Takeaways
- Buying a new car can be exhilarating, don’t let your emotions take over.
- Get your financial house in order and save for a down payment.
- Include the full cost of the transaction, not just the car’s sticker price.
- Shop your financing options and secure the best auto loan available.
- Test drive cars to ensure the online ascetics match real-world practicalities.
Does this sound like you?
Driving around in a car that is costing you more than it is worth? Or maybe you were the beneficiary of a not-so-great hand-me-down car from family or friends. Perhaps you are tired of taking public transportation and want the luxury of your own space.
Buying a new or used car is a big financial decision that should consider your financial goals. Buying a new car is a major personal milestone, but it can also cost you thousands of dollars of interest payments, monthly car notes, and higher transportation costs (if not done correctly).
7 Steps to Buy a New Car
Going into your purchase fully prepared financially and mentally will help ensure you are happy with your new car purchase. Here are seven steps to consider when purchasing a new car.
1. Consult Your Budget
The first step to purchasing any major item should be to consult your budget. No matter what budgeting strategy you are currently using, you should ensure that you have enough cash saved for a down payment and be able to make forecasted car payments on time. The last thing you want is to purchase a car you cannot afford and ruin your credit score and finances.
2. Determine How Much You Can Afford
With your budget in mind, how much car you can comfortably afford? Analyze your budget for how much free cash you can apply to your car payment. Personal finance experts recommend spending no more than 20% of your monthly take-home pay on debts, including your car payments.
Once you start car hunting it is important to contemplate not just the sticker price but all the ancillary expenses surrounding a new car purchase. Expect to pay dealer fees, taxes, license fees, car insurance, and warranties. After you have your total car purchase price in mind, you can begin to play with loan parameters to see the monthly cost of the car to analyze whether it fits into our budget.
3. Improve Your Credit
Before deciding that you are ready to purchase a new car, you might need some financial preparation, including improving your credit score. Your credit score is computed using several factors, including outstanding credit, payment history, and credit utilization. Here are some quick ways to increase your credit score:
- Make On-Time Payments: Paying your bills on time is one of the most critical factors in your FICO credit score and VantageScore. The benefits of making on-time payments might take several months to accrue to your credit score.
- Pay Small Outstanding Balances: If you have a bunch of small credit card or loan balances hanging out, consider paying off these loans to reduce your total outstanding debt and improve your ability to manage a new line of credit, like an auto loan.
- Ask for a Credit Increase: This is a low-hassle way to improve your credit utilization. You can increase your credit limit by asking your credit card provider or providing updated income information.
Smart Money-> 7 Steps to Improve Your Credit Score
If you have a great credit score, you can secure higher-quality loans that have features like lower interest rates. Lower interest rates on your car loan increase the affordability of comparable loans. You might be able to afford a car you want with a better credit score. Another tactic is to boost your savings for a down payment.
4. Save for a Down Payment
Much like with purchasing a home, your down payment plays an integral role in how much car you can afford. Personal finance experts advocate saving at least 20% of your car’s purchase price to reduce your outstanding loan and increase your ability to secure better financing terms.
Finding the perfect car and being able to afford that car are two very different things. Taking the time to save up for your down payment is a smart money move. You might need to switch budgeting strategies to align directly with your down payment savings goals. Play with the levers in your budget to increase your car savings.
Saving for your down payment also helps put your car’s price into perspective. Buying an expensive car can erode your ability to save and invest. You don’t want to pour all your discretionary income into a depreciating asset.
Smart Tip:
Paying off your car note early will help you save on interest payments, putting cash back into your pocket. If you can’t come up with a high down payment, consider committing to paying higher than required payments to reduce your outstanding debt.
5. Research Online and In-Person
Researching the right car for you should be done in a hybrid fashion, partly online and in-person. When researching online, remember that the right choice for you comes down to many variables – make, model, color, reliability, gas mileage, technology, and more – converging on the perfect fit. We recommend using Edmunds and Kelley Blue Book to compare all sorts of specific statistics on cars you are considering. Ultimately, you want to feel comfortable in your new car and with its affordability.
Once you have narrowed down your top choices, it is time for the fun part of the car-buying process. Head to the dealership and test drive your top selections. Car dealerships list their available inventory online, allowing you to call ahead and book an appointment or make a reservation online. Many people feel uncomfortable dealing with new or used car salesmen and don’t enjoy the experience of being sold to. However, you can also test drive cars alone to truly feel what it’s like behind the wheel of your dream car.
Smart Tip:
The old business model of how to buy a car has been disrupted by companies like Carvana, True Car, and Vroom. These companies give you access to a trove of inventory nationwide and even deliver the car straight to your doorstep. These companies even offer a test-driving period of up to a week and return policies (although most people never return them).
6. Negotiate Price
Negotiating the price of a new or used car can be a buyer's least favorite part of the transaction. But with any major purchase, like purchasing a new home or buying a boat, it makes financial sense to negotiate as much as you can on price.
Reducing your car’s purchase price can save you months of repayment, increase the impact of your down payment, and decrease your interest payments. Ignore the car dealership’s no-haggle price. You are there to haggle away. It might take a trip or two to the car dealership to successfully decrease the car’s purchase price, which depends on a variety of factors outside your control, like the interest rate environment, new car inventory, and recent dealership success.
7. Pick the Perfect Car
After you have laid the financial foundation to prepare yourself for purchasing a new car and selecting a car that fits your needs, it is time to pull the trigger. Negotiating for a reduced price can make you feel even better about your purchase, but at the end of the day, you want to walk away feeling confident you made the right decision.
Smart Summary
While buying a new or used car isn’t permanent, you will only experience this process a handful of times. The new car purchasing process can be exhilarating, but the most seasoned buyers don’t let their emotions dictate the day. Instead, savvy buyers prepare financially months in advance and conduct heavy due diligence. Drive away with the perfect car by getting savvy on how to buy a car.
Frequently Asked Questions
Personal finance experts usually recommend keeping all your debt payments below 20% of your take-home pay. Even the 50/30/20 budget allocates 20% to debt payments, which includes credit card payments, auto loans, and other consumer debt. Make sure you don’t stretch your budget too thin with a new car note.
This question is like the age-old debate about which debt repayment strategy is better: the snowball or avalanche method. The financially conservative route is to pay for a new or used car with cash. The reality is most consumers don’t have the money to meet new car prices and instead choose to finance car purchases. At the end of the day, select an option that leaves you feeling the most comfortable about your new car purchase.
Depending on your financial situation, paying for a new or used car with cash can be a great money move. However, you want to ensure you aren’t sacrificing financial security. We do not recommend pulling money from your emergency or slush fund to pay for a new car. Instead, map out a saving strategy to pay with cash.
Ready to get rid of your monthly car payment? Learn more about how to pay off your car note in 7 easy steps and eliminate your car payments for good.
