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Your guide to buying a car and to getting an auto loan
Deciding to buy a car is exciting! But it can be a stressful and complicated process. Before you make a big purchase or take out an auto loan, learn how to get the best deal within your budget and avoid problems down the road.
Think about what you’d like to focus on — you'll be able to prioritize your goals at the end. Look out for money-saving tips along the way.
Meet Mya and Frankie—they’re here to help you navigate the car-buying process to make it feel a little less overwhelming.
Calculating your budget
While it’s tempting to head straight to the dealership, taking the time to figure out your budget is an important first step.
Mya checks her budget first to avoid problems down the line
Mya needs a car fast so she can get to her new job. But first, she needs to make sure she can afford all the expenses that come with a car, such as:
- Loan payments
- Emergency expenses (like a flat tire or cracked windshield)
The trick is making sure that the she can afford the monthly payments but also adding up all of the payments over time. She doesn't want to end up paying too much in the long run.
Mya knows the total cost of buying the car is just as important as the monthly payment amounts. The maximum total amount she thinks she would be willing to pay for a used car, over time, is $8,500. Keeping that number in mind, she also calculates her monthly maximum. If she can’t make her monthly payments, she could be charged late fees, hurt her credit score, have her car repossessed, and even be sued.
Mya completes a budget and thinks she can afford about $350 a month, which breaks down to:
- $250 for loan payments
- $100 for other expenses like gas, insurance, etc.
She plans to keep these numbers to herself. When she goes into a dealership she’ll need to negotiate, which she can’t do if the dealer knows the maximum she’s willing to pay.
When she compares different cars, she knows that she would rather go with a higher monthly payment, within her budget, if that means she pays a lower total cost and has a shorter loan term.
Mya checked her budget first to figure out how much she could afford. Be sure you start with your budget, too.
A down payment on a car is money paid upfront for the car you purchase. The more you pay on a down payment, the less you’ll have to borrow and pay interest on, which can lower the total cost of the car over time.
How much you pay depends on your budget and your negotiations with the lender or dealership. Some sources say you should pay at least 10% of the total price of the car for a down payment. That means if the car costs $7,000, you can pay at least $700 upfront for the down payment and the remaining loan payments will be divided up into smaller monthly payments over a set period of time, plus interest.
You can also choose to pay the full price of the car up front. One benefit is you won’t have to pay interest on your loan or worry about monthly payments. However, you also won’t have that money on hand if you need it for other expenses later.
If a car doesn’t pass inspection, it cannot be legally driven. It will also have high maintenance and repair costs. You should have the car you want inspected to check for safety and emissions issues prior to purchase. Ask your caseworker about inspection requirements in your area.
Loan payments vary depending on your loan terms. Try not to miss a payment as late fees can be very high. Read more on loans.
Lenders will not process your loan if you do not have insurance in place. Insurance rates vary depending on the type of car, your driving history, your credit score and how much coverage you want to protect yourself in case of an accident.
- If you don’t have insurance, call around to different insurance companies before you buy a car, especially if you’re planning to take out a loan. Researching car insurance for your preferred car ahead of time will ultimately save you money.
- If you already have insurance, ask your insurer about adding a new car to your policy.
According to a study done in 2017, maintenance (to cover repairs or new tires, for example) for new cars can cost around $1,186 per year. The cost is likely higher for used or pre-owned cars. Some months you won’t have maintenance issues, but other months you will, so it’s important to have this money set aside.
Shopping for loans
Shopping for and comparing auto loans can be a complicated process for anyone, especially a first-time borrower. You actually have more control in the situation than you think. You can ask questions as well as negotiate the terms of the loan, including interest. And you always have the right to walk away if you want to look for other options.
Frankie negotiates his loan rate
Frankie checked his credit score, but assumed it wasn’t good enough to qualify for a loan. He then remembered his friend was able to get pre-qualified despite having a low credit score, which inspired Frankie to try.
