Buy Your First Car: A NerdWallet Guide

When you buy a car, it's very easy to overspend. Here are steps you can take to prevent that from happening.

How much car payment can you afford?

More than likely, you won’t be paying cash and will need a car loan. Since you’ll make monthly payments on the loan, first figure what payment amount fits your budget.

When getting a car loan, choose a term, which is the length of time you have to repay the loan. Terms can be 24, 36, 48, 60, 72 and even 84 months. Going with longer terms may sound good, because it lowers your monthly car payment. However, you can end up paying much more overall, because you’ll pay loan interest longer.

Also consider what you’ll be paying on top of your loan payment. AAA estimates a typical new car buyer with a five-year loan will spend nearly $10,000 a year, including depreciation, loan interest, fuel, insurance, maintenance and fees.

NerdWallet recommends spending less than 10% of your take-home pay on your car payment and less than 15% to 20% on car expenses overall. Remember, you'll be making that payment long after the thrill of buying a car wears off.

Know what affects loan approval

A common worry for first-time car buyers is “Will I qualify for a loan?” You won’t know for certain until you apply, but there are steps you can take to improve your chances.

Lenders will pull your credit report to see your credit score history and whether you’ve paid other credit cards and loans on time. You might want to get a copy of your credit report yourself to check for any errors.

Most lenders consider 670 to be a good credit score, but about 7% of new car borrowers and 25% of used car borrowers have credit scores less than 600, according to consumer credit reporting company Experian. If that’s you, you will need to provide proof of stable income and be ready to make a larger down payment. Also, you may be asked to have a co-signer, someone who will take responsibility if you default on the loan.

Be aware that regardless of your credit score and history, you will most likely find a lender to approve your loan, but it may be at a very high interest rate.

Get preapproved before you shop

When applying for a loan, ask to be preapproved. When you’re preapproved, the lender estimates the amount you will qualify to borrow and at what interest rate. They will provide documentation of preapproval you can take to the dealership.

Getting preapproved for a car loan does two great things: First, it allows you to shop with confidence knowing what amount you can borrow as you shop for cars. Second, it gives you numbers for the dealer financing office to beat if they want to finance the car you buy.

Always apply to several lenders to find the lowest interest rate you can qualify for. If you belong to a credit union, that should be your first stop. After that, consider your bank or online auto lenders.

As a first-time buyer, you are unlikely to get the lowest interest rates. If you end up with a higher rate, you can make payments for a year and then refinance at a rate that reflects your improved credit history.

Figure out what you want to buy

Before you face a high-pressure salesperson at the dealer, do some research. Browse online sites or visit dealerships outside of business hours and ask yourself the following questions:

  • Use: Will you travel long distances and need better gas mileage, or mainly stay close to home?
  • Size: Will you be more comfortable driving a small car or large SUV? Do you have limited parking space?
  • Space: Do you need to allow room for children, pets or hauling items?
  • Cost: Will a car, which tends to be much cheaper to buy and maintain, fit your budget better than a truck or SUV?
  • New versus used: Should you buy a new car, which will lose value quickly, or save money upfront with a reliable used car?
  • Gas versus electric: Do you want an eco-friendly car with lower fuel costs? Can you pay more upfront for an electric car?

Once you have a list of models that catch your eye, do your due diligence. Typically that will mean you:

  • Check fuel economy ratings at FuelEconomy.gov.
  • Review Insurance Institute for Highway Safety, or IIHS, ratings.
  • Compare the relative cost to insure each vehicle.
  • Check online listings to see what sellers are asking.
  • Find reliability ratings through Consumer Reports; if you don't subscribe, your local library does.
To investigate further, find online communities, like Reddit, for owners of the vehicles you like. Read online reviews. These sources can reveal whether current owners are happy or have faced any issues.

Your car buying cheat sheet

Get quick tips to streamline the car buying process before you hit the dealership.

Prepare for the dealership

Your first visit to a car dealership can be intimidating and an opportunity for the dealer to make money off of an inexperienced buyer. It’s a good idea to know what to expect.

You should already know the maximum payment you can afford, and that’s important for your monthly budget. At the dealership, the number that matters is the out-the-door price.

Why out-the-door price matters. The out-the-door price can be thousands of dollars higher than the price you see on a car’s window sticker. On top of the vehicle price, it includes sales tax, documentation fees, delivery and prep charges, registration and all options, including any dealer accessories. If you're financing, the out-the-door cost should include interest charges too.

Your out-the-door price is what you will finance and the amount that is broken down into monthly loan payments. If you share what monthly payment amount you can afford, dealers tend to focus on that, because they have ways to manipulate numbers and provide the payment you need. For example, they could extend the loan term to reduce the payment, but you would end up paying more interest over the course of the loan. If you firmly insist you will negotiate only on out-the-door price, you’re in a better position to know if the total cost truly fits your budget.

Use your loan preapproval in the finance office. A car dealer's finance office is where you'll bring that out-the-door price. If you have a preapproved loan, it gives the finance manager a rate to beat and can help you get the lowest rate possible.

Beware of yo-yo financing. On weekends or during busy times, some dealerships may allow you to take a car home without an approved loan, a practice called spot delivery. Finance offices make an educated guess based on the hundreds of deals they have already done. When Monday morning rolls around, a dealer may ask you to sign new paperwork with different terms, which you are legally obligated to do if you keep the car.

You can avoid yo-yo financing by having a preapproved loan. If you don’t, be wary of signing any incomplete contract, and remember you have the option to turn down the loan and return the car.