If you’re buying your first vehicle, the process may seem overwhelming. Maybe you know what you want, but you’re not sure it will fit in your budget. And how do you know you’re getting the best deal? This guide is designed to help you successfully maneuver down the road to your new vehicle and avoid any potholes that could derail the process.
When buying a car, you have a lot of decisions to make. You need to carefully weigh your needs and wants with how much you can afford. While you may think you need a convertible, your actual needs (and budget) may suggest otherwise.
Ask yourself the questions below to get a better idea of what kind of vehicle you need. Even if you already have a make or model in mind, go through the questions and answer honestly. You want to make sure the vehicle you end up with is the one that best fits your needs.
- What will be the primary use of the vehicle?
- How many passengers will you need to transport regularly?
- Do you want manual or automatic transmission?
- What safety features are most important to you?
- What style vehicle do you want? Coupe? Sedan? SUV? Truck?
- How many miles do you plan to drive yearly?
- How long do you want to keep the vehicle?
- Do you want an environmentally friendly vehicle? Are you willing to pay more?
- Do you need all wheel drive?
- Do you need cargo space?
- What features are most important?
- Do you want to lease or buy?
After you have determined what kind of vehicle best fits your needs, you then need to know how much vehicle you can afford.
Total Cost of Ownership
What you can afford each month isn’t just the monthly payment – you need to consider the entire cost of ownership.
The cost of ownership includes:
- Monthly payment
- Registration fee, license, taxes
- Maintenance and repairs
- Parking and tolls
The total cost of ownership will be different depending on the type of vehicle you get. A new car may not have as many repairs but the monthly payment may be higher. Kelly Blue Book has a Five-Year Total Cost of Ownership calculator to help you compare costs between vehicles.
To determine how much you can afford, you need to review your monthly budget. Use the Guide to Building a Budget to get started.
Here a few additional questions to consider:
How much of a car payment can you afford? This isn’t necessarily how much of a loan can you get approved for – it’s how much can you afford each month with your budget. Just because you’re approved for a $50,000 auto loan doesn’t mean you can afford the monthly payment.
Beyond the monthly payment, how much can you afford to pay for insurance, gas, maintenance, etc. each month? Your monthly insurance premium is going to depend on a variety of factors including your zip code, credit history, type of car, year of car, miles driven and more. Gas costs will depend on how much you drive and what kind of vehicle you get. Maintenance and other costs will depend on whether your car is new or used, your driving style, weather and more.
Do you have money saved for a down payment? A down payment or even a trade-in can reduce the amount you need to borrow and potentially your monthly payment.
How quickly do you want to pay off the loan? A longer loan term may mean a lower monthly payment, but that also means more interest paid.
Figuring out your budget and financing go hand in hand. If you’ve decided to purchase your vehicle and don’t have cash for the entire purchase price, you’re going to need a loan. Getting pre-approved before you begin shopping will help you narrow down your options and give you more power when negotiating.
Applying for a Loan
When you apply for an auto loan, the lender is going to use the information you provide in addition to the information from your credit report to evaluate how much you can afford and the likelihood of you paying back your loan. Factors lenders take into consideration:
- Monthly income and expenses
- Length at current address
- Length at current employer
- Car information/value
- Down payment and amount financing
- Credit score and credit report
Lenders use all of this information to determine if you’re approved and the terms of the loan.
Terms of the Loan
When you receive your loan approval, you’ll receive the terms of the loan. These include the payment amount, length of the loan, and interest rate.
In general: if you want a lower payment, it will likely take you longer to pay off the loan and you’ll pay more in total interest. If you have a higher payment, you will likely pay off your loan faster and pay less in total interest.
In addition to financing, you may want to consider adding additional protection to your vehicle.
- Mechanical Breakdown Protection (MBP) may also be called an extended warranty, this protects your vehicle beyond the manufacturer’s factory warranty.
- Guaranteed Asset Protection (GAP) pays the unpaid balance of your loan if your vehicle is stolen or damaged beyond repair
Both MBP and GAP can be added to your monthly payment.
Once you know how much car you can afford, it’s time to begin your research. With the internet, there’s no shortage of search engines to help you find the car for you. Keep your list of needs and wants in mind as you begin researching vehicles.
If you’re also searching private sellers, always be careful. Take someone with you to test drive, don’t give any private and confidential information to the seller and schedule to meet in a public location.
Once you’ve found a couple vehicles, call up the dealership/seller to schedule a time to come by to look at the vehicle and take a test drive.
The test drive is an important step in the car buying process. A vehicle may have all the features you need, but it may not drive how you would like. Ideally, your test drive should be as close as possible to how and where you plan to drive on a regular basis. For example, if you have a lot of traffic on your commute, try driving with frequent stops and slow speeds.
If you’re buying a used vehicle, the Used Vehicle Checklist will give you an idea of what to look for before and during the test drive.
Once you’ve narrowed down your choices, it’s time to see if the dealer/seller is willing to negotiate price. Some dealerships have moved away from this practice and have a “this is lowest price we will offer” policy. Others expect you to negotiate price and their sticker prices are reflective of that.
Whenever you are negotiating, make sure you have done your research.
- Know the car’s worth. Look up prices of the specific make and model so you know when a price is good or too high.
- Know the value of add-ons. This will give you an idea of what each feature will add to the total cost. A sunroof may sound nice, but is it worth an extra $1,000?
- Know what else is out there. You’re not limited to one dealership. When you do your research, look for options on dealership, make/model, features, etc. This means being flexible on the type of vehicle or the different features. If you fall in love with a particular vehicle, your negotiation skills may suffer as you won’t want to lose the vehicle.
- Know your limits. How much are you willing to pay? Even if you have a pre-approval, you may not feel comfortable spending the maximum. Set your max and stick with it.
- Know you can walk away. If you make an offer and the dealer counters with something you’re not comfortable with and won’t budge, don’t be afraid to walk away. Again, you have options.
After the purchase
After you’ve signed the paper, don’t forget to get these other items in order:
If you purchased from a dealer, they should get you set up with your temporary registration, but you’re responsible if you purchased from a private seller. You can look at the New York DMV website to find out what’s required.
You may be required to get your insurance set up before you get your registration, so it’s important to update your insurance for your new vehicle as soon as possible. Make sure you know your VIN, make, model, etc. so you’re ready to go when you get to this step.
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