He called and visited a few different banks and credit unions, as well as online lenders. This way Frankie can get estimates of loan terms with each lender even if he didn’t have an account with them. Frankie isn’t obligated to go with any of these loans but getting pre-qualified for an auto loan with a certain interest rate may give Frankie more negotiating power when he gets to the car dealership.
At the dealership he started the negotiation by insisting the dealership provide him with a lower interest rate in order to compete with the quotes from other lenders.
Frankie shopped around for the best rate. Here are some steps you can take to make sure you’re getting the best loan for you.
Credit reports and credit scores
Credit reports and credit scores aren’t the same thing. Your credit report is an outline of your credit activity. This activity is, in part, what determines your credit score.
If you’d like to learn about your credit score, ask your caseworker about different free, trustworthy credit score-checking services or apps you can use. Read more on credit reports and credit scores.
Pull your credit report and review it to learn more about your credit activity. You can get a free copy of your credit report once a year from each of the three nationwide credit reporting companies at .
Remember to focus on the total cost of the loan, not just the monthly payment. Sometimes people focus on the cost of monthly payments but end up paying more in the long run because they didn’t consider all of the loan terms.
Here are some important terms to keep in mind when negotiating the total cost of your loan. Read more about negotiable terms.
- Length of loan: A lower monthly payment (over a longer period of time) doesn’t mean you’re paying less. For example, if you go to a dealership you could see a car (Car A) with a sign that says the monthly loan amount, “only $70 a month and 4% interest.” You may find an almost identical car may be found at a different dealership or online outlet (Car B) with the same monthly payment amount and interest rate. But they might not actually cost the same amount in the long run. Car A requires 4 years of loan payments, so the total cost comes out to $4,320. But Car B requires 5 years of payment, making the total cost $5,400. Car A is actually the better deal.
- Interest rate: An auto loan’s interest rate is the cost you pay each year to borrow money expressed as a percentage. The interest rate does not include fees charged for the loan.
- The Annual Percentage Rate (APR) is the cost you pay each year to borrow money, including fees, expressed as a percentage. Read more on APR.
- Changes to any of these factors will affect the total cost, so it’s important to calculate the total cost of any auto loans. Use our to compare your options.
Banks and lenders aren’t required to give you the best rates available. You can save money over the life of the loan by negotiating for the best interest rate and the lowest APR available to you.
Being pre-approved or pre-qualified—whether with a printed letter or in an email, even if you don’t plan to take those loans—will give you more negotiating power when you’re trying to get the best price on an auto loan.
But remember, the rates aren’t the only important part of a loan, you need to consider all of the loan terms when calculating and comparing the total cost of different loans. Ask the dealer to match or beat your best pre-approval rate. You never know, they may be able to offer an even better deal.
Shopping for cars
Ah, the exciting part — car shopping! Do some research on different models and features, then test-drive a few different cars until you find one that best fits your budget and lifestyle.
Mya shops around for a certified pre-owned (used) car in good shape
Mya is eager to start car shopping but she’s worried about being rejected for a loan because of her credit history.
At first, she plans to look at two options:
- Go to a local dealership
- Buy from a friend of a friend who has a car they want to sell
She finds a dealership near her apartment that is selling a car she’s always liked. Then she remembered that her cousin bought that same car last year. It broke down a week later and her cousin still had to make all the monthly car payments.
Mya wants to avoid this problem. She goes home to research her favorite car models online, comparing prices and features. Armed with her budget and a list of models and features she is interested in, she visits a few more dealerships to test-drive several certified pre-owned and to help her find the best deal for her needs.
Shop around like Mya did before making a decision, even if you feel rushed or pressured to buy a car fast.
Find out if the car is Certified Pre-Owned (CPO). These cars are low mileage trade-ins and lease returns that are reconditioned to the specifications of a new vehicle. After these CPO cars are restored, the manufacturers may extend their original warranty.
Research the average upkeep costs of car models you like so you have an idea of how much regular maintenance will cost.
