10 tips for buying your first car

Buying your first car can be an exciting experience — but also a complicated one. Between researching the right model, choosing the right financing plan and reading the fine print, the logistics can feel overwhelming if you're not prepared.

If you're feeling lost on your car-buying journey, consider the following tips to make buying your first car a breeze.

1. Consider your lifestyle.

If you're starting a family or like to take road trips or go camping on the weekends, you may not want to purchase a sports car with no back seat. Your vehicle is intended to be a tool to make your lifestyle easier, so consider what that lifestyle entails. Decide what three factors matter most to you in a vehicle, then narrow down your choices from there. You can use car comparison tools, auto journals and online resources to find information.

Once you have a vehicle in mind, research its capabilities and related car maintenance costs. If a vehicle meets your lifestyle needs but not your financial needs, it may not be the right choice. Consider what the market looks like for this kind of vehicle, and how quickly it will depreciate over time. For example, an electric vehicle might save you the cost of gas, but its battery has a limited shelf life. After that, the battery must be replaced, which can cost thousands in mechanic fees and parts. Do a cost-benefit analysis of the make and model that you're interested in to avoid being blindsided down the road.

2. Decide if you want new or used.

Historically, one of the best ways to get a great deal on a car is to buy a slightly used car with 2 to 3 years' worth of miles on it. But due to manufacturing issues during the pandemic, used cars have not been depreciating, and a gently used car can be nearly as expensive as a brand new one right now. Your best option is to do your research on the prices for used and new models of the vehicle you're interested in. If a used car is only $1,000 less than the new model, it may be worth spending a bit extra for the newest features.

If you decide to buy a used car, consider looking for a certified pre-owned vehicle through an authorized dealer. These cars are inspected and cleaned, and they're often manufacturer-backed as well. If you're willing to do your research, purchasing from a private seller can knock off thousands from the asking price, but be smart about it. Obtain the vehicle history report, and have a mechanic do an inspection before you buy.

3. Know what you can afford.

There are a lot of options out there for how to finance a car, but most important is affordability. Personal finance experts recommend against spending more than 10-15% of your take-home pay on a new car. If you have some savings, then you may be able to stretch your budget further, but don't exceed what you can afford. Remember that a vehicle adds up to more than the sticker price when you consider insurance, repairs, gas, parking and other car maintenance costs.

Leasing versus buying is another financial decision. Buying means you'll own the vehicle once it's paid in full, and, if you financed with a loan, part of your monthly payments goes toward the principal cost. Payments are typically higher here. Leasing means your monthly payments may be lower, but you're not putting equity into the vehicle because at the end of the lease you will return it.

There's no right choice between leasing versus buying. It all depends on what makes the most financial sense for your budget and goals.

4. Get to know the car you're buying.

You wouldn't marry someone without taking them on a date first. Similarly, you shouldn't buy a car without looking into its history. Look up the repair history for your specific make and model and see if it has a laundry list of known issues. You can do this through Autotrader®, a quick Google search or by speaking to a mechanic. For used cars, check the title through the DMV, and check CARFAX™ for an entire history of the car from purchase date to selling date.

If you've found a car you love, make sure to take it for a test drive to see how it handles and if there are any apparent issues. Also, never say “I do” without an inspection, even if the seller attempts to dismiss it. It's worth the money to spot any potential issues before you're financially committed.

5. Familiarize yourself with the lingo.

Any major financial decision comes with a lot of financial jargon. Before you negotiate, know the words the seller uses. Here's a quick guide to some of the more common ones:

• APR. This stands for annual percentage rate, referring to the amount of yearly interest that you'll pay on a loan. The lower the APR the better, as this means you'll pay less over time.
• Invoice price. This is the initial price that a manufacturer charges a dealer. This is rarely the price that you'll pay but can give you an idea of how much you can negotiate.
• MSRP. This stands for manufacturer's suggested retail price, which is how much the manufacturer suggests the dealer should sell the car for.
• Sticker price. This is literally the price you see on the sticker in the window of the car. It factors in the MSRP and adds in any costs that the dealer sees as appropriate.
• Market value. This is the average amount that other people in your area are paying for this vehicle. It doesn't include dealership extra taxes or fees.

6. Determine if you'll make a down payment.

If you can put down some cash up front for your car, you're likely to get a better rate on your auto loan, which means less money you'll pay every month. Consider paying 20% up front, or at least 10%, and factor in the length of your loan. While a shorter loan will have your car paid off faster, make sure it's something you can afford in the long term.

7. Get preapproved for a loan.

A preapproval is when a bank or credit lender looks at your credit score to determine how much cash you can borrow from them. The preapproval process varies by lender, so check with yours for specific questions. Even though a preapproval or prequalification is not required to obtain a loan, it is a good way to see how much you can spend at the dealership and may give you more leverage to use in negotiations.

If you decide to get preapproved by several lenders, make sure to apply with them all within 14 days. Preapproval may require a hard credit pull, which can be damaging if you've had too many. By applying for them all at once, they'll only count as one pull rather than multiple. You can also choose to get prequalified for a loan, which requires a soft credit pull but will give you an estimate of the loan terms. Check with your lender for more information. Also, remember a preapproval or prequalification is not a guaranteed loan. The application process still must be complete, and you may or may not qualify.

8. Consider a cosigner.

A cosigner is a second party, usually a family member, who takes full responsibility for paying back your loan if you do not. They serve as a kind of insurance for your lender, in that if you can't pay off your loan, your second party will be responsible for it. Cosigners are a great option if you have a low credit score, a short credit history or an income that doesn't meet the lender's guidelines. A cosigner with a good credit score may even lower your APR on the loan.

9. Negotiate the price.

This is typically the trickiest part of purchasing a car. It can be emotional and tedious to negotiate the price of a car. The best thing you can do is to come prepared. Know your credit score, research your loan options and research the dealership that you're visiting. If you have friends who are knowledgeable about cars or finance, bring them along as well. Also keep in mind what is and isn't negotiable regarding fees, preparations and miscellaneous costs. It is helpful to know which questions to ask before your next vehicle purchase. The better prepared you are, the more options you may have when negotiating.

When negotiating, don't focus just on the monthly payment but rather consider the overall price of the car. It can be easy to get lost in the details and to talk yourself into a monthly payment price that loses you money. If a seller asks how much you can spend each month, counter by asking for the “drive-away,” cost of purchasing the car that day. Look into the deals they post online or at the dealership and stay up to date with market value.

10. Read your contract carefully.

At this point, you know what you can afford, and know what you're prepared to accept. Make sure the details in the contract reflect what you've agreed to, and that there are no extra fees or warranties like tire and wheel protection, gap coverage or windshield protection that were not agreed to.

Once you've read and signed the contract, make sure your financing has been approved before you leave the dealership to avoid yo-yo financing. This is when the dealership brings you back after purchase because your financing fell through, asking you to sign for a higher cost. If this happens, contact your bank or online lender to set up alternative financing.