The Dream of Owning Your First Car
Buying a car is stressful and confusing.
So we’ve put together this complete guide on how to buy your first car, including tips for first car owners.
Whether you’re a high school student looking for an old jalopy or a newly-minted MBA with a need for speed, buying for first car can be tricky.
There are all sorts of factors to consider, including:
- Your budget
- The type of car you want
- The cost of the car
- The lifetime cost of the car
- Whether you’ll buy new or used
- Whether you’ll qualify for financing
- Finding the best deal
And then, of course, there’s the whole process of actually finding a car, securing financing if you need it, and signing the paperwork.
It can be quite overwhelming!
Never fear! We’re here with the ultimate guide on how to buy your first car.
We’ll start with preparing financially.
Then, we’ll talk about how to choose a car that works well for you.
Finally, we’ll talk you through the actual shopping and purchasing process.
First, the Money
It doesn’t take a rocket scientist to know that there are essentially two ways to buy a car: in cash and with financing.
Which option is better?
Because cars depreciate–lose their real value–very quickly, buying in cash is typically the best option.
And if you’re looking to buy a beater that will just get you from point A to point B, cash may be your only option.
Lenders typically have limits on the age or mileage of used cars they’ll finance.
So if you’re looking at $2,000, high-mileage options, you’ll need to plan to save up cash.
Luckily since your price point is so much lower, you don’t have to save as much.
But what if you want or need a newer vehicle?
Maybe you don’t want to pay $30,000 for a brand new model.
But if you want your car to last several years, investing in a newer, lower-mileage option up front can be a wise decision.
In this case, it’s still a good idea to save up cash if possible.
Those monthly car payments can quickly eat into your budget.
With that said, most Americans who drive do finance their vehicles.
Put down as much as you can
Just like when you buy a home, when you buy a car, you’ll want to put money down.
This is cash you’ve saved up that you can put towards the car purchase.
It reduces the overall amount of financing you’ll need.
And it’s a very good idea to have a high down payment whenever possible.
There are a couple of big reasons for this: depreciation and interest costs.
First, let’s talk about depreciation. Because cars are subject to lots of wear and tear, they lose their value really quickly.
This is especially true for newer vehicles. For instance, as soon as you leave the lot, a brand new car loses around nine percent of its original value!
After one year, the car will lose about 19 percent of its value, and it will have lost 31 percent of its value after just two years.
Actual depreciation rates vary by make and model.
Cars that tend to last longer will hold their value better. But, still, the average car will be worth just 37 percent of what you paid for it at the dealership five years after your purchase.
So what does this mean for a car buyer?
It means that you can get yourself into an upside-down loan really quickly.
An upside down loan is when you owe more money on a piece of property than it’s worth.
Say you do 100 percent financing a new car for $30,000.
A year later, you decide to sell it to get something else.
Now it’s only worth $24,300. Since you put no money down, you likely owe the bank more than the vehicle is worth.
So you have to actually pay the bank money before you can sell the car.
This is not a good financial position to be in. It really restricts your ability to make choices with your car purchase in the future.
Luckily, you can mitigate these effects by making a good down payment on the vehicle.
If you’re buying a used car, putting down 10 percent of the car’s purchase price is wise. If you’re buying new, bump that down payment up to 20 percent.
These down payment amounts will keep you ahead of depreciation so that you never wind up upside down on your loan.
Of course, the larger your down payment, the smaller your loan.
That means lower monthly payments, less interest over time, and an even smaller chance that you’ll wind up upside down on your loan.
Next, the Car
Now that you’ve got the financial piece of this process figured out, it’s time to figure out what type of car you want to buy.
You’ll need to prioritize your wants and needs for a vehicle and then look at different types of cars that will suit you.
Then, you’ll need to shop around to find the car that will best suit your needs.
Identifying wants and needs
You already have some idea of what kind of car you can afford.
So that will help limit the field right off the bat.
But there are probably still a wide variety of vehicles available that meet your budget.
So now it’s time to decide what you really need in a vehicle, and then a few things you might want.
So what does your needs and wants list look like?
Chances are it’ll be balanced a bit like ours.
You’ll have a few things you truly need from a car, but many things you’d like to have.
Do your research
Now that you know what you want and need from a vehicle, find a few makes and models that will suit you.
The broader your search, the easier it will be to shop around for a car.
When you’re researching, you want to look at several different things, including:
The mileage you can expect from that make/model in your price range
The actual five-year cost to own the vehicle,
Information about how long the vehicle is likely to last.
General availability of the vehicle in your price range and your area.
It’s important not to just pick a make and model that seems to have what you need and fits your budget.
This is especially true if you’re buying used and want to own the vehicle for another five years or more.
In this case, do your due diligence to ensure that your vehicle will last long enough to meet your needs.
This is different depending on whether you’re buying a new or a used car.
If you’re buying a brand new car you’ll just need to find a couple of dealers who offer that make and model.
If you’re buying used, you’ll want to shop around online for listings of that vehicle.
When you’re shopping around for a used vehicle, consider buying directly from an individual.
With the right due diligence, this can be a safe process that will save you potentially thousands of dollars.
