Buying your first car is an exciting milestone, but it's also an important financial decision that requires preparation and planning. Start by assessing your finances and creating a budget. From there, research your options, decide whether to buy new or used, understand your financing options and know your rights. These steps will help you make informed decisions throughout the car-buying process.
First-Time Car Buyer's Guide
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Key Points to Consider Before Buying Your First Car
Aim to spend 10–15% of your monthly income on car payments and about 20% on total car-related costs. Remember to factor in ongoing expenses like insurance, maintenance and fuel.
New cars offer the latest features and warranties but come with higher costs and rapid depreciation. Used cars are more affordable upfront and have slower depreciation but may require more maintenance.
Focus on reliability, cost and functionality when selecting a car — consider factors like fuel efficiency, safety and how the car fits your lifestyle.
Credit unions, first-time buyer programs and auto loans are common financing options. Cash payments avoid interest but may limit your choices, while leasing offers flexibility but no ownership.
Calculate How Much to Spend on Your First Car
To determine how much you can afford to spend on a new car, start by calculating your income and listing your expenses. This will show where you have flexibility or areas to cut back, helping you decide if a car fits your budget.
When calculating the total cost of car ownership, think beyond the sticker price. Remember, car costs are ongoing, even after purchase. Below are steps to help you determine how much you can spend on your first car and its related expenses:
Calculate your income
Add up all your sources of income, including your salary, freelance work or any other regular earnings.
List and categorize expenses
Break down your expenses into two categories: fixed expenses (rent, utilities, loans) and variable expenses (groceries, entertainment, subscriptions).
Identify discretionary spending
Look at areas where you spend money on nonessential items like dining out, shopping or entertainment. You may be able to reduce these expenses to free up more budget for a car.
Review your savings goals
Ensure you’re accounting for savings, whether it’s for an emergency fund, down payment or other financial goals. This will help you see how much you can safely allocate toward a car.
Determine your car budget
Based on your income, expenses and savings goals, calculate how much you can comfortably afford for a car payment. Aim to spend no more than 10–15% of your monthly income on car payments and around 20% on total car-related expenses, including fuel costs and maintenance.
Factor in related expenses
Don’t forget to account for additional costs such as the down payment, loan payments, registration, taxes, car insurance and maintenance. These ongoing expenses should be factored into your overall car budget to avoid surprises.
Should You Buy New or Used?
One of the biggest decisions when buying your first car is whether to buy a new or used vehicle. Both have pros and cons — the right choice depends on your budget, needs and long-term goals. New cars offer the latest features and warranties, but the price of new cars is often higher. Used cars are more affordable upfront, though they may require more maintenance.
Below is an overview comparison of new and used cars to help guide your decision:
Criteria | New Car | Used Car |
|---|---|---|
Upfront Cost | Higher price | More affordable |
Depreciation | Rapid depreciation in the first few years | Slower depreciation, value stabilizes |
Maintenance | Lower maintenance in the first few years | May require more frequent repairs |
Insurance Costs | Typically higher premiums | Lower insurance costs due to lower value |
Warranty | Comes with manufacturer’s warranty | May not have a warranty (unless certified) |
Latest Features | Includes the latest technology and safety | May not have the latest features |
Resale Value | Depreciates quickly, lower resale value | Slower depreciation, may hold value better |
What Do You Need in Your First Car?
First-time buyers should prioritize finding a car that balances reliability, cost and functionality. Understand why you need a car and how you'll use it. Whether you need a compact car for city driving, an SUV for family trips, a fuel-efficient car for long commutes or even an electric vehicle for eco-friendly driving, knowing your priorities will make your search more focused and less overwhelming.
Below are key considerations when finding your ideal first car:
- Purpose: Will you use the car for daily commuting, road trips or both?
- Size: Do you need a compact car for city driving or a larger vehicle for people and cargo?
- Fuel Cost and Efficiency: How important is gas mileage based on your driving frequency, distance and budget?
- Safety: Check safety ratings from trusted sources like IIHS or NHTSA.
- Resale Value: Some models hold value better over time, which is important if you plan to sell or trade them in later.
- Technology and Features: Do you need advanced features like Bluetooth, backup cameras or driver assistance systems?
- Maintenance: What are the maintenance costs and reliability for the model you're considering?
Decide Where to Buy Your First Car
After deciding on the type of car you want, the next step is choosing where to buy it. As a first-time buyer, find a place that offers reliability, transparency and support. Below are some recommended places to find your first car, each with its own advantages:
Shop online, buy in person
This strategy is ideal for first-time buyers as it offers the convenience of online research and the security of finalizing the purchase in person. Websites like TrueCar provide transparency, helping buyers compare prices and avoid overpaying.
