How much should you pay for your first car?

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

A young couple looks happy as they meet with a car salesperson to discuss their car-buying options

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 term lengths 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.

Comparing costs

A young woman sits on her bed as she looks at insurance rates on her computer

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 like the Toyota Camry and Honda Fit and 6-year-old SUVs like 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 the price range:

Average Vehicle Costs
Type of Vehicle New Used
Sedan $25,000 $15,380
SUV $33,000 $25,883
Minivan $32,000 $16,020
Truck $41,000 $25,615

Sources: Car Gurus, Kelly Blue Book

Should your first car be new or used?

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

Buying a new car

A smiling man sits in his new car and admires it

While the potential expense of a new car can be intimidating (the car itself, plus the insurance), 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.

Buying a used car

A used black car is shown with a sales sticker on it

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).

Researching and finding a new car

Looking over a man's shoulder, you can see he is researching cars for sale on his computer and he is also talking on the phone to ask about a car he sees

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, 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.

Shop online, buy in person

Many people shop for new and used cars online then arrange to test drive and purchase their car in person. Sites like TrueCar partner with thousands of dealers so that buyers can compare prices from many sources.

Shop and buy 100% online

Carvana allows buyers to shop for and purchase a car online before having the vehicle shipped to their home. If a buyer prefers to pick up the car, Carvana reimburses $200 of any necessary airfare. Carvana offers buyers a seven-day money-back guarantee, so there is a week-long trial period.

Brave the dealerships

Research the inventory of dealerships in your area online and call ahead to inquire whether the cars you’re interested in are available. Head to the dealership with an appointment, pre-approval for a loan if you need one and a full stomach plus a snack. Negotiations may take a while.

The Zero-haggling experience

Carmax associates won’t try to upsell you on a vehicle because it’s not in their interest to do so. Buyers interested in purchasing a used car without haggling over price can visit a Carmax dealership in person or arrange for the delivery of a Carmax car and complete the sale after a short test drive trial period.

Explore resale markets

Facebook Marketplace and Craigslist both provide platforms for dealerships and private sellers. In either of these markets, be sure to learn about the car’s history. Ask about the car’s title history and get the vehicle identification number (VIN) to obtain a vehicle history report. If everything checks out, you may want to arrange for a test drive and have the car inspected by an independent mechanic before beginning negotiations.
As always, exercise extreme caution when meeting strangers in person. Research safe exchange zones in your area, and insist on meeting sellers at one.

Mine your network

With the advent of social media, putting the word out to your network that you’re on the lookout for a first car is easier than ever. Be careful not to publish or send any personal or financial information, but make it known, in general terms, what you’re looking for in a car. Beyond social media, there’s always the old-fashioned way of mining your network: Talk to family and friends.

How to pay for a car

a finance manager at a car dealership figures out how much a car buyer's payments will be

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 main 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.

Car-Buying Options
Cash The apparent advantage of paying with cash is the simplicity of the transaction. Going forward, you have no car payments and no interest to pay.

You can still negotiate a final sale price with the dealer even if you do plan to pay by cash.

Financing To save the most money, buyers should shop around for optimal terms and interest rates.

Be prepared to provide a lender with proof of identity and creditworthiness (i.e., proof of income, job history).

Lease There are mileage limits on leased vehicles that can be relatively expensive if exceeded.

One significant advantage of the lease is that the monthly payments are often lower than a typical car loan.

Car-buying terms to know

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.

Car-buying laws to protect your purchase

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.

How to negotiate when buying a car

a woman sits at a desk at a car dealership with a salesman as she negotiates the price of a car she's interested in buying

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:

  • Start with a full stomach, a focused mentality and a chunk of time. Never negotiate while you’re hungry, tired, distracted or have somewhere else to be. Whether you’re buying a car new or used, whether it’s from a private seller or a dealer, it’s also better to negotiate when you’re not in a hurry.
  • The ball is in your court. “Never feel like you have to stay and purchase this car,” attorney and negotiation expert James Goodnow counsels. “There will always be other vehicles.”
  • Make the first offer. Making the first offer means doing your homework in advance. If you come armed with market research about cost and know what the dealer is offering, you can start the negotiation at a place that’s advantageous to you. “Dealers will generally not want to bid against their own prices,” says Goodnow. “So don’t be afraid to put in an offer at or below the dealer invoice price.”

What to look for during a test drive or inspection

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.

Test-driving and inspecting a new car

a young man prepares to test drive a new car while his girlfriend sits in the passenger seat

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.

Test-driving and inspecting a used car

a young man inspects a used car he is considering purchasing

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.

Should you get an auto service contract and warranty?

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.

Warranty Auto Service Contract
Cost
No additional cost. Warranties are included in the vehicle purchase price. Depending on the amount and length of coverage, auto service contacts cost anywhere from a few hundred to a few thousand dollars.
Additional Cost for Using the Plan
No additional cost. Many auto service contacts have a deductible that the consumer must pay for covered repairs.
Who Offers It
The original vehicle manufacturer. Third-party companies, often through dealerships. Auto service contracts are sometimes offered by vehicle manufacturers.
Coverage Time Period
Coverage begins at the time of purchase and usually ends after a set period or mileage point in the car's life, whichever comes first. Three years or 36,000 miles is a common length for a bumper to bumper warranty, whereas a more specific warranty may last five years or 60,000 miles. The period depends on the contract's terms but is comparable to warranty length (3 years or 36,000 miles). Auto service contracts covering longer periods are possible but more costly.
What It Covers
Problems with the vehicle not related to an accident or normal wear and tear are usually covered. Vehicles can have several warranties, ones that cover anything wrong with the vehicle (bumper to bumper) to ones that cover only specific components. It can range from full coverage, similar to a bumper to bumper warranty offered by the original manufacturer, to coverage for specific components, like the transmission or electrical.
What It Doesn't Cover
Items intended to wear over time as well as bumpers, body panels, glass and interior trims are not typically covered. Each contract has specific terms, but exclusions are generally similar to warranty exclusions, such as parts damaged through normal wear and tear.
When to Purchase
The warranty is automatically included in the purchase price of the vehicle and goes into effect when the owner takes possession You probably don't need a service contract if your warranty is still in place.
Service Location
Practically all repairs made under warranty will take place at an authorized dealership service center. Covered repairs can usually be done at any repair shop of the owner's choice.

Key points about buying your first car

a young woman is happy to be driving her new car

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.

Alana Lytle writes for MoneyGeek. She is a freelance writer and former MoneyGeek finance editor with a passion for helping people find ways to live their best lives on a budget.

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