How to Buy a New Car

How to buy a new car in 9 steps

While buying a new car can be time consuming, it doesn’t have to be difficult. Follow our step-by-step guide to help you get the right car at a good price with minimal hassle.

1. Figure out your budget

Car ownership is expensive, with the average monthly payment on a new car at $772 per month. But the cost of a new car is much higher than just the monthly payment. There are also other costs to consider, like taxes, fees, insurance, fuel and maintenance.

That’s why it’s best to work backward from the true cost of car ownership when formulating your budget for a new car. After going over the numbers, you might decide that, for now, it’s best to stick with your old car a little longer or buy a used car.

» MORE: 10 tips for first-time car buyers

2. Decide how you’ll pay for your new car

If now’s the time to buy a new car, your next step is to decide how you’re going to pay for it: paying all cash, financing or leasing. If you pay for it all in cash, you won’t have a monthly payment, interest or lender insurance requirements. But it also means you’ll have less cash on hand for emergencies or to cover the ongoing costs of car ownership.

Leasing might be the better choice if you want to buy a new car every few years.

If you plan on financing a new car, it’s best to get preapproved for auto financing through a bank, credit union or online lender before you start shopping. You’ll also need to plan for a down payment. Typically, it’s best to put down at least 20% on a new car. Putting more down can help to lower your auto loan payments.

Leasing is like a long-term rental. You’ll generally get a lower monthly payment, and after the lease ends, you can give the car back to the dealer or buy the lease out. However, leases generally have mileage limits — often 10,000 to 15,000 miles per year — and your monthly payments aren’t building ownership equity.

» MORE: Leasing vs. buying a car: pros and cons

3. Check your credit score and credit report

If you opt to finance or lease, you’ll want to check your credit score. Generally, if you have a higher credit score, you’ll qualify for better rates and terms. You can typically check your credit score for free through your bank’s online dashboard. You can also check your credit report for free at AnnualCreditReport.com to make sure there aren’t any errors on your report.

How to improve your credit score

You can improve your credit score by paying bills on time and in full, lowering your credit utilization ratio and disputing credit report errors.

4. Get preapproved for financing (if applicable)

Getting preapproved for financing can help you learn how much your credit score will affect your payment. It’ll also help you determine how much you can borrow and what your monthly payment will be.

Getting a preapproval letter from a lender also gives you negotiating power with a car dealership. Dealers will try to get you to finance through them, but if you bring a preapproval letter into the finance office, there’s a baseline they have to beat to earn your business.

5. Research cars and pick a few models within your budget

Next, think about what features you want in a car, and do some research on car models. Some websites that can help you search include Kelley Blue Book, Edmunds and CarGurus. While researching, consider aspects like safety, reliability and miles per gallon, along with any features you want, like a sunroof.

If you choose to purchase instead of lease, consider factors like:

• Manufacturer’s warranties: Factory warranties typically last anywhere from 3 years/36,000 miles to 5 years/60,000 miles, depending on the manufacturer.
• Long-term reliability: Look up long-term reliability for the cars you’re interested in. Some models may cost more in maintenance and repairs over time.
• Depreciation: The true cost to purchase a vehicle is the difference between what you paid and what you sell it for later. After a few years, your car could lose 50% of its value.

6. Test-drive every car you’re interested in

Before you buy a new car, you should test-drive it. Even if you’re buying a new car, test-driving a slightly older model can give you a similar, if not identical, experience to test-driving a brand-new one. You can do this at a local dealership or even a used car dealer like CarMax or an online-only vendor like Carvana.

If you want to test-drive brand-new cars, you’ll generally need to head to a dealer. It’s a good idea to call ahead to confirm that the vehicle you’re interested in is available since dealership inventory is constantly changing. Once you get to the dealer, it’s usually best not to show your interest, even if the dealer has the car and color you want for a great price since this can help you to negotiate later.

The dealership may have a short and restricted driving route, but you can still test the car’s features, like the air conditioning and dashboard, while you’re parked. At the end of the test drive, the dealer will likely try to sell you the car. It’s best to be polite but say that you’re just in the research stage and keeping your options open for now. You can then repeat this process for each car that you’re interested in.

» COMPARE: Carvana vs. Vroom vs. CarMax

7. Get your insurance ready

The ideal time to buy car insurance is right before or after you buy a car, depending on whether you already have insurance. If you already have insurance on your old car, most providers will give you a seven- to 30-day grace period before you have to update your policy with your new car. If you don’t currently have car insurance, you'll need to have a policy in place before the dealer lets you drive off the lot.

New cars are more valuable than older cars, so they cost more for insurance companies to repair or replace.

To get a quote, you can call your existing insurance company and simply tell it which make, model and year you’re considering. If you’re considering several cars, get quotes for those models, too. You should also shop around for quotes from different auto lenders. This is easy to do with online quote tools, and you may be able to find an insurer that offers the coverage you need for less money.

8. Negotiate with dealers

When negotiating with dealers, you’ll want to ask them for their best possible out-the-door (OTD) price. The OTD price is the exact amount of money you’ll need to pay to take the car home. It’s the final price including tax, title, tag, dealer fees, extras and more.

Typically, dealers talk about cars in terms of monthly payments, not OTD prices. This may be because they’re trying to see how much they can make off you through financing charges, or so they can potentially upsell you. You can (and should) discuss OTD prices over the phone and via email. Negotiating on site puts you at a disadvantage because dealers can often wear you down.

Shop for a deal

It’s best to get OTD prices for similar cars at multiple dealers. Then, keep asking dealers to beat each other’s OTD prices, and buy the car with the best deal.

If you want to pay cash for a new car, it’s best not to reveal that to dealers. In general, dealers prefer financing customers to cash customers since borrowers are more profitable in the long run. It’s OK to mention if you’re financing, but don’t mention a preapproval letter from a bank or lender, if you got one.

9. Finalize your purchase

Once you’ve negotiated a final price, it can still take some time to finalize a car purchase. First, you’ll want to schedule an appointment to buy the car. If you can get there within a week, most dealers will place a courtesy hold for you. When you arrive, the salesperson you’ve been working with should offer you another chance to test drive and inspect the car.

Next, they’ll give you forms to sign and escort you to the finance office to discuss add-ons (like protection packages or prepaid maintenance plans) and dealership financing. The dealer will ask if you already have financing, and now’s the time to reveal your preapproval letter.

Skip extra features or add-ons

It’s usually a good idea to skip optional extras at a dealership since they’re typically overpriced, and you can often get the same or similar features or plans for less elsewhere.

If you receive a competitive offer from the dealer, you may choose to go with that instead of your original lender. If you end up going with your original lender, you’ll work with the lender and dealership to arrange the funds transfer. You’ll then sign more forms and be handed the keys.

Is buying a new car worth it?

Buying a new car can be worth it if you have the money, it doesn’t eat into your emergency funds and you’re set on having the latest model. It’s also typically better if you plan to keep your car long term, want to make modifications to the vehicle or don’t want to worry about mileage limits, which are common with leasing.

However, new cars lose 20% of their value over the first year alone. That means you’ll save thousands if you get even a slightly older vehicle. Granted, auto loan rates are higher on used cars than on new cars, but you can typically refinance your loan later.

Alternatively, you might consider leasing if you want to get another new car in several years or if you prefer to drive a more expensive car but can’t afford the monthly payment that comes with buying it.

FAQ