Shop and buy 100% online
Platforms like Carvana are great for first-time buyers who prefer to shop for a car online. Carvana's seven-day money-back guarantee offers peace of mind, allowing buyers to test the car before fully committing.
Browse dealerships
Dealerships are a good option for first-time buyers because they often offer warranties, financing options and the ability to test drive multiple cars. This can be particularly helpful for those who want more hands-on support throughout the buying process.
Mine your network
Finding a car through your network can be beneficial, especially if you know and trust the seller. However, first-time buyers should still take precautions, such as inspecting the car and verifying its history.
Explore Payment Options for Your First Car
Your payment option will affect your budget, monthly expenses and overall financial health. Consider getting pre-approved for a loan to compare interest rates. First-time buyers with little credit history might benefit from exploring credit unions or first-time buyer programs.
Keep in mind that a higher credit score will get you better rates. Weigh the pros and cons of each option to find the one that best fits your situation. Depending on your budget and preferences, you might opt to pay upfront, take out a loan or explore leasing. Explore the most common options for financing your first car:
Paying With Cash
This is the simplest option, as it avoids debt and interest payments. However, it may limit your choices if you don't have enough savings to purchase a car outright. If you have the funds, this option gives you full ownership from day one.
Financing With a Car Loan
An auto loan is one of the most common ways to purchase a car. You make a down payment and finance the rest of the car's cost through a loan. Keep in mind that while loans offer flexibility, interest rates will increase the overall cost. Loan terms typically range from 36 to 72 months, and longer terms may result in lower monthly payments but higher total interest. Use loan calculators to understand what fits your budget before making a commitment.
Leasing
Leasing allows you to drive a new car for a fixed period (typically 2-3 years) while making monthly payments. However, at the end of the lease, you don't own the car. Leasing a car can be a good option if you prefer driving newer vehicles and don't mind switching cars frequently, but there are mileage limits and potential fees for wear and tear.
Manufacturer or Dealer Financing
Some manufacturers and dealers offer special financing deals for first-time buyers, including low-interest rates or promotional offers. Be sure to compare these offers to outside lenders to ensure you get the best deal, as some promotions may come with hidden fees or higher rates after an introductory period.
First-Time Car Buyer Programs
Many credit unions and financial institutions offer first-time car buyer programs designed for those with little to no credit history. These programs provide flexible terms and often feature lower down payments or special interest rates. For example, First Community Credit Union offers a First-Time Auto Buyer program with no credit history requirement and competitive loan terms. Be sure to explore these options if you’re buying your first car.
Personal Loans
If you don't qualify for a car loan or prefer another financing route, you can explore personal loans. Depending on your credit score, these can offer more flexibility but may come with higher interest rates.
Learn Key Car Buying Terms
Whether you're navigating loan agreements, warranties or dealership negotiations, knowing these terms will help you avoid misunderstandings and potential pitfalls. You'll feel more confident throughout the purchasing process if you're familiar with these most common car-buying terms before purchasing or negotiating.
Term | Definition |
|---|---|
Amount Financed | The total amount of money lent to the borrower to finance the purchase of the car. |
APR (Annual Percentage Rate) | The "cost" to borrow the money, expressed as an annual percentage. The lower the APR, the less you’ll pay in interest. |
Buyer's Order | A legal document that details the terms of the car purchase, including price, taxes and fees. |
Certified Pre-Owned (CPO) | A designation for used cars with a clean history, inspected and protected by a manufacturer’s extended warranty. These cars are often more expensive than non-certified used cars. |
Depreciation | The loss in a vehicle’s value over time, especially significant in the first few years for new cars. |
Down Payment | The upfront payment made towards purchasing a car, which reduces the total amount borrowed. |
Extended Warranty | Optional coverage that extends beyond the manufacturer’s warranty, covering repairs for a longer period. |
F&I (Finance and Insurance) | The department at a dealership that handles financing, insurance and extended warranties. |
Finance Charge | The total cost to borrow money, expressed in dollars, including interest and other loan fees. |
Gap Insurance | Gap insurance covers the difference between what you owe on a car loan and the car’s actual value if it's totaled or stolen. |
Invoice Price | The price the dealer paid to the manufacturer for the car, usually lower than the MSRP. Dealers often use this in negotiations. |
Leasing | A contract allowing you to drive a car for a set period while making payments, but without ownership. |
Loan Term | The length of time over which you’ll repay the car loan, typically ranging from 36 to 72 months. |
Monthly Payment | The amount paid every month on a car loan or lease, which includes both principal and interest. |
MSRP (Manufacturer’s Suggested Retail Price) | The price the car manufacturer recommends the dealer sell the vehicle for. Often negotiable. |
Residual Value | The estimated value of a car at the end of a lease period. A higher residual value can lower lease payments. |
Trade-in Value | The amount a dealer offers to credit toward the purchase of a new vehicle when you trade in your old car. |
Upside Down | A situation where you owe more on a car loan than the car is worth, often caused by depreciation. |
Understand the Laws That Protect Your Car Purchase
Car purchases involve significant financial commitments, and knowing your rights can help you avoid scams, unfair practices or costly mistakes. Consumer protection laws ensure that dealerships and private sellers operate transparently and that buyers have legal recourse if something goes wrong.
