How to buy a car

Buying a new car should be an exciting experience. You get to test a lot of cars and choose the one that's right for who you are – or who you want to be. The best way to keep your car-buying experience fun and stress-free is a little advance planning. Our guide to buying a car will walk you through everything you need to consider and anticipate so that you can strike a balance between the fun parts and the responsible parts.

Saving to buy a car

Most people can think of something they enjoy more than budgeting. While it’s not always fun, it’s a necessary first step for buying a car. Taking the time to plan for the costs associated with your new car means that you’ll be able to really enjoy the buying process and won’t have to wonder if you really can afford the car that the dealer is trying to talk you into.

Calculate a price you can afford

A general rule of thumb is that your transportation expenses should be about 10-15% of your net income. That includes car payments, insurance, gas and money for your deductible and any repairs.

You should also consider the following:

• Existing debt – Prioritize paying off your debt. Use some of that 20% if you need to. It’s better to pay 15% of your income toward transportation and be debt-free. Paying down debt could also save you money by helping you qualify for better interest rates when purchasing your vehicle.
• Financing – Shop around to find the best interest rate for your car loan. Unless you’re saving to buy a car outright, your loan terms will impact the total amount that you spend on your new vehicle and should be considered when calculating your budget.
• Credit score – Getting your credit score into good shape can save you money on financing your new vehicle.
• Taxes and fees – These can add a lot to the purchase price so research what your local fees are and factor in the taxes.
• Maintenance – Oil changes and tire rotations can add up. Some new cars come with offers that pay for some of these services for a period of time, but you’ll need to be prepared to pay for them when that time is up so factor this into your budget.
• Gasoline – You can’t forget gas. The price per gallon fluctuates so look at the average for your area for the past year and estimate high. The worst that could happen is you overestimate and have extra money at the end of the year.
• Auto insurance – We can’t forget this one! Our ultimate auto insurance guide outlines some attributes that are considered when calculating your premium. Some can be changed or controlled to get you a better rate. When you’re buying, you have control over the vehicle make and model and can change your deductible to get a lower premium. Your improved credit score might also help get you a better rate.

While all of the above is important to consider, there is a difference between how much you can afford and how much you should spend. Once you have calculated how much the experts say that you can afford, determine if you’re comfortable spending that amount. Don’t spend more than you’re comfortable with, even if your salary and budget say it’s possible.

Research values

Seeing a car listed for $20,000 doesn’t mean that the car is worth $20,000. Look at the Kelley Blue Book value and comparable cars for sale when looking at used cars rather than taking the word of the seller. There’s also such a thing as too good of a deal. If it sounds too good to be true, it likely is. Anything with a significantly higher or lower price than similar vehicles should be looked at with suspicion. It’s certainly possible to get a great deal but be sure that you’re actually getting a great deal and not getting taken advantage of.

If you’re planning to replace a vehicle you currently own, you’ll also want to research the value of your current car. Whether you’re selling it or trading it in, knowing the value will help you to price it properly and determine the minimum that you’re willing to accept. You can go into negotiations in a strong position if you do your research ahead of time.

Get pre-approved for a loan

Car dealers want to know that you can afford the cars they’re selling. A pre-approval shows sellers that you’re a serious buyer. You’re interested and, more importantly to them, you can pay them.

Note that a preapproval and a prequalification are not the same thing. You want a preapproval when you’re seriously looking. You also want to wait to get your preapproval until you’re ready to buy. They usually expire after 90 days so if you haven’t purchased in that time, you’ll need to get another one. It’s best to limit the number of times your credit score is pulled. Too many checks might hurt your score and that’s the last thing you want when you’re looking for a loan.

• Prequalification – This is usually a quick process where you state your income, debts and assets but don’t provide any proof that you’re telling the truth. The bank may or may not pull your credit score. You’ll get an answer on how much of a loan you qualify for likely within a few minutes. However, the fact that it’s based on your word makes sellers take it less seriously than a preapproval.
• Preapproval – This will include a credit check and documentation to prove what you’ve included about your financial situation. It will take longer to complete the application and to get an answer, but it will be a more accurate answer on how much a bank is willing to loan you. That could mean that sellers are more willing to work with you. Before you get pre-approved, research a few banks and apply for all of them to give you a pre-approval. This will give you a realistic view of what your options are and help you decide which to use for your loan. You’ll need to work fast as they will all need to pull your credit score. If you time this well, it shouldn’t affect your credit score. If you have multiple credit pulls within 14 days, the reporting companies will see it as one inquiry so try to submit all applications within that time frame.

