How to buy a car in 8 steps

Whether buying a new or used car, it's important to take your time and do your research. It's not just the initial cost that you need to look at, but the total cost of owning your car, including things like gas, insurance and maintenance. With that in mind, figure out what you're willing to settle for and what you must have in a car.

Used cars are more expensive year over year. According to research from CarGurus, the average price for used cars since 2017 has increased by approximately 40% with most price increases taking place in 2021 and 2022. While the used car market has softened recently, the overall price trends should encourage buyers to do their due diligence.

Researching your purchase is important because your car expenses can be a big factor in your overall budget. Let's say you go with an electric car to reduce your gas costs, but all the new tech in your ride may be more expensive to insure or maintain, and your home utility bill could increase as well. Or you go with a well-priced older car but you're taking on more potential expense in maintenance and repairs. It's all a balancing act to get a car that works for you and your finances.

These eight steps can help you to stay within budget and simplify the negotiation process, allowing you to find your next set of wheels and hit the road.

1. Calculate what you can afford.

If you're planning to take out a loan to help cover the cost of the car, you'll need to determine how much you can afford in monthly payments. If you're selling or trading in your current car, factor in its cash value and then add your planned down payment. We suggest 15% to 20% of the purchase price. Use online tools such as our Car Affordability Calculator to estimate a monthly payment.

2. Determine the true cost of ownership.

Plan for maintenance costs, the price of gas and auto insurance. Get an auto insurance quote, but note that collision and comprehensive coverage generally costs less for used cars.

If purchasing an older car, consider getting pricing for an extended warranty, or vehicle service contract, from an independent company before you go to the dealer. Not all car warranties are made equal. Typically, there are two types of extended warranties — component coverage and exclusionary coverage.

Covered components contracts provide mechanical breakdown coverage for components named within the contract only. Exclusionary contracts are similar to manufacturer warranties. They cover your car's mechanical items comprehensively except for specific items that are identified as not covered, like belts or hoses.

Estimate your warranty costs and compare them to the potential out-of-pocket costs you could have for repairs if you didn't have a warranty to help.

3. Keep an open mind.

Prioritize a list of the features you'd like, such as styling, engine power or cargo space. But be flexible. Stay open to two or three models that would meet your needs and your budget. Look at your daily use now and consider what things you need versus the nice-to-haves. If you're driving kids to various activities, you may want extra storage or a seating setup that's easy to get in and out of. You may also want to have a car that's fuel efficient. Many models will have different motor configurations to help save money if you don't need the extra power from a bigger engine.

Bells and whistles can add to the bottom-line cost for your car, but some modifications or equipment packages may not add to your car's resale value. Technology features like backup cameras and collision detection sensors have become more common. If it comes down to fancy wheels or safety technology, consider what future buyers will want more when you sell your car.

4. Research your market.

Don't wander car lots all over town. You can explore local classified ads and dealer inventories through websites like Cars.com‍ ‍ ^{See note 1} and Autotrader.com.‍ ‍ ^{See note 1} If you have your eye on a specific make and model, go online to research the manufacturer's suggested retail price (MSRP).

Things like dealer fees, delivery charges and document fees can add up at the dealership. Having a better understanding of the pricing can help put you more in control during negotiations.

5. Determine market values.

Once you've found a car you like, consult a car-buying service to determine a fair asking price. If you find a car you may be interested in at a dealership, contact them to see if it's still in their inventory.

Consider depreciation as part of your purchase and ownership cost. Car values can depreciate as much as 50% over the first five years. But recent used-car price surges have reduced average depreciation to 40%.

A study by iseecars.com found that the Nissan LEAF and BMW i3 depreciated by 65.1% and 63.1% respectively, while the Jeep Wrangler and Wrangler Unlimited depreciated by 9.2% and 10.5%. Depreciation isn't a forecast of which car is better, but it tracks the change of value from the average MSRP. Rapid innovation in electronic car technology may have been responsible for the LEAF and i3's resale values being hit harder than other cars.

If you find a few different cars that meet your needs, give bonus points to the one that tends to hold its value longer, because it will cost you less in the long run.

6. Explore your financing options.

Determine how you're going to pay for your new car. Are you planning to take a loan, get a lease or buy the car outright with cash?

Leasing may be an option if you need lower payments or don't plan to put a lot of miles on the car, but there are trade-offs. While lease payments can be lower than a loan payment, you don't own the car. You're basically paying for the car's depreciation over the lease period.

If you plan to pay cash and purchase a car without a loan, the number one thing you should be concerned about is the out-the-door price. Review any add-ons or dealer charges and negotiate to get the price you feel comfortable with.

If you're planning to get a loan, see if you qualify to be preapproved for an amount and interest rate before you go to the dealership so you know where you stand. Look for low loan rates and flexible terms to fit your budget. USAA Bank or another financial institution might offer lower interest rates than a car dealer. Aim to pay off the loan within three to five years.

7. Run a background check.

Make sure a used car has never been salvaged by entering the vehicle identification number into the National Insurance Crime Bureau's VINCheck® system.‍ ‍ ^{See note 1}

Salvaged cars aren't necessarily unfit to drive, but it usually means something happened where the total repairs exceeded the car's value. It could have been deemed a total loss and sold at auction to someone looking to restore it. A hailstorm could have damaged the body significantly, or it could have been flooded out by hurricane waters or involved in a collision. There's a bit of a gamble if you consider a salvaged or restored car.

While a salvaged or restored title isn't a poisonous kiss for the car itself, it may be more of a challenge when you decide to resell or trade. Unless you're familiar with salvage or restored titles, it may be best to avoid these cars.

8. Go for a test drive.

Hit the highway to properly gauge a car's performance, inspect its mileage, tire tread and overall condition. If you're buying a used car, especially from a private sale, run it by a trusted mechanic for an under-the-hood inspection to forecast longevity and maintenance needs.

Remember that factory warranties usually transfer, depending on the mileage and original in-service date of the vehicle. After-market warranties may be transferable as well, potentially for a fee.

It may also be worthwhile to order a vehicle history through a service like Carfax or AutoCheck. You may find some reports for routine maintenance or other service items.