Buying a car is stressful and confusing. So we’ve put together this complete guide on how to buy your first car, including tips for first car owners.
Whether you’re a high school student looking for an old jalopy or a newly-minted MBA with a need for speed, buying for first car can be tricky. There are all sorts of factors to consider, including:
1. Get preapproved for a loan before you set foot in a dealer’s lot.
“The single best advice we can give to people is to get preapproved for a car loan from your bank, a credit union or an online lender. Getting a loan from a lender outside the car dealership prompts buyers to think about a crucial question. “How much car can I afford? You want to do that before a salesperson has you falling in love with the limited model with the sunroof and leather seats. ” So before you start car shopping, you might want to build up your credit score or get erroneous information off your credit report.
2. Keep it simple at the dealership.
If you’re buying a car at a dealership, focus on one thing at a time. And don’t tell the salespeople too much. Remember — this is a kind of game. And if you’re playing cards, you don’t hold them up and say, “Hey, everybody, look — I have a pair of queens,” right?
3. Don’t buy any add-ons at the dealership.
If you’ve bought a car, you know how this works. You’ve been at the dealership for hours, you’re tired, you’ve settled on a price, you’ve haggled over the trade-in — then you get handed off to the finance manager.
4. Beware longer-term six- or seven-year car loans.
A third of new car loans are now longer than six years. And that’s “a really dangerous trend,”. We have a whole storyabout why that’s the case. But in short, a seven-year loan will mean lower monthly payments than a five-year loan. But it will also mean paying a lot more money in interest. Seven-year loans often have higher interest rates than five-year loans. And like most loans, the interest is front-loaded — you’re paying more interest compared with principal in the first years. “Most people don’t even realize this, and they don’t know why it’s dangerous,”.
5. Don’t buy too much car. And consider a used car to save a lot of money!
“The golden rule is that all of your car expenses should really be no more than 20% of your take-home pay,” and that that’s total car expenses, including insurance, gas and repairs. “So the car payment itself should be between 10 and 15%.”
And if a new car with a five-year loan doesn’t fit into your budget, you might decide you don’t really need a brand-new car.
“We’re actually living in a golden age of used cars,”. “I mean, the reliability of used cars is remarkable these days.” There is an endless river of cars coming off three-year leases that are in very good shape. And even cars that are older than that, he says, are definitely worth considering. “You know, people are buying good used cars at a hundred-thousand miles and driving them for another hundred-thousand miles,”. “So I’m a big fan of buying a used car as a way to save money.”
While we’re talking about buying your first car, let’s also consider how to make the experience even better next time. If possible, you should aim to have only one car loan in your life. After this first vehicle, you can use the equity in the car plus any money you’ve saved to pay cash for your next vehicle.
To do this, try to leave more wiggle room in your budget so you can save more for your next car. For example, say you can comfortably afford a $300/month car payment. Instead of taking up that full amount, try to wind up with a $225/month payment. Then, save the extra $75 per month. Just consider that part of your car payment.
That doesn’t seem like a lot. But let’s say your car loan is paid off in three years. You’ll have some equity in your car, plus $2,700 saved for your next vehicle. After your car is paid off, you can save the whole $300/month you’ve been allocating for a car. At the end of that period, you’ll have $6,300 in cash plus your car’s equity. So you can likely move into your next car completely debt-free!