Buying Your First Car: 7 Steps to Navigate the Process

Buying your first car? Congratulations! Before you plan your first road trip, though, there are several important factors to consider as you ready yourself to buy this big- ticket item. It’s more than simply finding the right car for your needs. You also need to plan for your purchase that can put you in the driver’s seat to make a more informed decision.

Furthermore, you need to examine your finances since the average new car payment is $740 a month for new cars and $527 for used cars¹. And, if you need to finance your purchase with a loan, then understanding what credit score is needed to buy a car is useful for first-time car buyers. Making sure you have healthy credit can help you pay less by getting better terms on a car loan for your target car.

Before you hit the gas, read these seven tips for buying a new car that can help you to prepare your finances and credit to manage the purchase process.

1. Find a car that fits your lifestyle

Matching your car choice with your lifestyle can help create a blend of functionality and your personal preferences. Start by prioritizing factors that resonate with your day-to-day routines.

To find the right car, consider aspects such as:

• Specific needs: Are you a city commuter? A weekend warrior seeking an off-road ready SUV? A family driver who needs spacious cargo room? Identify the must-have’s up front.
• Make and Model: Research online car comparison sites to understand various vehicle strengths and weaknesses.
• Features: Whether it’s an advanced driver-assistance system, a specific interior color or a top-notch sound system, identify which features align with your unique preferences. Car and Driver and Edmunds are examples of resources for detailed information on the latest car features and technological advancements.
• Vehicle options: Explore pros and cons of new vs. used cars and consider traditional gas-powered, hybrid and electric car possibilities.
• Fuel efficiency: According to the U.S. Department of Energy, the annual fuel cost is influenced by a car's miles per gallon (MPG) and the average fuel price in your area². Choosing a vehicle with a higher MPG can lead to significant long-term savings.
• Safety ratings: Organizations like the National Highway Traffic Safety Administration (NHTSA) and the Insurance Institute for Highway Safety (IIHS) evaluate vehicles to measure their safety. They can provide insights into crashworthiness and accident prevention features.
• Reliability: Platforms like Consumer Reports and Kelly Blue Book (KBB) offer insights into the dependability of various makes and models. Knowing your target car’s average longevity and maintenance costs can help ensure the car you purchase is more likely to be functional when you need it.

You should consider car shopping online first before visiting a dealership. Doing so can help you get an idea of what cars cost in your area, and you can request quotes to get specific pricing.

TransUnion conducted a survey in October 2023 of 400 consumers who purchased a vehicle in the last 12 months. The survey showed that nearly 80% of consumers used websites during the vehicle search process, with the top ones being local dealerships and vehicle listing sites.

Details to consider include:

• Your finances: Evaluate your monthly income from all sources to determine how much you earn. Track your monthly expenses, including existing recurring costs, necessities like housing, and any non-recurring expenses. Also factor in any potential changes in your future financial circumstances. Do you have other large expenses, such as a wedding or tuition payment? If so, incorporate the estimated costs into your total expenses for the coming year.
• Insurance costs: States vary on their requirements for car liability insurance, so you’ll want to research your options for car insurance in advance. Insurance premiums may vary based on your driving record, your credit history, the car’s make and model, and other factors. Request quotes from several insurance companies so you can compare pricing.
• Maintenance costs: It’s smart to budget ahead in anticipation of the ongoing maintenance your car will require. The American Automobile Association (AAA) annually publishes data that can help predict maintenance costs . The reliability ratings mentioned above can help identify which cars and car parts may need the most attention.
• Taxes: State car taxes can significantly impact the final cost of your car and can vary widely. Understand the local tax regulations and factor them into your calculations.

Online financial tools, like the driving costs calculator from AAA, can provide some insights into the potential long-term expenses associated with car ownership such as fuel, maintenance, fees, insurance, and other costs.

3. Review your credit history

Understanding your credit health is crucial during this purchase process, as it directly influences your ability to secure favorable financing terms for your new vehicle.

First, start by analyzing your credit report. Take note of areas that may need improvement, such as high credit card balances that impact your credit utilization rate, or derogatory information which can include late payments, charge-offs, and accounts sent to collections.

And be sure to look for any discrepancies or inaccuracies that need to be disputed. Taking this step in advance before you look to finance your vehicle can provide you time to correct your credit report as needed.

