Buying a new car involves research and preparation to get the best deal. Whether you already have a specific make and model in mind or you're open to different options, it's essential to pay close attention to the financial aspect of the deal to avoid overpaying.
Here are some steps you can take to prepare yourself and complete the car-buying process.
1. Set a Budget
Take a look at your budget to see how much you can afford to pay each month. Make sure to consider other financial obligations and goals, as well as the discretionary spending that makes up your lifestyle.
Also, look at your savings to see if you can afford a down payment and, if so, how much. A larger down payment can reduce how much you need to borrow and, therefore, your monthly payment. But if you drain your savings to buy a car, it could leave you financially vulnerable if an emergency occurs.
Using a car loan calculator, you can get a better idea of how much you can afford to borrow based on your monthly budget.
2. Decide What Type of Make, Model and Trim You Want
If you already know the vehicle you want, you can skip to the next step. Otherwise, take some time to research different options based on your budget to determine what you're looking for in a vehicle.
If you can't make this decision without test driving a few different models, you can still narrow down your list of options to make the selection process go more smoothly at the dealership. Some tips for choosing a vehicle include:
- Decide which features you're looking for. For example, determine whether you want to buy new or used and what class of vehicle you want—-coupe, sedan, SUV, crossover, van or truck. Additionally, think about specific safety, technological and fuel features you want to prioritize.
- Use an online car finder tool. Many online car finder tools let you filter models based on your desired specifications. You may even be able to compare prices between local dealers.
- Read online reviews and pay attention to word of mouth. Reading reviews from car experts and current and previous owners can give you more detailed information about where a specific model excels and falls short, as well as what the driving experience looks like. Getting opinions from trusted friends could also help guide your decision.
3. Save for a Down Payment or Plan a Trade-In
If you don't already have sufficient funds for a down payment, take a look at your existing savings to see if you can allocate some money toward your new vehicle purchase. If you don't have much savings, decide how much you want to put down and create a savings plan to achieve your goal:
- Set up a dedicated savings account. Opening a dedicated savings account for your down payment can make it easier to track your progress and avoid dipping into the funds for other expenses. A high-yield savings account can help you earn money faster than a traditional account.
- Define your savings plan. Decide how much you want to save and calculate how much you can afford to set aside each month to reach your objective. Then, divide your savings goal by your planned monthly contribution to find out how long it'll take you.
- Set up automatic transfers. The best way to ensure you meet your savings goal is to automate the process. Set up automatic monthly transfers from your checking account to your dedicated savings account, preferably on a date when you know you'll have sufficient cash to cover the transfer amount.
Alternatively, you may consider trading in your current vehicle in lieu of a down payment. This can be particularly beneficial if you have a lot of positive equity in your car. If you owe more than the car is worth, you may end up needing to borrow more with your next car loan to cover the negative equity.
Before proceeding, though, take some time to determine whether it's better for you to trade in your car or to sell it in a private-party transaction.
4. Get Preapproved for a Loan
While it may be more convenient to have the dealer arrange financing on your behalf, getting preapproved before you visit the dealership can help you ensure that you get the best possible deal.
It's generally best to get preapproved with several lenders so you can properly compare your offers. The preapproval process typically requires you to provide the following information:
- Personal information for you and your co-applicant or cosigner (if applicable)
- Employment and income details
- Housing status and costs
- Down payment or trade-in information
- Desired loan amount and terms
In some cases, the lender may also require specific make and model details. If you don't know this yet, though, you can make a guess or simply focus on lenders that don't need that upfront.
Once you've gotten preapproved with multiple lenders, compare rates, terms and monthly payments to pick the best offer. Make sure you're comparing similar loan offers, meaning they share the same loan amount and other details. Here are some average rates and terms you can expect based on your credit score and the type of loan, according to Experian's State of the Automotive Finance Market report from the second quarter (Q2) of 2024:
| Average Terms for a New Car Loan | ||||
|---|---|---|---|---|
| Credit Score Range | Loan Amount | Loan Term | APR | Monthly Payment |
| Super prime (781 - 850) | $39,172 | 64 months | 5.25% | $717 |
| Prime (661 - 780) | $42,993 | 71 months | 6.87% | $742 |
| Near prime (601 - 660) | $42,467 | 74 months | 9.83% | $765 |
| Subprime (501 - 600) | $38,045 | 73 months | 13.18% | $749 |
| Deep subprime (300 - 500) | $33,917 | 72 months | 15.77% | $719 |
Source: Experian data as of Q2 2024; VantageScore® 4.0 used
Loan terms for a used car loan can differ, especially in terms of APR. Generally, new car loans offer lower APRs. Used cars are typically cheaper, however, which results in a smaller loan size and therefore a lower monthly payment.
| Average Terms for a Used Car Loan | ||||
|---|---|---|---|---|
| Credit Score Range | Loan Amount | Loan Term | APR | Monthly Payment |
| Super prime (781 - 850) | $28,079 | 66 months | 7.13% | $522 |
| Prime (661 - 780) | $27,594 | 69 months | 9.36% | $518 |
| Near prime (601 - 660) | $25,238 | 68 months | 13.92% | $535 |
| Subprime (501 - 600) | $21,918 | 66 months | 18.86% | $536 |
| Deep subprime (300 - 500) | $19,950 | 64 months | 21.55% | $532 |
Source: Experian data as of Q2 2024; VantageScore 4.0 used
5. Research the Price
Whether you know the specific make and model you're looking for or you're still trying to decide, make sure you're prepared before you head to the dealership.
