There are few projects that you will undertake that will be more costly than buying a car. According to the FTC the purchase of a car is the second most costly financial activity that you will undertake, and it falls just behind buying a home. The average cost of a new car is around $30,000. That's a big investment for anyone considering buying their first car. To simplify the process we’ve put together a basic primer on what you need to know when purchasing a car for the first time.
First things first, whenever you’re taking on a big financial project you need to start by assessing just how much you can afford. Ideally it would make sense to use mostly cash to purchase a new car, but since the cost of a new or new-to-you car can be so high, it makes sense to look toward financing. To set a budget take into account your monthly expenses, things like your cell phone bill, housing costs, groceries, gym memberships, savings, and health insurance. Get a clear picture of what you have to outlay each month when you are just living day to day. Also include any amount you want to save for other projects (like buying a house). Once you have your monthly expenses, subtract the amount you spend from the amount you earn each month, and the remaining money can be spent on a car. Remember when you are budgeting for a car you’ll not only need to include the monthly payment but also the insurance, gas, and any kind of maintenance you may need to do to keep your car running.
A word of caution about budgeting; depending on how much you decide to finance (or if you decide to finance) you want to be careful about over-leveraging yourself. To get reasonable financing, you need to have decent credit and have an established credit history. To have decent credit you need to have a good debt-to-income ratio-one of many factors that banks use to determine how credit worthy you are. You also should be careful to protect your credit while you are shopping for good loans. Here’s how to make sure your credit doesn’t get dinged each time you apply for a loan.
According to Edmunds you should never spend more than 20% of your take home pay on a car loan. To help you determine what that number, use a car affordability calculator. Another good rule of thumb according to Kelley Blue Book is that every $1,000 that you finance over 48 months will cost you $25 per month. If you are financing over 60 months each $1,000 will cost you $20 per month. You have a number of financing options, too, so check out which will work best for your needs. If you want to learn more about ways to finance a new or new-to-you car check out our recent story on how to finance a used car. You can choose private financing, a credit union, or a big bank. For more on private financing, check out our post here. If you’re curious about how to choose between a big bank and a credit union, read this.
Next you’ll need to assess which cars fall into your budget range. This can be kind of a tricky process. Consumer Reports suggests creating a short list of the features you want in a car—and the features you need. Say for example you really want a sports car, but you have kids to schlep to and from soccer practice. A sports car likely won’t be your best choice. Perhaps you want an electric car but your office and apartment don’t offer charging ports. An electric car wouldn’t make sense for you in that case. Are you parking in tight spaces and battling city traffic or doing mostly long drives to and from work? Focus on cars that make the most sense for your needs. Do you need navigation? Are you looking for a certain number of seats? What’s the weather like year round? Do you need all-wheel or four-wheel drive? Do you do specific activities on the weekend like drive off-road or head to the beach with a bunch of surfboards? All of these factors need to be considered when you’re making your list.
Look for vehicles with good safety ratings and reliability stats. You can use any number of sites like Consumer Reports, Kelley Blue Book, or J.D. Power to check out the reliability and reviews of specific vehicles. Also check out the Insurance Institute for Highway Safety. They give out annual awards for the safest and most reliable cars. Be sure to read reviews from across the web—everything from the big magazines (like Automobile and Motor Trend) to web-only publications like Motor Authority and Autoblog. These sites can also give you a good idea of a fair price for the vehicles you are interested in. Be sure to consider used cars in your research too, as you can save a bundle and get a great vehicle that meets your needs.
Once you’ve narrowed your focus to a few models and/or a few used cars, it’s time to test drive. New cars and even some certified pre-owned (or CPO) used cars can be driven at local dealerships. Come armed with all the research you’ve done and ask any questions that you may have. You should drive any used car you are considering purchasing and take it to a certified mechanic to have it checked out. To find a certified mechanic in your area follow the steps outlined in this article. If you are looking at a specific used car be sure to check out the vehicle history reports. If you need help understanding a vehicle history report, read this.
Look any car that you are going to buy off a lot or from a private seller over from top to bottom in full sunlight. Look for rust, dings, and scratches on the outside. Look for rips, tears, missing pieces, and cracks inside. Use your nose and if you smell something foul, know that you may be dealing with a formerly flooded car. If it smells odd to you, walk away. If you find something wrong, and it seems to be minor or cosmetic, you can use it as a negotiation point to get the price down. If it’s something major, walk away. Your mechanic should be able to point out any potential problems with the car. You don’t want to have your first car laden with problems that could cost you a pretty penny down the road.
Next you’ll need to negotiate the price. The trick to negotiation is to know the product. Use KBB’s information on Fair Purchase Pricing, located here, to know what you should aim for. Once you’re armed with that info, stick to your guns. Know that all salespeople are working for a commission and as Consumer Reports notes you should have the mentality that a salesperson’s commission shouldn’t all come out of your pocket. During this phase you can also play dealers off one another. If you visit one dealer and they give you a better price on the same car, you should go back to the first dealer and let them know that you’ve found a better price. In most cases the dealer will meet or beat that price and you’ll walk away with a better deal. As Edmunds notes, too, its best to let the dealer name the price first and then negotiate from there. Use your strengths (like friendliness or intelligence) to get the best price. You won’t regret it.
Once you’ve test driven your selected cars, it’s time to crunch the numbers and figure out how you are going to finance (if you are.) This is when you should start shopping around at various banks, credit unions and private lenders for the best rate for your credit.
If you are purchasing from a dealer, they will often offer you financing. This isn’t always your best financial bet. Dealers often charge higher interest rates and you can do better by doing the extra work and getting a loan elsewhere. While the process can sometimes be a hassle (and requires things like certified checks and sometimes additional paperwork), it can save you a bundle down the line. For details on what to expect when you go outside of a dealer to get a loan, check out our article. Once you’ve secured financing its time to take the check to the dealer or private seller and get ready to take your new or new-to-you car home. You’ll need to review documents (and always read the fine print) and sign some papers to take possession of the car from a dealer. If you are buying a car from a private seller you’ll need to do some additional work after the sale to transfer the title and the registration to your name. Depending on the state there could be additional fees associated with this.
When it’s all said and done, the car buying process should be relatively smooth. If you do your homework and stick to your guns you should have no problem buying a new or new-to-you car.
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