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Making a big purchase like a new car can be overwhelming, but having a solid game plan in place can make it less daunting.
A new car can come with a hefty price tag. The average purchase price for a vehicle in the U.S. was $35,742 in September 2018, according to Kelley Blue Book.
Doing your research and comparing options can help you determine a fair price for the car you want and identify loan offers — which together could save you hundreds or even thousands of dollars.
Follow this guide to learn steps on buying a new car.
- Set a budget
- Do your research
- Calculate a fair price
- Schedule a test drive
- Compare dealer quotes
- Sell or trade in your existing vehicle
- Close the deal
The first step in buying a new car is figuring out how much you can afford.
You have two options for buying your car: paying in cash or getting a loan. If you have enough money saved, paying in cash is generally the more cost effective option because you won’t pay any loan interest. If you get a car loan, you may need to make a down payment. After that, you’ll make monthly payments determined by the amount you borrowed, your annual percentage rate and the length of your loan.
Whether you plan to pay in cash or get a loan, remember to set money aside for additional expenses, including vehicle registration, car insurance, gas, sales tax and ongoing maintenance.
If you plan to finance your car, take a look at your monthly income and expenses to determine how much you can comfortably afford for a car payment. On the income side, consider your take-home pay after taxes, not your gross pay. When it comes to expenses, add up food, rent or mortgage, student loans and other debt as well as entertainment and other costs. Subtract your expenses from your income, then consider how much of what’s left that you want to put toward a monthly car payment.
Getting preapproval on a car loan from a bank, credit union or other lender could help you set your budget. When you’re preapproved, the lender lets you know the loan interest rate, maximum loan amount and length of the loan that you would likely be approved for. Being preapproved is no guarantee you’ll be offered a loan (you’ll still need to provide more information before you can be approved and receive an official loan offer), but it can help give you an idea of the price range you need to stay within.
You may want to get preapprovals from a few lenders, so you can compare offers and identify the one that works best for you. Just be sure to get them within the same time period. Preapprovals typically result in a hard credit inquiry. But multiple inquiries within a span of 14 days to 45 days are typically counted as a single inquiry, depending on the credit-scoring model used.Some important things to do before you apply for a car loan
Begin by identifying your top priorities. For example, if you’re single and on a tight budget, you might find a fuel-efficient subcompact hatchback ideal. But if you’re a parent with children, a larger vehicle like a minivan or midsize crossover with strong safety ratings may be the most appealing option.
Here are some websites to help you research.
- Fueleconomy.gov — Look up a car’s fuel economy.
- National Highway Traffic Safety Administration — Find vehicle safety ratings.
- Edmunds.com and Kelley Blue Book — Get information about some of the strengths and weaknesses of the cars you want. These sites also offer tools that provide estimates of a model’s cost of ownership, including expenses related to depreciation, maintenance, fuel and repairs. You can even find lists that rank models with the lowest cost of ownership.
- J.D. Power — The company’s annual U.S. Vehicle Dependability Study ranks the dependability of car brands.
Get a sense of pricing for the cars that caught your eye, so you can weed out any that fall outside your budget.
Kelley Blue Book and Edmunds.com offer pricing tools that let you know what others are paying for certain models, based on data from thousands of transactions in your area.
Once you’re at the dealership, you’ll see a “sticker price” in each car window. This price is the manufacturer’s suggested retail price, or MSRP. Each vehicle comes with an MSRP, which is set by the auto manufacturer.
In addition to the MSRP, you’ll see the destination charge, which is the cost to transport the car to the dealership, and added costs for any special features beyond the standard equipment.
Dealers can adjust the sticker price up or down. One factor that can influence pricing is availability. If the model isn’t in high demand, a car dealer may be willing to offer the vehicle at a price that’s lower than the MSRP.
