When buying your first car, you might spend hours researching different makes, models, dealerships, and even colors of your potential vehicle.
But if you plan to borrow money to buy your first car, it's just as important to look around at financing options and take the proper legal steps to become a car owner. Taking a big-picture view of how to buy a car will allow you to drive off the lot with your dream first car and your finances intact.
Determine How Much You Can Afford
The first thing you should do is determine whether you can comfortably take on a new loan now or need to save more for a down payment. Saving can also reduce the amount you need to borrow for a car.
If you have the financial stability to get a car loan, determine how much you are willing to spend on the car based on how much you can afford to pay each month.
Establish a budget to calculate how much you can afford to borrow:
- Add up your monthly income. Include wages and any self-employed income.
- Add up living expenses. Include fixed expenses that don't change (rent and utilities, for example) and variable expenses that do change, such as food, entertainment, and emergency expenses.
- Add the costs of ownership. Include the cost of auto insurance, registration, and maintenance costs.
- Factor in what you would get for trading in a vehicle. If you owe more on the loan than its market value, you may want to pay the debt first to avoid rolling the old loan into a new loan and living with higher interest rates and monthly payments as a result.
- Subtract all costs from your income. Your monthly car loan payment should be less than the resulting figure.
Keeping your budget top of mind is one of the most important tips for how to buy a car within your means. Don't get swept away by the excitement of getting your first car. This strategy will help you avoid overextending yourself financially and getting deep into debt when buying a car.
Shop for a Lender
Naturally, how much you can afford to spend on your first car will determine what type of car you decide to purchase. So, once you've established your budget, begin looking for a loan.
You can secure financing from one of two sources:
- Direct lender: This is a bank, credit union, or other financial company from which you secure a car loan directly. You may be able to get a better deal from a direct lender. Many direct lenders will not guarantee a rate until you sign the papers, but they will give you preapproval for a loan amount and the current rate. You may be able to negotiate better financing terms once you get to the dealership if you get preapproved beforehand.
- Dealership: This is a business authorized to sell cars. You will enter into a financing contract with the dealership, but it will outsource the contract to a direct lender. Getting financing from a dealership allows you to skip a separate visit to a lender and may offer multiple financing options and incentive programs.
Don't automatically go through your local dealer for financing. To start, contact several banks or credit unions and ask about the interest rate, loan term, and any borrowing limits.
Look for a Car
Now that you've established your budget and secured funding, it's time to start looking for a car. Decide whether you want a new or used car and what make, model, and features you want. You will likely experience fewer problems and more years of use with new cars, but they cost more and depreciate quickly. A used car may be a better bargain, but be prepared for more repairs and a shorter useful life.
Then, shop at dealerships or online sources or look into a private sale through the classifieds. Take new or used cars for a test drive in different road conditions. While it's always wise to have a used car inspected by an independent mechanic before you buy it, even if the dealership has certified its condition, this step is even more crucial if you opt to get a car from a private seller. A good mechanic can tell if the car has been in an accident, has been totaled, or if there are any other major problems with it.
If you go with a private seller, also obtain the car's service record and ensure that the seller owns it (the title and registration should be in their name) and that there are no liens against it.
If a seller seems reluctant to let you take the car to a mechanic, that's a red flag.
Negotiate and Sign the Contract
Once you have picked out the car, you will need to negotiate the price of the car and sign a financing contract.
When you negotiate, try to get the best price on the car and the most favorable financing terms, including a low interest rate and a reasonable loan term. Come prepared with an estimate of the wholesale or dealership prices of the car you want and any preapproved loan terms you obtained. Keep in mind that a longer loan term may result in lower monthly payments, but because you will be making payments longer, you may pay more in interest charges over the life of the loan than you would have paid with a shorter-term loan.
Contact your lender or the dealership to finalize the details. Before signing the contract, ensure that you understand the repayment schedule and interest rate and are not signing up for any hidden fees.
Title and Register Your Car
Once you own the car, you will need to get a vehicle title in your name, register it, and get the tags (license plates) in order to legally drive it. This applies even if the dealership gives you temporary tags. In some states, the dealership will file an application for the title and registration and supply the plates, and you will receive them.
If not, or you buy a used car or buy from a private seller, you will need to apply for a title (or have the title transferred from a previous owner) and registration at a local government office, which could be the Department of Motor Vehicles, the Secretary of State, or the county tax office depending on where you live. You may need to accompany a private seller to the office to complete the title transfer.
Another thing to keep in mind: You will not be allowed to register your car until you have found and purchased car insurance. You will need to take proof of insurance with you to the government office.
Other Tips for How to Buy a Car
Keep these considerations in mind as you shop for your first car:
- Don't automatically purchase a new car. A car is a depreciating asset, which means it decreases in value over time. You can save a lot of money by buying a two- or thee-year-old car.
- Sell your car yourself instead of trading it in. This is an option if you are shopping for your second car. You may be able to make more money by selling the car directly.
- Do not become upside down on your car loan. This is when you owe more on a car than it is worth. This is bad because if you tried to sell your car, you could not pay off the loan with the sale of the car. Additionally, if your car was totaled or stolen, the check from the insurance would not pay off the amount of the loan.
- Save up and pay for a car with cash if possible. It will free up your income since you will no longer have a monthly payment. Additionally, you will be able to save money on interest.
- Join a car share. If you're not sure that you need a car or are trying to save money for one, you may be able to get by with a year or two of membership to save up enough money to buy your own.