First Time Car Buying

Buying a car is most people’s second most expensive purchase. Here are a few tips to know that will help ensure you get the vehicle you want at a price you can afford.

What is your Budget?

The first step in buying a car is to establish a budget. This will help you narrow your focus to cars within your price range before you fall in love with one that'll break the bank.

Create a budget by adding up all your monthly income and all your monthly expenses. Be sure to categorize your expenses as either fixed (such as your rent, utilities or student loan payments) or discretionary (such as going out to eat or buying new clothes). Once you've got an accurate idea of your expenses, you're likely to see several areas where you could cut back, which could leave you more money to put toward your monthly car payment.

Loan terms are another factor to consider. Auto loan terms generally range from 36 to 84 months. The longer the loan term, the smaller your monthly payment will be, but the more you'll pay in interest over time. By choosing a less expensive car and putting down a larger down payment, you can opt for a shorter loan term and keep your payments manageable.

Explore Your Financing and Purchasing Options

When you've narrowed down your dream car list, it's time to think about how you'll finance the purchase. Unless you've saved up enough money to buy a car outright with cash, you'll more than likely need an auto loan to finance the purchase.

You can get financing through an auto dealership or through a third party such as a bank or credit union. You can also get pre-qualified through financial institution prior to arriving at the dealership. This will provide you with a fairly accurate assessment of how much you can borrow.

If you're applying to multiple lenders to get the best loan terms, be sure to apply to all of them within a short time period. Applications made within a 14- to 45-day period (depending on the scoring model) will only count as one hard inquiry in your credit score. Once you're approved, the lender will give you proof of the loan terms and amount to show the dealership.

When it's time to buy, your options for where and how to do it are greater than ever before. Depending on whether you're seeking a new or used car, you can buy from dealerships, dealership websites, online car-buying sites or private sellers. E-Shop will even have the car delivered right to your door for those dealerships that participate.

Improve Your Credit Score

Knowing your credit score before you seek financing for your purchase will give you an idea of which loan terms you're likely to qualify for. Start by getting a copy of your credit report and checking to make sure it's accurate. Then check your credit score.

To help improve your credit score, continue to pay all your bills on time, pay down your debt and reduce your credit utilization ration. For a quick boost to your credit score, consider boosting your credit score through the credit bureaus services.

Save for a Down Payment

How big does the down payment on a car need to be? Just as with buying a home, most lenders like to see a down payment that’s at least 20% of the car’s price. 

There are several reasons a 20% down payment makes sense:

• New cars typically lose a portion of their value in the first year of ownership, so a down payment of 20% helps make sure you never owe more than your car is worth.
• The bigger the down payment, the smaller the loan you'll need.
• A bigger down payment generally earns you more favorable loan terms, which saves you money in the long run.

Many dealership, automaker and automotive websites have online payment calculators you can use to arrive at the best down payment amount. By putting in various car prices and loan terms, you can estimate how different down payment amounts might affect your monthly payment and the amount of interest you'll ultimately pay.

Negotiate the Price

Both dealerships and private sellers expect you to haggle over the price of the car. You'll have more wiggle room with a used car, since it doesn't have a set MSRP (manufacturer's suggested retail price). Even with a new car, you can generally negotiate your way to a significant savings off the sticker price. Supply issues may impact the amount negotiating the dealers are currently experiencing with the Chip shortage.

Timing can help you get a better deal too. If you're buying new and don't need the car right away, try waiting until the last few months of the year to go shopping. That's when dealerships typically offer special incentives such as cash back or promotional 0% APR financing so they can clear cars off the lot to make way for next year's models. Can't wait that long? If you can hold out until the end of the month, salespeople eager to make their monthly sales quotas are often quite willing to bargain.

Read the Contract Carefully

Buying a car can be a lengthy and stressful process. By the time you have a contract in hand, you're probably so eager to get behind the wheel that you're ready to sign the contract without even glancing at it. Ensure you are comfortable with the charges and terms you discussed.

When you sign a contract, you're entering into a legal agreement with the seller—and once you put your name on the dotted line, it's often very difficult or impossible to renege (and if you can, you'll almost certainly pay a fee). Take as much time as you need to read the contract in full before you sign. Don't be shy about asking questions or calling a trusted friend or advisor if there's anything you don't understand.

Enjoy Your New Car

Congratulations—you're a car owner! Buying your first car may be the first major purchase you ever make. There's a lot to consider, but following the simple steps above can help ease the stress. With some careful budgeting, research and planning, you'll have the confidence to negotiate the best deal and get the car of your dreams without getting taken for a ride.

See also the CFPB’s guide to obtaining an auto loan.

https://www.consumerfinance.gov/consumer-tools/getting-an-auto-loan/