Find warranties and insurance

You know what you can afford, what you want to pay and you have a preapproval. You’ve researched a good price for your trade-in and the vehicle you want to buy. What’s next?

• Find a seller – Shop around to be sure that you’re happy with your dealership. There are a lot of dealers for every make of car so take your time to find one that you like working with and whose commission you’d be happy to pay.
• Find warranties – A lot of new cars come with a warranty, but you can extend it or add one if it’s not included in the purchase price. Explore your options and decide if it’s worth the money to you. If it is, research the companies that offer used car warranties and choose the one that has the best offer for you.
• Find auto insurance – It’s easy to insure your new car with the same company you’ve used for your current car. Is it right though? Now is a great time to consider additional coverages  and re-evaluate if your insurance needs have changed. Your policy, or even your insurance company, might not be right for you anymore. A VIU by HUB Advisor can work with you to decide if it’s time to make a change.
• Note that your insurance options may change with your new car. Some cars are known to have a high theft risk so it’s harder to find insurance options and you’ll likely pay a higher premium. Electric vehicles cost more to repair due to having expensive parts. An advisor can help you make sense of the insurance differences and give you a realistic look at any changes that you can expect based on the make and model you choose.

Do your research

You’ve done the hard work of budgeting. Now comes the slightly more enjoyable work of figuring out what to do with the money you’ve decided that you can spend. At this stage, you’re going to look into what kind of car you want and how you want to buy it.

Narrow down your shopping list

If you’re going to buy one car, you’re probably going to have to consider a lot of them. Let’s get started narrowing that list down.

Build your dream car

One of the most fun steps for buying a car is making a list of your dream cars. Not by make and model, but by feature. If you could build a dream car with any feature from any brand, what would it have? Be free, not realistic. Some things to consider:

• What color is it?
• Is it a sedan, an SUV or something else?
• What is the zero to sixty acceleration?
• Is it electric?
• Does it have heated seats?
• Is the roof solid or a sunroof?
• Are there self-driving features?
• What is the safety rating?

And so on. Again, be free here. This is just a wish list.

Once you have a list of features you want, look closer. You want a blue car. Is that more important than the acceleration? Would you sacrifice heated seats for a better safety rating? Now is the time to rank your wish list. There’s no wrong answer here. It’s not about what you should want. It’s about what you do want.

As an insurance brokerage, we should really mention that some of these features can cause you to have a higher premium. That’s something to consider when you’re completing your ranking. There’s still no wrong answers, but there are cheaper answers. There are also things that you can do to lower your auto insurance premium  if you really want the more expensive features.

Take your wish list shopping. Ask Google or a dealer what vehicles have the most features you care about and are available in the price range you can afford. You’ll get a short list of what cars are best for you and can focus your efforts on looking for one of them without the analysis paralysis that comes from unlimited options.

Leasing vs. buying

After you’ve decided what cars you’re interested in, think about how you want to take possession. Do you want to own this car, or do you want to lease it? You’ve spent a lot of time saving to buy a car, make sure that you’re spending your money wisely. Because of the difference in price between leasing and buying, deciding what you want to do here will help you narrow down your wish list.

You should buy your car if:

• You want to eventually stop paying monthly payments
• You want to drive unlimited miles
• You expect a lot of wear and tear
• You want to customize the car

You should lease your car if:

• You like always having a new car
• You don’t want to have an old car with mechanical problems
• You like expensive cars that you can’t afford outright
• You care about always having the latest safety features

Used versus new

People usually feel strongly that new or used is vastly superior to the other option. You may leave this section with a renewed love for your preferred type of car or you may walk away with a changed perspective. Either way, it’s good to challenge those beliefs sometimes.