- 1
Consumer Leasing Act
The Consumer Leasing Act requires lenders to disclose essential information, such as the interest rate, monthly payments and key details about the lease terms, to ensure transparency during the leasing process.
- 2
Equal Credit Opportunity Act
The Equal Credit Opportunity Act prohibits discrimination in the loan application process based on race, gender, age or other protected categories. Lenders are required to evaluate loan applications based solely on financial criteria.
- 3
Implied Warranty of Merchantability
The Implied Warranty of Merchantability is a legal protection that applies to most car sales. It guarantees that the vehicle is in working condition and meets basic quality standards. If a dealer sells a car that is not fit for normal use, the buyer may have legal grounds for a repair, replacement or refund.
- 4
Lemon Laws
Lemon laws protect buyers who purchase defective new vehicles. If a car has a significant defect that the manufacturer cannot repair after a reasonable number of attempts, the buyer may be entitled to a refund or replacement.
- 5
Right to a Clear Title
When purchasing a car, the buyer is entitled to a clear title. This means the car must be free of liens or legal claims. Sellers are required to provide the title at the time of sale, and it must be properly signed over to the buyer.
- 6
Risk-Based Pricing Rule
The Risk-Based Pricing Rule requires lenders to disclose when they charge higher interest rates based on a consumer's credit report. This ensures that consumers understand why they may be paying more for their loans.
Know What to Look for During Inspection and Test Drive
Before finalizing your car purchase, inspect and test-drive the vehicle. Whether buying new or used, these steps help ensure the car meets your performance, safety and comfort standards. Inspections can reveal hidden issues for used cars, while test drives show how the car is handled. For new cars, it's about confirming everything works as expected.
Here are some key questions to ask yourself during the inspection and test drive:
- Are there any visible signs of damage, such as dents, rust or paint inconsistencies?
- Does the car's interior show excessive wear, stains or odors?
- Are the tires evenly worn, and do they have enough tread?
- Are there any leaks under the car after it's been parked for a few minutes?
- Is the engine clean and free of strange noises or smells?
Test Driving and Inspecting a Used Car
When purchasing a used car, the test drive helps identify potential mechanical issues and assess the overall condition. An inspection of the vehicle can also help you avoid buying a car that will require immediate repairs. Here's what to look for when inspecting and test-driving a used car:
- Exterior Condition: Check for dents, scratches, rust or mismatched paint that may indicate previous damage or repairs.
- Tires: Look for uneven tire wear, which could suggest alignment issues or suspension problems.
- Brakes: During the test drive, listen for squealing, grinding or vibrations when applying the brakes, as these could indicate worn-out brake components.
- Engine: Check for unusual noises, smoke or smells coming from the engine and make sure it starts smoothly without hesitation.
- Transmission: Pay attention to how the car shifts gears. Jerky or delayed shifts may signal transmission issues.
- Steering and Suspension: Test the car's steering responsiveness and suspension by driving over bumps and making sharp turns. Any unusual noises or loose handling could indicate suspension problems.
- Interior Electronics: Ensure all electronics — including lights, air conditioning, radio and power windows — function correctly.
- Vehicle History: Ask for a vehicle history report to verify the car's past ownership, accidents and service records.
Test Driving and Inspecting a New Car
The inspection process for new cars is generally simpler, as the vehicle should be in excellent condition. However, ensure that everything works as expected and that the car fits your needs.
- Comfort and Ergonomics: Ensure the seats are comfortable and the controls are easy to reach. Adjust the seat, mirrors and steering wheel to check if they suit your body and driving preferences.
- Technology and Features: Test all the car's features, including the infotainment system, backup camera, Bluetooth connectivity and advanced safety features like lane departure warnings or adaptive cruise control.
- Brakes and Acceleration: Pay attention to how the car accelerates and brakes. New cars should respond quickly and smoothly.
- Handling: Check how the car handles at various speeds and performs when turning corners. Make sure the car feels stable and responsive.
- Interior Noise: Drive at different speeds to evaluate the cabin's noise level. Ensure that road, wind or engine noise doesn't interfere with your comfort.
