First-Time Car Buyer's Guide: Get the Right Car for the Right Price

The process of buying your first car is exciting, but weighing what kind of car to buy and where and when to buy it can be overwhelming. These days, when many people are hanging onto their cars longer than ever, choosing the right car matters. Use these tips when you purchase your first car, so you’re in the driver’s seat during the whole experience.

The first step to take when buying your first car is something you can do before even researching a make and model: Scrutinize your budget. Some people can pay for a car with cash, while others opt to lease or finance the purchase by taking out a car loan. Having a budget allows you to be realistic about which method makes the most sense, what your price point should be and how much you’re able to spend on a car each month on gas, regular maintenance and a car payment if you’re financing or leasing.

Making a down payment can lower costs if you’re planning to take out a car loan, and a higher-than-average down payment may also decrease the interest rate on your loan. A typical, reasonable term length for a car loan is five years (60 months), though lenders offer longer lengths of term as well (72 to 84 months and beyond). A longer-term length may be tempting because the amount you owe each month will be less, but think twice before committing to that kind of deal — you may end up paying more overall in interest while your car depreciates in value.

Another budgetary consideration when purchasing a car is insurance. The cost and age of your vehicle can impact your car insurance premiums. The average cost of a used car in 2019 was $20,683, while the price of a new car averaged $37,200. If these prices are more than you planned on spending for your first car, rest assured there is a vast range of vehicles available for purchase well below these averages.

Three-year-old sedans, such as the Toyota Camry and Honda Fit, and 6-year-old SUVs, such as the Honda CR-V and Chevrolet Traverse, can cost under $15,000. Slightly older but reliable models of sedans and the Toyota RAV4 SUV can be found for under $10,000. Average vehicle costs like the ones listed below can offer an idea of price range:

^{Sources: Car Gurus, Kelly Blue Book}

With your budget in mind, it’s time to consider whether you want to buy your first car new or used. Here are some variables to keep in mind while weighing your decision:

• Cost
• Warranty
• Vehicle History
• Safety
• Depreciation
• Comfort

While the potential expense of a new car can be intimidating (the car itself, plus the auto insurance quotes comparison), don’t take the proposed sale price at face value. A dealer may be able to offer an incentive like a cash-back deal or, to those with good credit, no interest financing.

A new car also has no adverse history to worry about, may come equipped with the most up-to-date safety features and should include a warranty in the sale price. Given the value of a brand new car, however, it’s essential to understand how quickly that value can depreciate. In other words, once you drive a shiny, new, expensive car off the lot, it usually loses its relative value more quickly than a less expensive car. If you’re able to purchase a new car with cash or with a sizable down payment, though, depreciation won’t be your primary concern.

Used cars are the choice of many first-time buyers who want to purchase a vehicle without breaking the bank. A used car obviously comes with a history, so buyers must be responsible for obtaining a vehicle inspection report and having the vehicle assessed by a mechanic before purchasing.

There may not be a warranty included with the purchase of a used car. Also, buyers can have fewer options to choose from when it comes to superficial features like color (which may not be that superficial given that you’ll be looking at and enjoying your vehicle for years to come).

For some people, choosing and deciding where to buy a first car may be trickier than determining how to pay for it. When choosing a car, weigh practical factors such as the following:

• How much you’ll be driving: Consider the gas you’ll be using daily.
• Your experience as a driver: Consider a bigger car with more protection and safety equipment and features and a good safety rating if you’re a newer driver.
• How much space you have to park: In urban areas where parking is scarce, a smaller car may make more sense.

These practical considerations should help to narrow your search.

Next up is where to buy your car. Car dealerships used to get a bad rap, but there are many places to buy a car now, and some dealerships have softened their hard-sell approach.

Figuring out how to pay for your first car can be daunting, but there are options for every financial situation. Knowing your credit score before purchasing a vehicle is essential. If your score is relatively low, your ability to get a low interest rate on a car loan could be affected.

Buying a car in cash can be beneficial as long as you're not depleting your savings. For non-cash buyers, car loans and leasing are the options. A loan can be obtained from a dealership or a third-party lender such as a bank. Leasing is similar to a long-term rental. Monthly payments are made for a set period, usually a few years. Once the period is up, the car is returned. Buyers who lease don't own the vehicle. Buyers who finance the vehicle are paying towards eventual ownership.

Understanding key terms can help you make informed decisions while buying your first car. These terms below so you’re comfortable in the shopping and purchasing process.

• Amount financed: The total amount of money lent to the borrower.
  
• Annual percentage rate (APR): The "cost" to borrow the money, expressed as a percentage.
  
• Certified pre-owned (CPO): A designation given to some cars that have a clean history and are protected by a manufacturer’s extended warranty. A certified pre-owned used car will typically be more expensive than a non-certified used car.
  
