Making a major financial decision can have a significant effect on your life. Whether you take out a loan to make a large purchase, such as a car or a home, or you save up to pay for the purchase yourself, it’s important to feel prepared for the next steps. Because a car is a must-have in most areas, affording individuals the opportunity to travel to and from work, school, and other places, buying a vehicle is a step many adults take. Even teens often purchase their own vehicles after earning their driver’s licenses.
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Whether you’re a first-time buyer or you’re planning to replace an existing car, review this guide that outlines what to know before buying a car. You might gain useful insight into how to prepare for the purchase or tips to qualify for a better rate if you’re planning to finance your vehicle.
We’re breaking down everything you need to know before you buy your next ride, regardless of where you plan to buy from or how you plan to make the purchase. This guide includes details on how to pick the best car for your lifestyle and needs, along with information about financing options. Go into your automotive deal feeling confident and ready to tackle the next steps.
Make a Budget First
The first step in the car-buying process is establishing a budget for the purchase. Do this before you start researching makes and models or apply for financing, because it’s important to know what you can afford to pay before you fall in love with a car that’s not within reach. Establishing a budget looks different depending on whether you’re paying for the car in cash or financing the purchase.
Financing a Car
If you’re planning to finance your car, you can use an online calculator to determine the monthly payment for different loan amounts. Plug in the amount you can afford to pay as a down payment, and use an estimated interest rate based on industry averages. Most financial experts recommend spending between 10 and 15 percent of your take-home pay on transportation, but this budget category includes more than just your monthly payment amount. Also consider the cost of insurance, gas, maintenance, and parking, if applicable, when calculating your total.
Paying with Cash
If you’re paying cash for your ride, you probably have an amount you know ou can spend on the purchase. When you’re using the funds you’ve saved up, it’s smart to set aside at least some of your total to keep on hand for unexpected expenses. Even a new car can experience unexpected issues, such as a tire blowout or a broken windshield, so you want to be prepared to pay for those things if they happen.
Get Preapproval for Financing
It’s best to seek pre-qualification for financing before you visit a car dealership or start looking for cars. When you have an idea of what you can afford after establishing your budget, you can confirm your assessment by getting a preapproval letter from a lender that indicates you’re qualified to borrow the funds needed to buy. The preapproval process is usually fairly easy to complete, requiring you to submit information about yourself and your financial situation.
Where to Apply
You can apply for preapproval with traditional lenders, including banks and credit unions, as well as online-only lenders. Some automotive manufacturers also serve as lenders, offering financing options to buyers of both new and used cars. If you apply with multiple lenders to compare your options, it’s best to do so within a few days to avoid multiple hard inquiries on your credit history.
You can use your preapproval as leverage when shopping for a vehicle. It allows you to clearly demonstrate how much you’re qualified to borrow, so salespeople will be less likely to steer you toward more expensive cars. You might even score a better deal on a car based on your loan approval amount if a salesperson wants to make a sale.
Research Makes and Models
You might go into the car-buying experience with a specific vehicle in mind, but it’s important to do your research before you make a deal. After all, the most expensive vehicle on the lot might have the worst ratings among drivers familiar with its features and performance. Many third-party automotive researchers offer detailed insight into their own experiences with various models, so you can learn the pros and cons of the car you’re interested in buying. If you find your dream car rates horribly among drivers, you might want to rethink your decision.
Compare Loan Terms
If you decide to finance your vehicle purchase, don’t just agree to the terms offered by the first lender who preapproves you. It’s important to compare terms and other elements of auto loans to protect yourself and your financial situation. Additionally, make apples-to-apples comparisons when looking at various loans. One car loan might show a lower monthly payment because it has a longer term than another, which results in more payments made. Longer loan terms might also have higher interest rates, so you end up paying more over the life of the loan.
Look at Interest Rates
Another element of auto financing that affects your monthly payment is the interest rate for which you can qualify. Interest is charged as a percentage of the total amount borrowed, and it’s added to the principal in your monthly payment. A higher rate means you pay the lender more in exchange for the funds needed to purchase your ride.
Your Interest Rate
The interest rate you can get depends on several factors:
- Your credit history
- The term of the loan
- The vehicle you choose
- Current economic conditions
If you have a low credit score, you might not qualify for an auto loan through a traditional lender. Some lenders specialize in second-chance financing, which is available to those with poor or no credit history. Loans offered through these lenders tend to have higher interest rates, so be aware of that before you agree to the terms.
By contrast, buyers with good to excellent credit can often qualify for low rates. Some auto manufacturers offer special promotions that charge 0 percent interest on a new vehicle purchase. Compare your options and choose the auto loan that offers the best annual percentage rate combined with terms that align with your financial needs and help you save money.
Consider a Trade-In
If you already own a vehicle but don’t plan to keep it, you can either trade it in to a dealership as part of a deal for a new or used car, or you can sell it privately. Some dealers will also purchase used cars from owners who don’t plan to buy from them. Trading in your car instead of selling it offers a few benefits. The main benefit is the trade-in value generally applies to the total cost of the car you’re buying, reducing the amount you must pay in sales tax.
Trading in a used car can also be easier than selling it privately, as you don’t have to interact with potential buyers. Instead, you work with someone at the dealership who makes an offer for the vehicle. If they can offer a fair price, it’s probably worth trading it in.
Before you decide whether to sell or trade your current ride, do some research to find out what it’s worth. The vehicle’s trade-in value is almost always lower than the private sale value, so you might take a hit by choosing to trade it in to a dealer. Compare various scenarios to see what yields the best financial result.
Always Take a Test Drive
Even if you think a particular model is the vehicle of your dreams, take it for a test drive. Every driver has different expectations and desires from their vehicle, and you might find certain elements of a car don’t align with what you want. If possible, keep the car for a couple of days and drive in different places with varying road conditions. Park it where you plan to keep your car when it’s not in use to make sure it fits comfortably in the designated space.
Have it Checked
If you have a trusted mechanic, take a used car to their location for an inspection. An experienced automotive technician can look for signs of damage or poor maintenance that aren’t usually visible to potential buyers. It’s better to find out if the car has problems before you buy it.
Know What’s Covered
Whether you’re buying a new car or a pre-owned model, it’s important to know your rights as a buyer and what might be covered if you experience major issues.
Warranty Coverage on New Cars
Nearly all new cars come with a warranty that covers the powertrain, as well as a bumper-to-bumper or comprehensive warranty that covers other components. However, these warranties don’t cover every component of the vehicle, so be aware of what’s included in the coverage before you buy.
If you buy a pre-owned model, it might have some remaining warranty coverage, depending on the year and mileage. Some dealerships and manufacturers offer extended warranty coverage for an additional fee. In several states, laws protect car buyers who purchase “lemons,” or vehicles that experience extensive problems shortly after purchase. By researching your rights and state laws, you can protect yourself if an issue does arise.
With these tips in mind, you can start the process of purchasing a vehicle feeling confident and excited about your new ride. Doing your own research is the best way to avoid problems and maintain a high level of protection.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.