One way to do that is to research price details for the models you have your eye on. You can use online valuator tools like Kelly Blue Book, J.D. Power or Edmunds to get a sense of what the market value is. Then, you can check inventories from local dealerships and private-party listings to see how those prices compare.
If dealers or private sellers are pricing models above their market value, you may be able to use your research to negotiate a lower price.
6. Test Drive the Car
With a preapproval letter and your price research in hand, head to your local dealership to check out the inventory. If you're planning to buy from a private party, contact the seller of the listing directly.
At this point, you'll want to test drive each model you're considering, so you can physically inspect it to better understand its condition, handling, acceleration and braking as well as comfort.
If you're buying a used vehicle, you'll also want to ask for a vehicle history report and potentially hire a mobile mechanic to inspect the car for major defects that could impact its value and drivability. If you like the car, you can use the information gleaned from your test drive and inspection to inform your price negotiation.
7. Choose a Financing Option
Even if you've been preapproved, it's still important to carefully compare all of your financing options before closing the deal. Here's a quick summary of your choices:
- Direct car loan: With this type of loan, you're working directly with a bank, credit union or online lender instead of going through a dealership. Consider this option if you're satisfied with your preapproval terms and don't want to undergo another credit check. It's also the only option if you're buying from a private party rather than a dealer.
- Dealer-arranged financing: Many dealers offer to arrange financing on your behalf by shopping your credit application to multiple lenders. This can help you compare further offers to make sure you're getting the best deal. However, dealer-arranged financing can result in a higher interest rate to compensate the dealer for its role in the process.
- Buy here, pay here (BHPH) financing: If your credit is in poor shape or you don't have a credit history, you may consider a BHPH financing arrangement. With this option, the dealer is the lender, and your terms may depend on your income rather than your credit history. That said, BHPH financing can be very expensive, and the dealer may not report your payments to the credit bureaus.
- Leasing: If you're planning to get a new vehicle, you may consider leasing instead of buying. Lease payments tend to be lower than auto loan payments because you're essentially paying for the vehicle's depreciation over your lease period. However, you may face mileage and other usage restrictions. Learn more about buying versus leasing to determine which is better for you.
8. Insure Your Car
Before you can drive your new car off the lot, you'll need to have insurance coverage in place. If you're financing or leasing the car, you'll typically need full coverage insurance, which includes liability, comprehensive and collision coverage.
If you already have an insurance policy on your current vehicle, that should be sufficient for proof of insurance. Insurers typically give you between seven and 30 days to update your policy with the new vehicle.
If you don't have an active auto insurance policy, however, you'll want to shop around and compare quotes from multiple carriers and purchase a policy before moving forward.
If you're not sure how much car insurance you need, evaluate your budget and the potential impact of a claim to find the right balance. In general, it's best to avoid optional coverages unless you can comfortably afford them and prefer the added peace of mind.
9. Complete the Car-Buying Process
Once you're ready to close the deal, you'll meet with the dealer to finalize the contract and arrange your financing.
Before you sign anything, make sure you understand all of the costs related to the vehicle purchase, especially the long-term costs of an auto loan or lease agreement. The dealer may try to convince you to include add-ons, such as service or maintenance contracts or gap coverage, but these are often unnecessary.
After carefully reviewing the terms and conditions of the agreement, sign it and prepare to take the car home.
If you're buying from a private party, contact your local department of motor vehicles (DMV) and your lender to find out which documents you'll need. This may include a bill of sale, an odometer disclosure and a title.
10. Register Your Car
If you're buying a car from a dealership, the dealer may offer to handle registration on your behalf for a fee. If you choose this option, you'll get a temporary registration and license plates you can use to operate the vehicle. The DMV will send you the vehicle registration and plates in the mail.
If you're buying from a private seller or you choose not to have the dealer arrange your registration, you'll need to visit your local DMV office and provide the necessary paperwork to register the car. The required documentation may depend on where you live, but you'll generally need the following:
- Driver's license
- Proof of insurance coverage
- Vehicle title (unless it's being held by a lender)
- Safety and/or emissions inspection certificate
If you haven't already done so, you'll also need to plan ahead for the cost of sales tax on the vehicle. Additionally, you'll typically need to pay a registration fee to the state department. Once you complete the process, you'll receive your registration and license plates, allowing you to operate the vehicle legally.
The Bottom Line
A car is one of the largest purchases you'll make in your lifetime, so it's important to take your time as you navigate the car-buying process. While you may be tempted to skip some steps for the sake of speed or convenience, it could end up costing you more money.
If a vehicle purchase isn't an urgent need, it's also a good idea to check your credit and look for opportunities to improve your credit score before proceeding. With Experian, you can get free access to your Experian credit report and FICO® Score☉ , along with insights to help you develop and maintain good credit habits.
You can also look for other ways to minimize your car payment and save money on car insurance, especially by comparing insurance rates.