Multiple factors contribute to your credit score such as:

• Payment history
• Credit usage
• Credit depth
• Recent credit

4. Know the terminology

Developing familiarity with some of the terms and acronyms commonly used in the auto industry will help you navigate the car-buying process. Entering a dealership without this knowledge could put you at a disadvantage during potential negotiations. You can make a more informed decision by understanding these terms:

• MSRP (Manufacturer's Suggested Retail Price): This term refers to the price recommended by the car manufacturer, also commonly known as the "sticker price." It serves as a starting point for negotiations. According to industry experts at Edmunds, being aware of the MSRP allows buyers to gauge the fairness of the price offered by the dealership.
• APR (Annual Percentage Rate): APR is the interest rate on a loan, representing the annual cost of borrowing. As explained by the Consumer Financial Protection Bureau (CFPB), a lower APR typically results in lower total interest costs over the loan’s lifetime.
• Market Price: The market price reflects the current value of a car in the local market, influenced by factors like supply and demand and the vehicle’s condition. Resources like Kelly Blue Book (KBB) may provide articles that offer insights into market prices, helping buyers assess a car’s fair value.
• VIN (Vehicle Identification Number): This unique alphanumeric code serves as a fingerprint for a vehicle, providing details about its make, model, year and country of manufacture. The National Highway Traffic Safety Administration (NHTSA) emphasizes the importance of checking the VIN to access information about recalls and ensure the vehicle's authenticity, such as year, make and model.
• CPO (Certified Pre-Owned): A CPO car has undergone a manufacturer's certification process, offering buyers additional peace of mind regarding the vehicle's condition. Car and Driver highlights that CPO cars can be more expensive than ordinary used cars, but come with factory warranties, verified service history and inspections, making them an attractive option for buyers seeking reliability in a used car.

5. Make a budget

After taking the time to determine how much you can afford to spend on your first car, it’s time to build a budget that works for you. Your budget should be long-term, accounting for the down payment you are willing to put toward the car and the ongoing expenses you’ll need to cover in addition to your monthly car payment.

Additional expenses to consider include:

• Gas costs
• Car insurance
• Maintenance + repairs
• Registration fees

Consider these items when budgeting for a car purchase that takes into account aspects of the loan itself and ongoing vehicle expenses.

Loan sources

A car dealership isn’t the only way to finance a new or used car. It’s possible to finance your vehicle through other lenders such as an online lender or a traditional bank.

It can be a good strategy to already have a car loan secured before you go into the dealership. This way 1) you know that you have financing available to you and 2) you can consider the kind of loan terms that the dealership offers to see if it’s better.

Bad credit or no credit history

Even with no credit history or a less favorable credit history, options are still available. Credit unions and specialized lenders may offer more flexible terms, ensuring you can secure a car loan that best matches your financial circumstances.

You may also want to consider having a co-signer on your loan if you don’t have much credit history or have a lower credit score. A co-signer agrees to take joint responsibility for a loan with you. Often a family member or friend, this person provides additional assurance to the lender that they will repay the loan if you are unable to. Getting someone to cosign your loan may help improve your approval odds, lead to better loan terms thanks to their more favorable credit history and serve as a way for you to start building or rebuilding your own credit.

7. Visit the dealership

When you’re ready to head over to one or more of the dealerships in your area, it’s helpful to know what to bring when buying a car. Start by gathering essential documents to streamline the transaction that may take place.

Bring these items with you to the dealership:

• Valid driver's license
• Proof of insurance
• Proof of residency
• Any preapproval or prequalification letters from lenders

Before your visit, you may want to check your credit report one more time to ensure accuracy and empower yourself with the confidence to discuss financing terms. You also may want to look online to see what cars meet your needs and if they are available in your area.

Once you’re on-site at the dealership, you can finally test-drive the car. To do so, the dealer will usually join you and ask you to follow a predetermined route. You can ask them for a bit more extensive road test if you’d prefer to take the car on the highway.

During your visit, you can also ask the dealer about the vehicle's safety features and any custom options you may want to explore. If it’s a used vehicle, you can inquire about its history to confirm it wasn’t involved in any major accidents.

When you’re ready to negotiate, ask them about any warranty coverage options and if there are any additional fees. If you’ve researched fair market prices, you may feel empowered to negotiate confidently. You may also consider bringing a friend to offer a second opinion and help keep you grounded while making this big decision.

Once you’ve purchased your new car, you’ll need to register it in your name with your state’s Department of Motor Vehicles (DMV). If it’s a brand-new car, you’ll also need to obtain the vehicle’s license plates and registration stickers.