Ask for the car's maintenance record from the owner, dealer, or repair shop so you can see the car’s history. You can also check the car’s accident history by pulling a . Check whether there are any unrepaired recalls on the vehicle. Start by asking the dealer if the vehicle you’re considering has a recall. You also can check yourself by entering the car's VIN at . Determine the car’s value before negotiating by checking resources like Kelley Blue Book or Consumer Reports.
Read more on buying a used car to see if it’s the right choice for you.
Don’t buy the first car you see! Research different cars and features online to find out what models may work for you. Once you figure out some cars you like, determine the value of the vehicle so you can negotiate the purchase. You should check:
Some of these organizations charge for this information.
Search online for your favorite models and compare prices at different online and in-person dealerships. You may find the best deal is online, and you can do all the negotiating over the phone or online instead of face to face. Or you can bring the best price you find to the dealership to see if they’ll match this rate.
Don’t forget to test-drive cars at dealerships and don’t be afraid to negotiate with the dealer to knock down the price—especially if it doesn’t have all the features you want.
The primary benefit of these types of dealerships is that they rarely require credit checks. However, interest rates on loans from these dealerships can be much higher than loans from a bank, credit union, or other lender.
Banks and credit unions are more likely to limit the loan amount based on the actual value of the car. In the long run, you may end up spending thousands of dollars more than the car is worth. Make sure to take this into consideration when making a final decision. Learn more about “buy here, pay here” dealerships here.
Confirming details before you drive away
You’re so close! Just a few last steps to make sure you’re ready to drive away in your new car.
Frankie says no to add-ons
Frankie has money saved for a down payment and extra money saved for future car payments. As he’s getting ready to sign all the final paperwork, the car dealer encourages him to buy add-ons. They all sound nice — an extended warranty, paint protection, window etching — but does he really need them?
Frankie reviews his options and realizes he doesn’t need these add-ons and they weren’t accounted for in his budget. Not only would he have to pay for the add-ons, he’d also have to pay interest on them since they would be added to his monthly loan payments.
He declines the add-ons and reviews his paper work one last time. He’s finally ready to drive off the lot with his first car.
Frankie turned down add-ons and negotiated for the best price on his car. Here’s what you can do to make sure you get the best value, too.
The price of the car isn’t set in stone. Be prepared to negotiate on price.
- Use your loan pre-approval and previous research online and at different dealerships to negotiate for a better price as well as better loan terms.
- Know that dealers may be willing to bargain on their profit margin, often bargaining down between 10 and 20 percent for new cars.
- Be ready to walk away if it doesn’t fit your budget or you don’t get the terms you want.
Add-ons are optional products or services, such as:
- Tire protection
- Racing stripes
- Extended warranties
- Guaranteed auto protection (GAP)
These products and services can significantly bump up the total price of the car and monthly loan payment. Carefully review the options, ask questions, and remember you can always say no if you don’t need or want any add-ons. It’s also worth checking your car insurance policy—some add-ons may be covered.
Take your time reviewing the details. If there are things you don’t understand in the paperwork, don’t be shy about asking questions. This is a major purchase and you’re signing a contract so you want to understand what you’re signing.
Read all the documentation about the loan before you sign. If you don’t have time to read it with the bank or lender, that’s fine—take it home, read through all the details and make sure you understand the terms, and sign whenever you feel comfortable.
Ask for a copy of all paperwork and keep it in a safe place so there are no surprises later.
Be sure to pay your monthly payments on time to avoid late fees—otherwise you risk hurting your credit score, or even worse, getting your car repossessed.
Set a calendar reminder on your email or phone to make sure you don’t miss a payment. You can also set up automatic bill pay so you don’t accidentally forget a payment. If you need to change the monthly due date of the loan payment, use .
Create your own personalized car-buying checklist
We know there’s a lot to consider but choosing a few goals to focus on first will help make the process feel more manageable.
Select a few goals
Choose at least one goal and up to five goals.
My Car-Buying Checklist
There’s a lot to consider when buying a car. Focus on a few goals first, and once you’ve had a chance to complete these goals, revisit the original checklist and decide what you’d like to focus on next.
I'm working on these goals first:
|Things to keep in mind