• Co-signer: Sometimes a lender will require a co-signer before agreeing to provide a loan. This co-signer essentially serves as an additional source for repayment if the primary debtor defaults on the loan.
  
• Credit score: A calculated number that rates the individual's creditworthiness. The higher the number, the better the terms of the loan.
  
• Down payment: The lump sum paid toward the purchase of the car to reduce the amount of borrowed money.
  
• Finance charge: The total cost to borrow the money, expressed as a dollar amount.
  
• Monthly payment: The payment you make every month on a leased or financed car, which includes principal and interest components.

Any vehicle loan will have to comply with many federal and state laws. Most of these laws exist to protect the consumer from predatory lenders. Here are some of the more prominent federal laws:

• Consumer Leasing Act: Requires the lender to disclose the interest rate, monthly payments and other key details to the consumer.
  
• Equal Credit Opportunity Act: Prohibits discrimination during the loan application process.
  
• Risk-Based Pricing Rule: Ensures that lenders who charge people more for a loan based on their credit reports must disclose that to them.
  
• Truth in Lending Act: Ensures that consumers receive disclosures about the cost of their loan so they can comparison shop.

Negotiation can be intimidating, especially for first-time buyers. If you’re planning to avoid the dealerships and purchase from a private party, knowing how to negotiate is still valuable to make sure you get the best deal possible. Here are some tips to remember:

After all the budgeting and research, actually getting behind the wheel can be exhilarating, but you want to make sure all that time and effort were well spent. When you’re test-driving or having your car inspected, make sure to listen for strange sounds from the engine or tires and to look out for any damage inconsistent with the history you received about the car as well as how the car drives and your ease behind the wheel. Most importantly, don’t let the seller or dealer rush you through a test drive: if you’re feeling pressured, walk away.

It may be easy to shrug off concerns about a new car, but being discerning during your test drive or inspection is just as important. Here are some questions to ask yourself:

• How does the car look? How does it compare with any photos you’ve seen of it?
• How spacious is the car, and does it accommodate your lifestyle?
• Are the controls and displays in the car functional, intuitive and easy to understand?
• What range of visibility do you have in the driver’s seat? What are the car’s blind spots?
• How does the car perform driving on the road vs. the highway?
• How does the car perform driving over potholes, hills or bumps?

If you have trouble driving or navigating the controls of the car, pay attention to that feeling — no one wants to wake up every day to a car that feels unsafe or is frustrating to drive. If the look or feel of the vehicle isn't quite right, ask to see other colors or other models. A simple request may resolve the nagging feeling that something just a little better was available.

Be vigilant while inspecting or test-driving a used car, and ask as many questions as needed to the seller or dealer. Here are some things to pay attention to as you test drive a used car:

• Does the car appear to have any damage not reported or explained?
• How comfortable is the car to drive?
• Are you able to adjust the seat and wheel height? How does the steering feel?
• How well does the car accelerate and brake?
• Is the car making any unusual noises, either the engine or the tires?
• What safety features does the car offer, and are they functional?
• Is the technology in the car functional?

When you bring a used car to a mechanic for an official inspection, make sure he or she checks for leaks as well as the brakes, tires, suspension, compression and steering components.

A warranty pays for repairs of certain defects in a newer vehicle. An auto service contract is a promise by a third party company to pay for any covered repairs during a set period. Auto service contracts are sometimes called "extended warranties" or "auto warranties," but this is technically incorrect.

In practice, auto service contacts and warranties cover similar things and usually offer similar protection. The following chart will help explain some of the differences between the two.

The primary takeaway for first-time car buyers is that a decision about which vehicle to buy shouldn't be made without careful consideration. Assessing personal finances is a responsible first step before researching vehicles and approaching private sellers or dealerships. Here's a quick summary of our first-time car buyer tips:

• Check your credit score.
• Create a budget.
• Research the cost of insurance, including auto insurance rates by state.
• Consider the purpose of your car to narrow down your selection.
• Research the market value of cars you like.
• If cost is an issue and you’re not picky about color, consider buying in December when deals are happening on the outgoing models of that year.
• Get pre-approved for a loan if financing.
• Exercise caution if buying from a private party. Consider meeting in a safe exchange zone.
• Obtain the VIN and Vehicle Inspection Reports of cars you’re considering.
• Always have a neutral mechanic perform an inspection of a used car.
• Be ready to walk if the price and terms aren’t right in a negotiation.
• If buying a used vehicle, check for recalls.
• Above all, drive safely and don’t be a distracted driver.

The process of buying your first car can be summed up simply: budget, research and negotiate. All your hard work will be rewarded with a purchase that leaves you with a feeling of security and a whole new sense of freedom.