There is nothing like getting behind the wheel of a brand new or used car and smelling that new car smell. It’s an exhilarating process to find the right car and get a great deal. But – if you go in blindly or without taking the proper steps you could end up paying for it in the long run. Your car purchase can turn into a nightmare if you got the wrong model or make a mistake with financing.
Buying a car is one of the more expensive purchases we make in our lives. The only other two that beat it are paying for college and buying a home.
Fortunately, there are tons and tons of resources out there for you to take advantage of unlike in the past. There are paid experts that review all of the cars, the deals, and can provide you with insight into the pros and cons of cars before you even leave for the lot.
In this car buying guide, we will walk you through navigating the car-buying process.
Buying vs Leasing
Before we dive into buying a car – what about leasing?
A car lease is a popular way to get in a new car with low monthly payments. It’s estimated that 30% of all cars that leave a dealership’s lot are leases. The key difference between a lease and buying a car is that you’re paying the depreciation value of the car in a lease and you don’t actually own the car. If you finance a car you’re paying the entire value of the car and in the end you’ll own it. These typically have longer loan periods and a higher payment due to the increase in cost.
Both methods have their pros and cons, make sure to read our car leasing guide to learn everything you can about leasing.
New vs Used
An important decision you’ll have to make is whether to buy a used car or buy a new car. A new car will come fresh with a few miles and that new car smell but almost always with a higher price tag. A used car might come with accident damage, mechanical issues, or worse. You’ll usually get a decent discount for a used car but you won’t have access to all the latest technology that comes with new ones.
An alternative car buying option is CPO, or certified pre-owned. A CPO car is usually a gently used car with low miles and no history of accidents. It goes through a thorough dealer inspection and a warranty is provided by the manufacturer.
How to Buy a New Car
Buying a new car can be a very fun, or painful process. If you choose the wrong car you could be out tons of money or be dissatisfied with your car for a very long time. Fortunately, navigating the car-buying process is much easier today for new cars.
Steps to Buying a New Car
- Set your budget. This is a big mistake many car buyers make. They never set a budget and they walk into a dealership with no plan. Before you even think about a car you should review your finances and manage your budget. You should know how much stress you’re willing to put on your budget. Keep in mind you have to pay sales tax, registration and license fees.
- Pick out a type of car based on needs. Now that you know what your budget is you can start to figure out what you need out of a car. Everyone wants that latest sports car or the luxury car of the year but do they need it? The answer is usually a resounding no. You should weigh the pros and cons of each type of car (van, coupe, etc.) and make sure it aligns with your lifestyle and even the lifestyle you’re going to have in the next 3-5 years.
- Research cars matching your type. Now that you know your budget and the type of car that fits all of your needs, it’s time to start researching cars. You should try to get at least 3 cars that you like in your list. You’ll want to review a cost-of-ownership for the car by reviewing Consumer Reports, J.D. Power data, and more.
- Test-drive the cars. You should never buy a car before test-driving it. You should take your list of cars and find the local dealers or dealerships that have them. You’ll want to set aside a good amount of time to test-drive the cars. It’s best to do this on a weekday and not around holidays or the weekend to give yourself the most time.
- Make a choice. Now that you’ve driven the cars and you have your mind set on a car, it’s time to make sure it’s the right car for you. A lot of the cars that dealers have come pre-built with features and those features don’t always line up with what you want. You’ll have to find a dealership that has the color and features you like.
- Find the right price. Before you go and talk to the salesman about the car you should already do your research and know how much the dealer bought the car for and compare it to the actual value of the car. You should also research the monthly incentives (all car dealers have them) for the cars and if there isn’t an incentive this month it may be smart to hold off until next month.
- Get a dealer quote. You should ask the dealer for a price quote for the car, or cars, you like. There is a high chance the seller is asking for more than the average market price or the suggested market price. You should compare the quotes with the research you did beforehand.
- You shouldn’t look to buy based on monthly payment. The dealers will structure the finance to make the most money out of you.
- Be unpredictable. Don’t let the salesman think they have you locked in.
- Review all of the fees. Many dealers will put in bogus fees to recoup money they lost in negotiating.
- Be ready to walk. If the deal doesn’t sound good or you don’t feel comfortable making it, leave.
- Maximize your trade-in value. A lot of people like to trade-in their old car to help towards the price of the new one or simply to just get rid of it. In some cases this can be a costly choice. The dealer will almost always give you a low quote offer up to $3,000 less than what the car is worth. You could ultimately lose money on your trade-in. It’s best to do your research and know what your car is worth before taking it in, it may be smarter to sell it yourself.
- Prepare for a potential down payment. If you haven’t paid off 20% or more of the car before you drive it off the lot you’ll be underwater as soon as you leave. This puts you in a bad situation financially if you had to resell the car or even when you try to turn it in later. The goal is to have 20% but if you can financially pay off more, you should.
- Setup auto insurance. If you’re financing a car you’ll need to have an auto insurance policy active on the car before you’ll be able to take it off the lot.
- Sign the note. If you’ve made it this far you’ve gone through all the steps and you’re ready to buy a car. You’ll want to go to the dealership to sign the papers in person. Be careful that they may try to get you to sign up for additional products and services (like an extended warranty) that the dealer makes tons of money on. A lot of new cars already have a warranty that will last a good 2-3 years. Take time to review the contract and make sure everything is correct.
How to Buy a Used Car
A lot of people relate shopping for a used car like a treasure hunt. You never know what you’re going to find and there are amazing deals out there. There are tons of incentives to buy used instead of new:
- You’ll usually spend less over time.
- You’ll save on depreciation.
- Often there are cheaper fees, registration, etc.
Here is a breakdown of the steps you’ll need to take to buy a used car.
Steps to Buying a Used Car
- Set your budget. There are really only two ways to get a used car – pay cash or take out a loan. You’ll want to adjust your budget and make sure you have enough to pay for the loan if you take out a loan. Many opt to buy a used car with cash since they tend to be much cheaper (in some cases under $10,000).
- Pick out a type of car based on needs. It may be more difficult to find the type of car you need since you’re limited to what the dealer lots have.
- Research cars matching your type. You’ll want to look at local dealership lots and see what they have to offer. It may be a bit harder to locate the exact car you want. You’ll want to review safety and awards to make sure you’re getting a good car.
- Test-drive the cars. Just like with new cars, you’ll want to test drive the car and make sure it doesn’t make any weird noises and it drives fine.
- Find a fair market price. A used car is much harder to price since there is a lot more to consider (like condition of car) compared to buying a new car. You’ll want to get all the information you can about the used cars you’ve found so you can run them through tools like KBB or TrueCar.
- Get a vehicle history report. You’ll want to run a vehicle history report by taking the VIN and getting the report from a company like CarFax or AutoCheck. It can save you tons of money in the long run if you avoid buying a car that has a history of being in the shop.
- Get a price/quote. You should start to talk about the price and negotiate a price for the used car. There isn’t a ton of room to move but if your research shows that the dealer has the car marked up by $5,000, it’s good to note that and try to negotiate it lower.
- Setup auto insurance. Just like with a new car you’ll have to have insurance on the car before you’re able to take it off the lot.
- Sign the note. Before you sign, make sure you read everything and understand everything on the paperwork. Be wary of dealers trying to push other services and add-ons into the deal.