New cars

Pros

• Reliability – You’re the first driver of a car that comes with a warranty. You probably won’t face any major problems and if you do, they’ll be fixed for free.
• Savings – Car dealers have quotas to make and these cars have to be cleared out to make way for the next batch.
• Safety – A new car will come with the most up-to-date safety features. Even a late model used car will be a couple years behind.
• Simplicity – It’s often easier to buy a new car. Most car sales are this type of purchase so the process is smooth.

Cons

• Price – You’re going to pay for all of those pros. These cars are more expensive than even a one-year-old used car.
• Depreciation – This is the big one. As soon as you drive it off the lot, it’s worth less than it was when you signed the papers for it.
• Insurance – New cars cost more to insure and if you’re financing your car, your lending company will likely have requirements for your insurance policy.

Used cars

Pros

• Price – The previous owner got all of the benefits of a brand new car, which means that you don’t have to pay for them. Their depreciated value is your gain.
• Loans – Used car loans are smaller than new car loans which means that you’ll be free from a monthly payment sooner and you’ll likely pay less in interest.
• Stability – Depending on the age of the car you’re considering, the model may have been around long enough for issues specific to this car to become known.

Cons

Warranty – You may not be covered by a warranty, leaving you vulnerable to high maintenance or repair costs.

Appearance – A used car likely won’t have the curb appeal of a new car. It may not be as flashy or impressive of a purchase.

Options – There are a limited number of used cars. You’ll probably have to make more compromises to your wish list than if you bought new.

Know when the price is right

You’ve set aside savings to buy a car, but that doesn’t mean you need to use that entire amount just because it’s there. You also don’t want to buy a car for more money than it’s worth just because you have the money set aside.

Research invoice and MSRP prices – Cars have multiple prices. The invoice price is what the dealership pays to the manufacturer. The MSRP is what the manufacturer suggests the dealership charge. There is also the price that you pay. It might be higher or lower than the MSRP but it will be higher than the invoice price. Dealerships aren’t in the business of losing money on sales.

Decide on a fair purchase price – Using your new knowledge about the prices above, you can decide what you think is fair to pay for the vehicle. Think of a few numbers here. Your dream price would be invoice or below, but that’s not realistic. Your upper-limit price is possible to afford, but it’s not ideal. A fair price is somewhere in the middle and leaves you and the seller both feeling good about the transaction. It’s a good idea to have a range for what you feel is a fair price instead of a set number. That makes negotiations easier.

Negotiate with the seller – Negotiating can be uncomfortable and difficult. That doesn’t mean you shouldn’t try. The goal is for both the buyer and the seller to feel like they are within their fair price range.

Steps for buying a car

Now that your pre-work is done, it’s time to make the purchase with the confidence that you’re making the right choice.

Sell or trade your current vehicle

Chances are, you’re replacing a current vehicle, not keeping it. You’ll need to figure out what to do with it. Your options are to sell or trade. Here are the pros and cons of selling and trading your current car.

The case for selling

Selling your car is going to get you more money than trading it in. It requires more effort, but there is a financial benefit to it. You can apply that extra money to your new car savings fund. If you live in a city with good public transportation or are willing to make some sacrifices, you could even sell your car before buying a new one and save some of those fuel and maintenance costs for some time and add those savings to your new car fund as well.

The case for trading

It’s so much easier to do this. You won’t have to worry about timing the sale. You arrive at the dealership with one and leave with the other so there’s no vehicle overlap or time spent without a car. You won’t make as much as you would by selling but you’ll have a lower tax bill from it, and you won’t have to pay for any ads to sell. The step from trading to buying a car is much shorter and more direct than the step from selling to buying.

Consider your buying options

You have a few options for where to buy your car.

Traditional car dealership

You’ll find sellers who have a vested interest in keeping you happy and making sure that you purchase the right car for you. They’re available to help with any questions you have and will work with you to negotiate a fair purchase price. If you’re not happy with the sales staff at one dealership, try another. Most cities will have multiple car dealerships, so you’re not tied to one where you’re having a bad experience. A good portion of your purchase price will likely go into your salesperson’s pocket so make sure it goes to someone you like and want to reward for the work they put in to help you with your purchase.

