When you’re shopping around for a car, check your state’s DMV or BMV website to find out your likely registration costs. Some cars cost a few hundred dollars! If you have to, reduce your down payment so that you’ll have enough money left over for this additional cost.
Also, check with your DMV to see what you need to bring in order to register the car. Often times, you’ll need to have a current driver’s license, a proof of address, and maybe one additional form of identification.
Once you get the registration, you should keep it in the car. And be sure to budget for the annual registration and license renewal you’ll need to pay! After you buy the car, those annual costs will be much less, most of the time. But find out when you register how much they’ll be, and add them as a one-off expense to your budget.
The best way to ensure that you get the most miles out of your first car is to take good care of it. Consult the car’s owner’s manual (you can probably find this online if your used car’s is missing) to find out when you should plan to perform regular maintenance on the car.
Then, find a mechanic you like to work with for your repairs. It’s helpful to work with a local mechanic who knows your car and its history. And when you find someone you trust, you can lean on them for advice on when to perform major regular maintenance, like replacing timing belts and other things that will help your car last as long as possible.
Again, once you buy your car, you should be budgeting every single month for maintenance costs. Even if you’re buying new, the cost of tires, oil changes, brake pad changes, and other regular items can total up really quickly!
Other than this, enjoy owning your new car!
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