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While the process of buying a car might seem overwhelming, especially since there are more options than ever before, there are strategies to help you find the right vehicle while keeping you from taking on unnecessary debt.
1. Know Your Budget
As of May 2022, the average cost of a new car was $47,148 while the average for a used car was $28,312, according to Kelley Blue Book (KBB). With these high prices, most borrowers rely on an auto loan to finance a new car. If you opt for a loan, be sure that the accompanying monthly payments will fit comfortably into your budget.
Also look at the trade-in value of your current car (if applicable) and how much money you can put toward a down payment. You can use our auto loan calculator to estimate your monthly payments and overall repayment costs.
In addition to looking at how much you can afford to spend on a car, consider what you might pay for gas, maintenance, repairs and car insurance. It’s typically recommended to keep your total car costs to 15% or less of your monthly take-home pay.
2. Research Cars Within Your Budget
After you’ve determined what you can spend on a car, you’ll need to decide which type of vehicle will best suit your needs. As you’re researching different options, think about what features are most important to you, such as performance, gas mileage, cargo space and safety ratings. Also consider any extra details you want, like heated seats or a premium sound system.
Additionally, make sure to look into ownership costs, reliability and market prices to help you narrow down your choices. Resources like Consumer Reports, Edmunds, J.D. Power and KBB can be helpful in this regard.
3. Research Dealers, Online Retailers and Private Sellers
- Dealerships. These are businesses that have contracted with one or more automakers to sell new or used cars directly to customers. Dealerships typically list their entire inventory online, which makes it easy to see if they have your desired vehicle. Many also offer in-house financing and help you with the paperwork required by the Department of Motor Vehicles (DMV).
- Online retailers. If you know exactly what car you want, you could consider buying a car online through a retailer like CarMax, Carvana or TrueCar. This type of website will find the vehicle you’re looking for based on manufacturer, model, year, mileage, condition and proximity to where you live. You can then opt to pick up the car or have it shipped to you.
- Private sellers. These are simply people who have chosen to sell their cars on their own. Because a private seller doesn’t have to make a profit, you might find a better deal on a used car this way compared to buying from a dealer. However, there’s also little protection for you as the buyer after the purchase if something turns out to be wrong with the vehicle. Additionally, you’ll have to manage the DMV paperwork on your own.
4. Get Preapproved If Financing With a Lender
If you’re going to take out an auto loan to pay for your new car, be sure to shop around and compare your options from as many lenders as possible so you can find a good deal. Auto loans are available from a few types of lenders, including online lenders as well as traditional banks and credit unions. If you already have a bank account, you might qualify for discounts if you also get an auto loan with that bank.
Additionally, many lenders offer a preapproval option. This allows you to see your personalized rates after providing some basic information and agreeing to a soft credit check that won’t impact your credit score.
Keep in mind that most dealers provide in-house financing that you might consider, too, which could be easier to qualify for if you have bad credit. If you walk into the dealership with a preapproval letter from another lender, the dealer might negotiate a better deal with the lender that they’ve partnered with. You can compare this with the preapproved terms you were offered to see which is the better deal.
5. Go for a Test Drive
After you’ve narrowed down the cars you’re interested in into a reasonable list, you’re ready to test drive them. It’s usually best to test drive the cars one after the other so the experiences are fresh in your mind—so set aside a morning or afternoon for it. Let the dealer know ahead of time when you’d like to come by so they can have the right vehicles ready and waiting for you, and predetermine a route that includes both city and highway driving.
Once you get behind the wheel, take note of the interior setup, the smoothness and comfort of the ride, the acceleration, and the braking and handling capabilities. Listen for any squeaks, rattles, vibrations or engine noise that could signal a problem.
Additionally, talk to the salesperson who accompanies you. They’ll likely be able to share more information about the vehicle than perhaps was found in your online research.
Most importantly, don’t feel like you’re taking too much time with a vehicle—this is your opportunity for due diligence.
6. Negotiate Your Purchase
If you’re purchasing from a dealership, it’s you versus a professional negotiator—and this is when you put that preapproval to work for you. Having a loan preapproval puts you in the category of a cash buyer, so don’t let the salesperson lure you into a discussion about monthly payments if you’ve already worked that out with your lending institution.
Take this slowly, and ask questions. If you’re thinking about saying yes, be sure to inquire about any fees to ward off a dealer trying to assign bogus charges in an effort to make a profit. And lastly, don’t be afraid to walk if the negotiations are going poorly or you feel disrespected.
7. Understand the Terms Before You Sign the Agreement
Rate and Terms, if Financing
If you’ve already been preapproved by a lender and want to pursue the loan, you’ll have to fill out a full application and submit any required documentation, such as tax returns or pay stubs. This process will require a hard credit check that could cause a slight, temporary drop in your credit score.
- Good credit. This usually means having a credit score of at least 670. There are also some lenders that offer car loans for bad credit, but these generally come with higher interest rates compared to good-credit loans.
- Verifiable income. Lenders want to see that you can afford to repay the loan.
- Low debt-to-income (DTI) ratio. Your DTI ratio is the amount you owe in monthly debt payments compared to your income. For an auto loan, your DTI ratio should be no higher than 50%—though some lenders might require lower ratios than this.
Mandatory Fees and Paperwork
Be prepared to fill out required paperwork for the DMV and pay mandatory fees, such as sales tax and fees for registration and title. If you’re working with a dealer, they will generally handle the paperwork for you—but beware of getting slapped with a documentation fee in return for this service.
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