Your final price will also depend on whether you purchase any additional options, such as window tinting, chrome-plate wheels or splash guards. For example, Kelley Blue Book’s pricing tool shows that if you buy a 2019 Honda Accord Sport in Charlotte, N.C., the fair purchase price range is between $24,375 and $26,196. But if you add on a trunk tray, all-weather floor mats and a heated steering wheel, the fair purchase price would be between $25,371 and $26,870.
Once you’ve narrowed your car choices, it’s time to do some test drives. Though a vehicle may look good on paper, your opinion may change after you get behind the wheel. You may find its seats uncomfortable or that it doesn’t handle hills or turns well. Maybe the engine is too loud. Doing a test drive will help you to identify any potential issues that you can’t live with.
You may be able to schedule a test drive at a local dealership. In some cases, you may even be able to schedule a test drive at your home or office.
Another option is to rent the vehicles you’re considering for a day or two. Though this will cost you money, it allows you to spend more time in the car, with no salesperson in the mix.
After you’ve test-driven your candidates, you should have a clear idea of which vehicle is at the top of your list.
With an idea of what you can afford and your top choices of cars in mind, it’s time to gather dealer quotes.
Compare each dealer’s asking price with the estimates provided by the pricing tools you’ve used, then negotiate based on your research. Dealers often make a profit of 10% to 20% and may be willing to bring the price down.
If you’re open to dealer financing and you’ve been preapproved for a loan, let the dealer know.
Give the dealer a chance to beat the best rate you’ve been offered.Why car loans from banks may be a better option than dealership loans
If you currently have a vehicle, selling or trading it in could give you some cash to use toward your new car’s down payment. You can sell it to a private party or a company like CarMax. Or you can trade in your old car at the dealership where you plan to buy your new vehicle.
Your goal here is to get the most for your used car. The pricing offered by Edmunds and Kelley Blue Book can serve as a guide for this step by showing your car’s current market value. Pricing will depend on factors like the car’s overall condition and the number of miles on its odometer.
Generally speaking, you’re likely to get a higher trade-in offer from a private party than you would from a car dealership. But trading in the vehicle at the dealer can be easier and less time-consuming, since it doesn’t require you to spend time and energy listing the vehicle for sale and meeting with prospective buyers.
You’re now at the finish line. This step involves applying for a car loan — if you’re getting the vehicle financed — and, if you’re approved, signing the paperwork for your new car.
Contact the lender you’ve decided to do business with, submit a formal loan application and, if you’ve been approved, finalize the loan. If you decide to finance through the dealership and are approved for a loan, you can finalize the loan and car sales paperwork at the same time.
Some dealers may deliver the closing paperwork and car to your home or workplace so that you don’t have to make another trip to the dealership. Or you can visit the dealership to sign the paperwork and collect the vehicle.
Either way, be sure to confirm the following information:
- Car condition and options — Be sure to carefully inspect the vehicle to make sure there’s no damage. Confirm that the car includes all of the options you’ve requested.
- Contract terms and pricing — When signing the paperwork, ensure that all the terms and prices listed reflect items agreed upon during your previous interactions with the dealer. Make sure the sales price is correctly listed. The sales contract will include such items as state and local taxes. There may also be a registration fee, if the dealer has gotten the vehicle registered on your behalf. You’ll also see a documentation fee, which dealers charge for the work involved in putting together a sales contract.
- Loan details — If the vehicle is being financed by the dealer, double-check the interest rate, loan term and any rebates the dealer may have promised in previous discussions.
If you see any discrepancies in the loan documents or fees listed that the dealer didn’t previously discuss with you, ask questions. Don’t be afraid to hold off signing the contract until your concerns have been addressed.
Once you’ve reviewed and signed the documents, it’s time to get behind the wheel and enjoy your new car.
Buying a new car can be a lengthy process, but taking the time to plan your budget and do some research can pay off. If you plan to finance your car, keep in mind that there are a lot of potential lenders out there. Getting preapprovals can help you shop for the best interest rates, which could save you money on your new car.
If you struggle to get loan approvals, consider putting your purchase on hold as you build your credit, or consider a less expensive make and model.