You can buy from an individual seller even if you’re financing the vehicle.
If you’re buying from a dealer, ask if they offer any sort of warranty on the vehicle for any amount of time. If not, you might try another dealer.
When buying from an individual, it’s important that you have the car inspected before you buy.
This is an additional expense in the car buying process, but it’s well worth your while.
You can and should negotiate when buying a car regardless of whether you’re buying at the dealership or from an individual.
In either case, you should always negotiate on the price.
With a dealer, you may be able to get an additional discount for paying cash–even if that cash is through your pre-approved loan offer.
You can also ask the dealer about dealer-based financing.
Don’t tell them first what your offer in hand is.
They may undercut the original lender’s interest rates in this case!
When negotiating with a private seller, you can also negotiate the price.
Most sellers are ready to get rid of their car as soon as possible, so they’ll likely come down on their first asking price.
You could also negotiate to leave the car at the same price if the seller will pay for the inspection and any essential repairs that pop up during the inspection.
Buying the Car
The actual purchasing process will vary, depending on where you’re purchasing the car–from a dealer or an individual.
Here are some tips for both situations:
Buying from a dealer
When you purchase from the dealer, you’ll sign the paperwork in the seller’s offices.
When you decide to do dealer financing (which is fine if they offer a better deal than your pre-approved offer), you’ll sign for both the financing and the sale in the office.
This process is fairly straightforward. Just be sure you’re looking at all the paperwork, and ask about any additional fees that pop up.
Dealers will often rush you through the paperwork, and you could end up owing more than you bargained for if you’re not careful.
Just go slowly, and take your time when needed.
Buying from a private seller
Buying from a private party can be a little different.
This is especially true if the car is still financed, and the seller doesn’t have the pink slip in hand.
It’s fine to buy a car with a lien on it, but it does make the process a little more complicated.
First, you’ll need to check with the bank that owns the lien.
They’ll turn over the pink slip to you or the new lienholder at the time of sale.
This can delay the sale, though.
You can negate this time some by doing the deal at the bank that owns the lien. When the seller uses the proceeds to pay off the balance of the loan, they can sign the pink slip over to you or your lender, as needed.
When buying from a private party, you’ll also need to make sure that you fill out a transfer-of-ownership document.
This should come with the pink slip.
It’ll include information like how many miles are on the car at the time of transfer and how much the vehicle is being sold for.
Also, make sure that the registration on the car is up to date.
If it isn’t, you could be on the hook for any late fees associated with it.
In fact, it’s a good idea to get proof of this before your scheduled sale date.
That way the seller can take care of this issue if they are, in fact, behind on paying the registration.
After You Buy
Now that you’ve actually purchased your first car, what do you do after the fact? You actually have to take a few steps. Here’s what you need to do:
Insure the vehicle
Actually, if this is the very first car that you’ll own, you need to get insurance before you buy the car.
A dealer won’t let you drive off the lot without car insurance, and you shouldn’t drive a privately sold vehicle with no insurance, either.
Driving a car with no liability insurance is illegal in most states.
And if your car is financed, the lender will usually require complete insurance coverage that will cover their investment in the case of a total loss.
If you’re already on someone else’s car insurance policy, like your parents’, you can transfer or add insurance to your vehicle at the time of sale.
But if you don’t currently have car insurance, you may want to shop around before you buy.
You can purchase a policy that will begin on the day you purchase the vehicle.
Again, you’ll need proof of this insurance to drive off the lot at a dealership.
And you may need it for your lender to finance any sale, including a private vehicle sale.
Register the car
You’ve probably seen cars from the dealer’s lot driving around with paper license plates.
They always have a prominent date on them.
This is the last day that the dealer-issued registration is valid.
After that date, the new owner must have their own registration complete with the state to legally drive the car.
When you’re shopping around for a car, check your state’s DMV or website to find out your likely registration costs.
Some cars cost a few hundred dollars!
If you have to, reduce your down payment so that you’ll have enough money left over for this additional cost.
Also, check with your DMV to see what you need to bring in order to register the car.
Often times, you’ll need to have a current driver’s license, proof of address, and maybe one additional form of identification.
Once you get the registration, you should keep it in the car.
And be sure to budget for the annual registration and license renewal you’ll need to pay!
After you buy the car, those annual costs will be much less, most of the time.
But find out when you register how much they’ll be, and add them as a one-off expense to your budget.
Take good care of your vehicle
The best way to ensure that you get the most miles out of your first car is to take good care of it.
Consult the car’s owner’s manual (you can probably find this online if your used car is missing) to find out when you should plan to perform regular maintenance on the car.
Then, find a mechanic you like to work with for your repairs.
It’s helpful to work with a local mechanic who knows your car and its history.
And when you find someone you trust, you can lean on them for advice on when to perform major regular maintenance, like replacing timing belts and other things that will help your car last as long as possible.
Again, once you buy your car, you should be budgeting every single month for maintenance costs.
Even if you’re buying new, the cost of tires, oil changes, brake pad changes, and other regular items can total up really quickly!
Other than this, enjoy owning your new car!