- Visibility: Ensure you have a clear view of the road from all angles. Check the mirrors and blind spots to ensure they provide adequate visibility.
Negotiate the Best Price for Your First Car
After finding the car you want, the next step is negotiating the price. Dealers often expect buyers to negotiate, especially for used cars and may have flexibility on pricing. Being prepared, knowing the market value and understanding the negotiation process will help you secure the best deal.
- 1
Do your research
Use resources like Kelley Blue Book or Edmunds to research the car's market value. This gives you leverage during negotiations.
- 2
Be prepared to walk away
Show the seller you won't settle for a bad deal. Walking away may even result in a better offer.
- 3
Start with a lower offer
Begin negotiations below your target price, giving you room to move upward while aiming for a fair deal.
- 4
Focus on total cost
Don't be swayed by low monthly payments if it means extending your loan term. Negotiate based on the total car price.
- 5
Be aware of add-ons
Dealers may offer add-ons like warranties or maintenance packages. Only accept these if they add real value or negotiate their price.
- 6
Use competing offers
Mention quotes from other dealerships to pressure the seller into offering a better deal.
- 7
Know the timing
The best time to buy a car is often during year-end sales, holiday promotions or when dealerships offer model closeouts, as these periods typically offer the best deals.
- 8
Stay calm and polite
Keeping calm and respectful helps maintain control and often leads to better outcomes.
Should You Get an Auto Service Contract or Warranty?
When buying a car, you'll encounter two types of coverage: warranties and auto service contracts. While they seem similar, they serve different purposes. A warranty is typically included with a new car and covers specific repairs for a set period or mileage, protecting against manufacturing defects.
Auto service contracts, sometimes called "extended warranties," are technically different but often provide similar coverage. Both offer protection, but the following chart outlines key differences between them.
Details | Auto Service Contract | Warranty |
|---|---|---|
Cost | Depending on the amount and length of coverage, auto service contacts cost anywhere from a few hundred to a few thousand dollars. | No additional cost. Warranties are included in the vehicle purchase price. |
Additional Cost for Using the Plan | Many auto service contacts have a deductible that the consumer must pay for covered repairs. | No additional cost. |
Who Offers It | Third-party companies, often through dealerships. Vehicle manufacturers sometimes offer auto service contracts. | The original vehicle manufacturer. |
Coverage Time Period | 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. | 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 5 years or 60,000 miles. |
What It Covers | 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. | 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. |
What It Doesn't Cover | Each contract has specific terms, but exclusions are generally similar to warranty exclusions, such as parts damaged through normal wear and tear. | Items intended to wear over time, as well as bumpers, body panels, glass and interior trims, are not typically covered. |
When to Purchase | You probably don't need a service contract if your warranty is still in place. | The warranty is automatically included in the purchase price of the vehicle and goes into effect when the owner takes possession. |
Service Location | Covered repairs can usually be done at any repair shop of the owner's choice. | Practically all repairs made under warranty will take place at an authorized dealership service center. |
Frequently Asked Questions
Buying your first car can bring up a lot of questions. Below are some other frequently asked topics regarding the car-buying process:
Which car is best for a first-time buyer?
First-time buyers often look for cars that offer reliability, affordability and ease of maintenance. Models like the Toyota Corolla, Honda Civic and Hyundai Elantra are commonly recommended for their safety features, good fuel efficiency and low maintenance costs.
What is the out-the-door price?
The out-the-door price includes the car’s price, taxes, registration fees and other costs. Ask for this total cost upfront to avoid hidden fees and get a full picture of what you'll be paying.
Should I get a pre-purchase inspection for a used car?
Yes, a pre-purchase inspection by a mechanic can reveal hidden issues and save you from costly repairs down the road. It’s a smart step when buying a used car.
What documents do I need to buy a car?
You’ll need a valid driver’s license, proof of insurance, proof of income (if financing) and often a down payment or trade-in information. Make sure you also have any required financing documents if applicable.
About Nathan Paulus
Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.
Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.
sources
- Federal Trade Commission. "Consumer Leasing Act." Accessed September 24, 2024.
- Federal Trade Commission. "Equal Credit Opportunity Act." Accessed September 24, 2024.
- Federal Trade Commission. "Using Consumer Reports for Credit Decisions: What to Know About Adverse Action and Risk-Based Pricing Notices." Accessed September 24, 2024.
- Legal Information Institute. "Clear Title." Accessed September 24, 2024.
- Legal Information Institute. "Implied Warranty of Merchantability." Accessed September 24, 2024.
- Legal Information Institute. "Lemon Law." Accessed September 24, 2024.