First-Time Car Buyer Guide

1. Know Your Budget

Setting a budget will help you focus on cars within your price range. Here's how:

• Add up your monthly take-home income.
• List your monthly expenses, including necessities (such as groceries, rent and student loan payments) and discretionary spending (such as entertainment and dining out).
• Look for ways to cut costs and free up money for your new car.
• When working your car payment into your budget, include the ongoing costs of owning a car, such as gas, repairs, maintenance and insurance.

Aim to keep your monthly transportation costs—including your car payment and ongoing expenses—below 10% to 15% of your monthly income.

Learn more: How Much Car Can I Afford?

Auto loan terms usually range from 36 to 84 months, although some can be as long as 96 months. The longer your loan term, the lower your monthly payment, but the more you'll pay in total interest. For instance, if you borrow $20,000 at a 6.35% interest rate, here's how different loan terms will affect the cost of your loan:

The longer loan lowers your monthly payment but ultimately costs you $2,807.07 more. And keep in mind that your interest rate on a shorter-term loan is likely to be lower than with a longer term.

If you can afford to do so, making a bigger down payment can be a better way to reduce your monthly payments than choosing a longer loan term. With a larger down payment, you won't have to borrow as much money.

Use Experian's car payment calculator to see how different loan terms and down payment amounts affect your monthly payment and total interest.

Car payment calculator

2. Do Your Research

Once you have a budget, research which vehicles fit into your price range and meet your needs. Consider your must-have features, such as four-wheel drive, lots of cargo space or great fuel mileage. Evaluate safety ratings and customer satisfaction too.

Visit automotive sites such as Edmunds.com, Autotrader or Kelley Blue Book to narrow down your options and get an estimated price for the car you want. You can also visit local dealerships' websites to check out their prices.

As you research vehicles, you're likely to see some tempting deals on auto leases. Leasing a vehicle generally costs less upfront than buying and ensures you're always driving a newer car. However, leases still require down payments and can have restrictive terms—plus you won't own the car when the lease is up.

Learn more: Is It Better to Lease or Buy a Car?

3. Save for a Down Payment

When you're buying a new car, lenders prefer a down payment that's at least 20% of the car's price. (If you're buying a used car from a dealership, aim for at least a 10% down payment.) A 20% down payment haas other benefits as well, including:

• New cars typically lose about 20% of their value during the first year of ownership. A down payment of 20% helps ensure you never owe more than your car is worth.
• The bigger the down payment, the less money you'll need to borrow.
• A larger down payment usually qualifies you for better loan terms.

Calculate the required down payment, divide it by the number of months until you plan to purchase, and start saving that amount each month. Setting up automatic transfers into a savings account can help you reach your goal.

Learn more: How to Save for a Car

4. Improve Your Credit Score

Before applying for an auto loan, make sure your credit score is where you want it to be. A good to exceptional credit score (which lenders generally consider a FICO^® Score^☉ of 700 or above) can help you qualify for favorable loan terms. The average auto loan annual percentage rate (APR) on new cars for consumers with the highest credit scores is 4.77%; those with the lowest credit scores pay an average APR of 15.75%, according to Experian's State of the Automotive Finance Market report from the fourth quarter (Q4) of 2024.

Here's how different interest rates would affect the cost of a $20,000 auto loan with a 60-month term.

The higher interest rate not only means higher monthly payments, but also costs you an extra $6,503.26 over the loan term.

Check your credit report to make sure it's up to date and accurate; then check your credit scores. If you're not happy with your score, postponing your car purchase until you improve it could save money. Making all debt payments on time, paying down high-interest debt such as credit card balances to reduce your credit utilization ratio, and only applying for credit when you really need it can help increase your credit score.

Learn more: How to Improve Your Credit Score

5. Consider Buying Used

Is the new car you want out of your price range? Consider a used version of the same model instead. The average monthly payment for a used car is $217 less than that for a new car ($525 versus $742), according to Experian data from Q4 2024.

Cars under five years old typically have similar safety features and technological bells and whistles as newer models, but cost less. If you want a more recent model, look for dealers selling two- to three-year-old cars that are coming off leases.

Learn more: How to Buy a Used Car

Used cars are available from private parties and auto dealerships. Many dealers and manufacturers sell certified pre-owned (CPO) cars. These used vehicles have been inspected and reconditioned and may include limited warranties and other extras. Before buying a CPO car, be clear on what any warranty covers.

Tip: Whether you're buying a used car from a private party or from a dealership, get a pre-purchase vehicle inspection first. Auto repair shops typically offer this service for $100 to $200.

6. Compare Auto Loan Offers

Unless you can afford to pay cash, you'll need an auto loan to finance your purchase. Dealers typically offer to arrange financing when you buy a car, but they frequently tack on extra fees. Your bank, credit union or another lender may offer better loan terms. To find out, compare loan offers from multiple lenders by getting prequalified or preapproved.

• Prequalifying for an auto loan provides an estimate of the amount, terms and monthly payment you may qualify for. This requires a soft credit inquiry, which doesn't affect your credit scores.
• Preapproval requires submitting more detailed financial information. You'll get a preapproval letter stating you're conditionally approved for a certain loan amount. Preapproval involves a hard credit inquiry, which can temporarily ding your credit score. Minimize any impact by completing all your preapproval applications within a 14-day period.

When evaluating loan offers, compare APRs rather than interest rates. Interest is only one aspect of an auto loan. APRs reflect the total annual cost of the loan, including interest, fees and other charges.

Learn more: How to Get a Car Loan Without Credit History

7. Negotiate the Price

Whether you're buying from a dealership, online car-buying site or private seller, you're expected to bargain over the price of the car. There's more wiggle room with a used car, but even with a new car, you can generally negotiate significant savings off the manufacturer's suggested retail price (MSRP).

You should already know the car's value from your research; also consider any extras such as leather seats or a fancy entertainment system. Subtract 10% to 20% from the car's estimated average price and make an offer. You'll have more leverage if you are preapproved for a loan or paying in cash.

When buying a new car, you can also save by timing your purchase right. The last few months of the year, holidays, the end of the quarter and the end of the month are generally the best times to buy a car. Near year-end, dealerships typically offer incentives such as cash back or promotional 0% APR financing to move cars off the lot and make way for next year's models.

Tip: Buy here, pay here dealerships specialize in car buyers with no credit history or poor credit. While their loan offers may sound tempting, they typically charge very high fees and interest, so try other options first.

8. Read the Contract Carefully

Buying your first car can be a bit nerve-wracking, and by the time you have a contract in hand, you're probably ready to sign without even glancing at it. Unscrupulous car dealers count on this and may pad contracts with extra charges you never agreed to or change the terms you discussed.

A contract is a legal agreement that can be difficult or impossible to get out of. To protect yourself, take as long as you need to read the contract in full before you sign. Ask questions about anything you don't understand, and don't hesitate to call a parent or other trusted advisor for help.

Learn more: Car Loan Key Terms You Should Know

Enjoy Your New Car

Careful budgeting, research and planning can help you buy the car of your dreams without getting taken for a ride. Making car payments on time can even help improve your credit score, so once you've got the keys in hand, consider setting up autopay to keep your payments on track.

Need to improve your credit score before applying for an auto loan? Consider signing up for Experian Boost^®ø. This free feature from Experian adds on-time payments for eligible utility, cellphone, rent and insurance bills to your credit report, which could give your credit scores a quick boost. You also get free access to your FICO^® Score and Experian credit report so you can monitor changes to your credit.