Tips and Resources

1. Set your budget

Know what you can afford before you start car shopping. That will help ensure that you don’t get over your head financially for the length of your car loan and will also make you feel more confident when you are ready to negotiate with an auto dealer.

To set a budget, a general rule of thumb is to allocate no more than 20 percent of your household income to all the cars being driven by family members in the household. This auto budget includes not only your car loan payments but all expenses, including insurance, gas, repairs and maintenance.

2. Develop a short list of car choices

You’ve probably been eyeing some cars on the road for a while, so start by researching the models that have caught your attention on independent auto information websites. Research the features and other details about the cars to make sure they offer what you want and need in a car.

Find out the retail and invoice prices for each car if you are shopping for a new one. Find out the range of prices, depending on model year and mileage, if you are shopping for a used car. Look for cars that cost at least 5 percent less than your budget so you have some cushion for insurance, fuel and other auto expenses.

3. Weigh the pros and cons of new vs. used

If you are open to buying either a new or used car, be sure you understand the pros and cons of each. Buying a new car means you’ll get fewer features for the money, but you’ll get the advantage of the full new car warranty and possibly some free maintenance if you buy a car from certain automakers. If you buy a used car, you’ll be able to buy more car for your money, but you won’t know the car’s full history and you’ll have a shorter warranty period, or possibly none at all. Used car loans also typically have higher interest rates and sometimes shorter loan periods than new car loans

4. Research all ownership costs

Remember that your costs for this car aren’t just associated with the car payment. The auto information websites where you did your initial research offer average ownership costs for each car. While it’s best to do your own calculations for car insurance and fuel costs based on your driving record and the area where you live, these sites are a great resource for average repair and maintenance data.

Crunch the numbers on the cars you are considering so you have a clear picture of how much they will cost overall. Don’t forget to include resale value unless you are reasonably confident you will keep this car for a very long time. You may find that a competitor’s model similar to a car you are considering has a much lower cost of ownership.

5. Don’t start looking for financing at the dealership

Financing at the dealership may be easy, but it’s not necessarily the best deal. Dealers are essentially acting as middlemen to offer you a car loan. They get paid for every loan they write, whether the loan is through the automaker or a local lender.

It is possible to get the best car-loan interest rate at the dealer, but you’re likely to find that it pays to shop around first. Be especially wary if a dealer offers you a car loan at a rate that is far better than other lenders. Sometimes, dealers entice prospective customers with rates to get them to sign a contract to buy a car. Read all contracts carefully to make sure that the interest rate is not contingent upon approval.

6. Determine the best interest rate

It’s best to get preapproved for an auto loan from a bank or credit union, even if you plan on getting financing from the dealer. Don’t assume that you’ll qualify for the zero percent or low-interest dealer loan because typically less than 10 percent of buyers qualify.

7. Find all possible discounts

Automakers often advertise rebates and cash-back incentives on new cars to attract customers to their lots. Some dealers also will offer incentives on certified pre-owned cars or noncertified used cars. In addition, automakers often have discounts that apply directly to the buyer, such as for members of the military, current students or recent graduates or even members of certain local credit unions.

Research all of these incentives online at the manufacturer and dealer websites before you visit the lot so you know what you qualify for to save the most money.

8. Know the car’s bottom-line price

The auto information websites where you researched the cars you were interested in also should have listed the cars’ invoice prices if new. If used, they should have listed the average selling prices for the same models in similar condition and mileage in your area.

Use these numbers as a guide in your negotiation with the dealer or private party. If you are buying a new car, aim to reach an agreement for an amount that is similar to the invoice price before any applicable discounts are applied, but remember that the dealer needs to earn a bit of profit to cover his costs of running a dealership.

9. Be prepared to negotiate

Since buying a car is such a pricey purchase, be prepared to negotiate to get the best deal. Before you visit a dealer, gather all your research materials so you are prepared. Then, make an appointment to test-drive the car or cars that interest you.

At a dealership, these salespeople are less likely to try to strong-arm you into a sale and are more likely to be willing to negotiate. If you are trading in a car, be sure to negotiate the purchase price of your new car separately and be aware of the value of your current car so that you know whether you’re being offered a fair price.

10. Take your time on the test-drive

Since you are spending a lot of your hard-earned dollars and you’ll be spending a lot of time behind the wheel, take extra time during the test drive. Make sure that you are completely comfortable in the car and can adjust the seat and mirrors so you have good visibility. Make sure you are comfortable driving on surface streets, in traffic and on the highway, as well as in parking.

Take extra time when the car is parked to make sure you’ll be happy with all the dashboard controls and understand how the features work. Although it’s not necessarily easy to imagine, think about how this car will suit your lifestyle years from now in terms of passengers and cargo you may need to transport.