Guide to Buying a New Car
This article is for general information about buying a new car only. If you need specifics on the process or paperwork required in your state, please refer to our Title Transfers or Paperwork When Buying a Car page.
Buying a new car can be considered one of life's natural highs. Who doesn't love that new car smell? But moving that shiny new vehicle from the dealership to your driveway can be a daunting process. This guide will help break down where to go, what to do, and how to think about securing a new ride.
Between errands, commuting to and from work, or for simple recreation, the average American spends a lot of time in the car. With this in mind, it is easy to see why it is so important to spend that time in a car you like. If you've been driving the same car for decades, it might be time for an upgrade, or maybe you need to replace your unreliable old car.
Prioritize Your Wish List
Before taking the plunge, think about what you want in your new ride.
Some key things to keep in mind:
- Features you need vs. features you want.
- Great sound system? Lots of leg room? Automatic door opener? The choice is yours.
- Your monthly budget.
- “Hidden" costs.
- E.g., depreciation rate, insurance, average miles per gallon.
Do the Research
Once you've decided what you want in your new car, see what some of the industry leaders have to say:
- For safety reports and Government 5-Star Safety ratings, check out the National Highway Traffic Safety Administration (NHTSA) website.
- The J.D. Power Circle Ratings are a good place to analyze vehicle quality.
- Expert opinions at Kelly Blue Book are a helpful guide.
- Scan the web for owner opinions.
Chances are if you are paying for your new car in full, you know exactly how much you can afford. However, if you are like most car buyers who need to take out an auto loan, you're going to have to think a little harder about your budget.
First, it's important to determine what you can afford to pay each month. Keep in mind that you won't just be paying for the car itself, but you'll most likely be putting money toward taxes and title and registration fees that would be included in the total loan.
It's also useful to think about down payments vs. financing rates, as well as the initial costs, recurring costs and potential other costs involved in owning a car.
Generally, a good rule of thumb is to spend no more than 20% of your monthly income on a car loan payment. Of course, this number could vary. If you already have a lot of debt, you may need to budget based on a very small portion of your monthly income.
For more details about budgeting for your car, visit our guide to Creating a Car Budget.
Arming yourself with information will undoubtedly help in the purchasing process. When buying a new car, the price is almost always up for negotiation. It's recommended to request price quotes from at least 3 local dealers to feel out the market.
You can also use your knowledge of vehicle pricing factors along with bargaining chips, such as trade-ins and pre-approved loans, as leverage for your negotiations.
New cars are priced according to several different indexes. Knowing the differences between each one can help you in the negotiating process.
Your new car's price tag may include:
- Invoice price—What the dealer pays for the car. It could give you an idea of the salesperson's lowest possible price point.
- Manufacturer's Suggested Retail Price (MSRP)—The price set by the manufacturer. This is a “suggested" price.
- Fair Purchase Price (FPP)—Reflects the going market rate or price range of the car. This number is updated weekly.
It's possible to shave some money off of your new car price by trading in your old vehicle to the dealer. However, there are pros and cons to this method.
Oftentimes, a dealer will offer less money than the car could fetch on the open market. On the other hand, it's typically faster and easier to trade a car back in to a dealer – plus, they'll do all the paperwork for you.
When considering a trade-in, make sure you research the value of your current car. The Kelley Blue Book is a great place to start.
A pre-approved loan is another great bargaining chip when negotiating the price of a new car. Walking on to the new car lot with a loan from a bank, credit union, or online lender will let you know the interest rate you qualify for and let you negotiate as a cash buyer.
Keep in mind, by letting you walk out the door with a pre-approved loan, a dealer is essentially letting money walk out the door.
Congratulations! You're almost a new car owner. But before you ink the deal, make sure everything is up to snuff. Give these last few considerations a double-check:
- Check the car for dents or scratches.
- Ensure all numbers on the contract are correct.
- Make sure all the all equipment – including floor mats and owner's manuals – is included.
- Your new car should come with a full tank of gas.
This will also be your chance to purchase additional features, such as an extended warranty.
Most of the time, a dealer will be required to file all the appropriate paperwork for you, but it's good to make sure your registration and titling are correct, and to prepare for any other DMV forms you may need.