Online dealership

This is a newer option, but these dealerships have been around long enough that it’s not as much of a risk to buy this way as it may have seemed in the past. The convenience factor here is huge. You can buy on your own time without needing to negotiate or work with a salesperson who is working toward a commission or quota. The prices are set, you can buy at any time and you can take delivery anywhere and any time you want.

Private seller

This type of purchase definitely has the price advantage. There’s no overhead like at traditional or online dealerships, so the seller is able to charge less money. You both get a better deal financially. You will have to put in a bit more legwork though. When buying this way, be sure that you:

• Know the Kelley Blue Book value of the vehicle to decide what your fair price range is.
• Check the car history (National Motor Vehicle Title Information System and VINCheck Look Up are good free options).
• Get the car inspected by a mechanic.
• Make sure that the seller’s driver’s license matches the title of the car to know that they’re authorized to sell it.
• Review your state’s requirements for a sale and transfer of title to be certain that you become the legal owner.

Get the most out of your test drive

You’ve done your homework and know that the cars you’re test driving fit your requirements, your wish list and your lifestyle. Here’s how you can maximize the time you spend on your test drives.

Before you go

• Call ahead to make an appointment or at least make sure that they’ll be available when you’re planning to go.
• Take your documents. You’ll need to give them your driver’s license or, better yet, show them your license and give them your own photocopy to hold while you drive and ask for it back when you leave.

On the lot

• Devote the day to the test drive. Do not buy on the same day. Sleep on it. Bring a pushy friend who can talk you out of it if you start to feel like buying.
• Look at the car. Do you see rust or scratches? Do the doors and trunk open smoothly? The windows? This is even important when buying a new car as it could have been damaged during shipment or a previous test drive.
• Get in and out a few times. Adjust the seat. Is it easy? Comfortable? Would you be happy doing that 5,000 times? Now get in the back. Will passengers be able to get in and out and sit comfortably with your seat in front of them?
• Play with the console. Is it easy to change the temperature and volume? Could you do it while driving 70 mph in heavy traffic? Can you connect to the Bluetooth? What does a call sound like?
• Inspect the storage areas. You don’t want to buy something just to find out there’s no space for everything you want with you while driving. If you have a specific mug that you always use, bring it and test that it fits in the cupholder. Open the trunk and verify that there is space for your stroller, bike or anything else that you frequently transport.
• Put down the sun visors. Do they cover enough to block the sun? Do they cover so much that they block your vision?

On the road

• Drive the car both during the day and at night if possible. Do the headlights illuminate the road well enough? Are you still able to easily read the information on the dashboard in low light?
• Take it onto the highway and see how it handles speed. How is the volume in the car? Can you hear wind? Do the engine sounds change?
• Park in a crowded parking lot. Is it easy to maneuver the car into a spot? Are you able to get out when parked next to another car? How is visibility when backing out?
• Spend some time in an empty parking lot. How long does it take to stop after you slam on the brakes? Can you make a smooth, tight U-turn? Does the car pull if you take your hands off the wheel while you’re accelerating?
• Try driving on different road surfaces. How does it handle potholes? Do you quickly lose speed on hills? Can it handle an unpaved road?

Bring the correct documents to the car dealership (or private seller)

You made it to purchase day! Before you can jump in your new car and ride off to the sunset, you’ll need to complete the purchase. Your seller will walk you through the procedure, but these are the things you’ll need.

• Driver’s license – this should really go without saying. You’ll need it to drive away in your new car and also to provide proof of identity.
• Form of payment – this could be cash, a cashier’s check or financing documents from your lender.
• Proof of insurance – your lender may have required this before processing your loan, but if not, today is the deadline. You need to have your auto insurance  in place before you’re able to drive the car off the lot. If you’re unsure of your options, a VIU by HUB Advisor would be happy to provide insight and help match you with the policy that is right for you.

Congratulations on your new vehicle. The time you spent and sacrifices you made while saving to buy a car have finally paid off. You followed the steps to buy a car and now you have it. Enjoy it. We hope you have a long time together.