Buying a car is something most of us do at some point in our lives.
And for some of us, it’s a necessary evil.
That’s why I’ve written out the step by step process for how to buy a car below.
Step 1: Set Your Budget
Before you buy a car, know your finances in and out. Know your income, your expenses, your budget, your net worth, your savings, your credit score, what’s on your credit report – know it all.
After you know where you stand financially, decide how much you can spend on a car. Typically, experts suggest that you do not exceed 20% of your disposable income on your car. This includes your car payment, insurance, maintenance, and gas. If you are financing, consider the Suze Orman rule of 3 years: never finance a car for more than 3 years. Her rule is not based on whether you can afford the payment for more than 3 years; it’s based on what’s a reasonable amount for you to spend on a vehicle in total given your finances, and 3 years is a good estimate of that. Under this rule, even if you can afford the monthly payment for 6 years, don’t do it! It’s too much car for you.
Step 2: Learn The Basics
After you know where you stand financially and have a car budget in mind, learn the basics. Buying a vehicle is a big purchase, so you need to know what you’re getting yourself into. Here are a few things that are important to the decision making process.
Buy v. Lease: A lot is made about whether to buy or lease a car. Leasing a car means you’re effectively renting a car. You continue to pay forever without getting anything you can keep and eventually sell. Unless your filthy rich, why would you do that?
Asset v. Liability: While owning a car outright means you have an asset in the sense that you can sell it and receive money, having a car really isn’t an asset. Assets appreciate (increase in value) and vehicles do not. So, your vehicle is a liability in the sense that it is going to cost you money and decrease in value over time. This concept is helpful to keep in mind when you’re deciding how much to spend on a car.
New v. Used: When you buy a new vehicle and drive it off the lot, you immediately lose value. The steepest depreciation of the vehicle occurs in the first couple years. A new vehicle depreciates about 15-20% each year (that’s 30-40% loss in value after two years). So, if you buy a car today you probably can’t resell that car for the same amount tomorrow; you’d get something less, possibly 10-20% less. So, financially speaking, buying a previously owned vehicle will save you money because you will not pay for the “new factor”.
Certified Pre-Owned: Buying a car certified pre-owned (CPO) means that the vehicle is gently used (usually 1-3 years) and meets certain mileage and wear standards set by the manufacturer. With a CPO vehicle, you can be sure that the title is clear, that it’s in top condition, and that you won’t lose thousands as you drive off the lot.
- Related: 10 Dos & Don’ts For Buying A Car
Step 3: Research Vehicles
Once you know what you’re willing to spend on a vehicle, research as much as you can on a variety of vehicles (make, model, safety, features, price, etc.). Look at Kelley Blue Book to see what is the current value. Continue to research – at home! You don’t need to go in to the dealership to do this. Look everywhere you can online. Go to the manufacture’s website and look for deals.
Once you’ve decided what car you want to buy, compare prices online. Look at dealerships and other online retailers, such as AutoTrader, Truecar, and Craigslist.
Step 4: Test Drive
Go to a few different dealerships and test drive the car you want to purchase. Make it clear that you’re there only to test drive, not to purchase. If you do it all in one day the dealer may notice you’re itching to buy and may be less likely to negotiate. You want to take your time.
Step 5: Negotiate
Before you buy the car you want, it’s time to negotiate. Before you negotiate with anyone make sure you know the following: 1) what car you want to buy, 2) the exact model / level (the extras), 3) what the dealer paid for the car (aka the dealer price), and 4) what you’re willing to pay.
After you know all of this, it’s time to negotiate. According to Consumer Reports, you should negotiate upwards from the dealer price versus downward from the sticker price (the sticker price is the price the dealer is offering to sell the vehicle).
At the point of negotiation, keep the focus on the price until it’s settled. If the salesperson tries to veer you off into a different direction, bring it back to the price. If you cannot get a deal that is a max of 1-5% above the dealer price, then move on to the next dealer.
Step 6: Buy
When the price is right, go for it – buy the car. If you plan ahead and buy a car you can afford, you can be confident you made a good decision and you won’t have buyer’s remorse.
A Final Note!
This is an overview of how to buy a car for those of us who hate buying cars (aka people like me)!