Buying a car should be straightforward with internet car shopping, competitive pricing and the ability to browse cars at your fingertips. However, that isn’t always the case.
With the start of COVID-19 in 2020, car buying in 2021 and beyond has changed. For better or worse, inventory, fuel efficiency, technology packages and how we go about buying a car are radically changing.
Today, we will provide you with a simple five-step process that will teach you how to buy a car, so you end up:
- The right vehicle for your needs
- A car that fits your budget
- You select a car that is going to last you long term
1. Start With a Budget
Here is where most people go wrong – they start with the car they want, not the budget they follow. When purchasing a new or used vehicle, beginning with the type you want is reasonable, but everything should stem from the budget.
SPONSORED: Find a Qualified Financial Advisor
1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.
In most cases, here is the car buying mistake most people make:
- They find the car they want
- They use dealership or bank financing to fit the car into their budget
- They end up with a car that has high payments and long loan terms
- The car depreciates significantly before they even come close to paying their car off
- Or, they lease the car
If the above depiction happens to resemble previous car-buying experiences, keep reading.
Budgeting for a car is vital. After housing expenses, automobile expenses are the most costly budgetary item for adults.
Knowing this, be sure always to follow these car-buying budgetary guidelines:
- Your car’s value (whether new or used) should not exceed 25% of your gross income. For example, a person who makes $60,000 a year should only purchase a $15,000 car.
- The total monthly payment, insurance and fuel costs shouldn’t exceed 10% of your budget. That will keep you in line with your debt to income (DTI) ratio and prevent you from exceeding your DTI score when home buying.
2. Settle the New vs. Used Car Debate
When it comes to purchasing a car, there is an ongoing debate about whether you should buy a new car or a used car. On the one hand, you have the fiscally conservative folk who recommend purchasing preowned to save money on dealer markups.
However, on the other hand, some will say with the competitive used car inventory in 2021 (and no sign of slowing down in 2022), a new car isn’t going to cost that much more. Not to mention, a new vehicle comes with a manufacturer’s warranty.
The Case for a Used Car:
- From a fiscally responsible position, never buy a new car
- Brand new cars depreciate 20% in just the first year
- Put another way – a $40,000 car is worth $32,000 at the end of the year
- New cars can hinder your debt to income ratio
The Case for a New Car:
- A new car often comes with a warranty
- New cars have upgraded technology and energy efficiency capacities
- As of 2021, the used car market is increasingly competitive, making a new car purchase less daunting than ever before
While each offers pros and cons, the ultimate how-to-buy a car method to fall back on when settling the new vs. used debate is your budget. Refer to number one above and keep in mind that whatever car you decide on should fit your budget, and you shouldn’t have to get a part-time job to afford it!
3. Factor “Other” Costs of a Car
After roughly one to two months, the newness of your car wears off, and at that point, it becomes something you use to get from point A to point B. Keep in mind that there are other costs of purchasing a car to always consider that shouldn’t go unnoticed.
Other Car Costs:
- Insurance costs
- Fuel costs and what type of fuel is required
- Auto maintenance costs include:
- How much does an oil change cost?
- How much do new tires run?
On a personal note, I once purchased a brand new truck after trading in my paid-off commuter car. The payment alone was close to $500! However, after gas, personal property taxes, insurance and maintenance, the truck cost me nearly $1,000 per month and was over 30% of my take-home pay! I was doing a landscaping side hustle every weekend to pay for it!
4. Select the Right Car
Once you take care of the first two, the steps to buy a car are relatively simple.
- Figure out what you can afford.
- Decided whether you will go with a new or used option
- Select the car you want
Selecting the right car can be exciting and intimidating all at the same time. In most cases, there are factors you want to consider when choosing the right vehicle based on what should be your priorities.
In the table below, these are factors most consider high priority, medium priority, and low priority:
|High Priority||Medium Priority||Low Priority|
Once you have found a car or a few cars that meet your high priority needs, the next step is to locate a few cars and test drive them. Be sure to have a plan when going to test drive, so you don’t find yourself committing to the first car you drive due to high-pressure sales techniques!
How to Setup a Test Drive:
Test driving a car is a must, but avoiding a car salesperson is also a top priority for some if they’re browsing. The key to navigating the overly ambitious car salesman is to call ahead and schedule a test drive with the internet manager.
Set up a few appointments on weekdays since others won’t be there and avoid just dropping by. That will help you drive the car and get a feel for the vehicle without sitting down and pretending to enjoy the small talk!
Stary firm on your stance that you’re simply browsing and not interested in purchasing just yet.
5. Use Internet Inventories to Browse Cars
Eventually, you will find the car that fits your budget, needs, and, hopefully, wants. After test driving a few cars, you can finally pinpoint the exact car you aim to purchase. However, don’t forget to use the internet to browse inventories.
The days of showing up to a car dealer lot without a clue as to what you might be getting yourself into are over. With countless online car purchasing tools and search engines such as:
You now can populate a list of potential cars you want to purchase before ever leaving your home. To do so, follow these steps:
- Enter the make of your desired car
- Enter the model of your desired car
- Enter your zip code and expand the search distance to populate more options
Following these steps will give you the ability to price, shop, and select the best fit for your car purchase. How to buy a car is a lot different due to COVID and the internet, but that doesn’t mean you can’t find one.
Lastly, once you find the ideal car, it is time to settle on how you will purchase it!
6. Purchase Your Car & Determine How You Will Pay
Purchasing a new vehicle isn’t overly complicated as far as paying for it goes. Most will use one of three options:
- They will pay cash (check) for their car and buy it outright
- They will finance their vehicle using a loan and repayment plan
- They will lease their car
Whatever option works best for you, you will be in good shape if you refer to No. 1 – Budget. That stated, it is highly recommended you avoid the leasing option in most cases. While leasing is ideal for companies and special situations, leasing is fancy for rent to buy.
Getting out of a lease, meeting all the fine print terms, and avoiding mileage charges can be daunting with a lease. Not to mention, you don’t own it until after the lease terms are up, and at that point, you would finance the vehicle anyway.
Knowing this, the best route is usually to purchase a car outright or finance a vehicle. To help you with your negotiations, get a preapproval for a car loan with a credit union or your bank, so you don’t have to accept dealer financing!
FAQ: How to Buy a Car Questions
How much do you have to put down on a car?
While you don’t have to put anything down when purchasing a car, you can use a trade-in to help offset the costs or follow the recommended amount of 20% down. If you buy a $40,000 car, you would want to put at least $8,000 down. That will not only lower the monthly payments but should indicate the affordability of your purchase.
What is the cheapest way to buy a car?
The cheapest way to buy a car is to get a loan from your bank and purchase used from a private party. However, with warranties and such, many will elect to purchase certified pre-owned at a dealership and finance the car. The average car loan is 5-6 years, or 60-72 monthly payments.