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How to Buy a Car

There’s no doubt about it: There’s a lot that goes into a car purchase. Since it may be one of the most expensive things you will ever buy (other than a home), explore all your financial options and consider your purchase carefully.

Main Takeaways: How to Buy a Car

  • Select a car that fits your lifestyle. If you’re planning on starting a family, you will need a car with extra room. If you live in a harsh climate, make sure you vehicle can handle the conditions.
  • Determine whether you’re buying new or used. This will depend upon your budget, use for the car, and other factors we explore below.
  • Select a private seller or dealership. There are certain steps you should take when buying your car from both of these sellers.
  • Weigh your financing options. Will you pay in full or take out an auto loan? We take a look at the pros and cons of each.

Step 1: Choose the Car You Want to Buy

Your reasons for buying a car are likely varied, so think long and hard about what you want to buy and why. Are you looking for an upgrade, a replacement, something practical or something a little fancier? Keep your reasons for buying top of mind to ensure that your needs are met.

Evaluate Your Lifestyle

What car best suits your lifestyle? If you have a growing family, a tiny sports car might not be a good fit. If you live in a city, a truck or large SUV might not be the best choice for you.

What kind of space do you actually need to haul your things around? How many people will ride in your car? How far do you drive each day? These are good questions to ask before you determine the kind of car that best suits your lifestyle.

Needs vs. Wants

Make a list of your needs and wants. Maybe you need to haul multiple children or dogs or require large trunk space for road trips. You might prefer a sunroof, heated seats, remote start or other bells and whistles.

It’s easy to get distracted by the flashy features of a car and forget to check the gas mileage for your daily hour-long commute.

Think Long-Term

Buying a car with an eye to the future will ensure that the car that you buy will be one that will take you up to the next decade of your life. A sensible sedan can serve you well if you’re a college student, through the beginning of your working years and even into parenthood.

Buying a car with low mileage or a model known to run without issues well into 200,000 miles lets you know you can keep the car for the long haul.

Other Considerations

There are many other considerations to take into account that are specific to the car you select. Luxury cars are often much more expensive to fix, so even a used BMW may still cost you a lot over the life of the car. Check safety ratings on the car to make sure that it’s well rated and won’t crumple like a Pepsi can in an accident.

Also, your car insurance rate will fluctuate depending on the year, model and mileage of the car you buy. The cheapest cars to insure are usually highly-rated minivans and SUVs because of their great safety ratings.

Not only that, but their repairs are relatively inexpensive after an accident. Mercedes and other luxury cars are the most expensive cars to insure since parts are so expensive and can drive up repair costs.

Step 2: Decide Whether You Want Used vs. New

The next step to consider is whether to buy the car you selected used or new. Both have their pros and cons.

Buying a New Car

Buying a new car can allow you to get the exact make, model, features and color of the car you want. You can even order it directly from the dealership so you get the specific features you want.

Dealerships also offer special leasing, financing and cash discount offers for their new cars. You’ll also know that a new car is in perfect condition, usually has a great warranty and has almost no miles on it.

Buying a brand new car is one of the most expensive ways to get a car because it will drop about 20% of its value in the first year and depreciate up to 40% of its value in its first 5 years.

A new car is a good choice if you need a specific model and features not available in a used car, it’s the first year the model is available or you want peace of mind of knowing the car is brand new.

Buying a Used Car

Buying a used car gives you more bang for your buck and more flexibility if you’re not set on a specific make, model or features.

Buying used saves you from taking the initial depreciation hit that the original seller took and you get to take advantage of a much lower-priced car that will retain more of its value over the time you own it.

For example, the Honda CR-V offers no shortage of cars to choose from and you can find some that are 10 years old with high mileage but a much lower price tag.

The downside to buying used is that you probably won’t know how well the previous owner(s) cared for the car.

You can tell whether the car was in any major accidents by pulling a vehicle history or Carfax report, but not every dent or minor incident will be reported.

It also won’t tell you whether the previous owners performed proper routine maintenance. Be sure you buy from a reputable seller, obtain the vehicle maintenance history and get the car checked out by a mechanic.

Step 3: Choose a Private Seller vs. Dealer

You limit your options to buy from a dealership when you purchase a new car, but if you plan to buy used, you can choose to buy from either a dealership or a private seller.

Dealership

Car dealerships either buy used cars from trade-ins or they buy from other dealers across the region, usually putting the cars they buy through a rigorous inspection process before they sell them.

Dealerships also offer warranties on new cars and certified used cars.Even if the dealership has done an inspection, you can take the car to your mechanic to check it out before you buy. When you test drive a car, make sure you press every button and that everything works as it is supposed to.

Dealerships may even allow you to return the car within a couple of days if you change your mind, but be sure that you verify the dealership’s policy. Pricing is not usually transparent at a dealership, so check TrueCar or Kelley Blue Book to give you a better idea of what the car is worth and what others in your area have paid.

Dealerships can walk you through the paperwork needed to buy the car and transfer the title into your name.

If you want to get rid of your old car and don’t want the hassle of trying to sell it on your own, dealerships will also usually offer you a trade-in price to take it off your hands. This makes for an easier experience, but you may not get the best trade-in amount for your old car.

Private Seller

Purchasing a car from a private seller may be a more affordable option, as a seller may be open to negotiation without the same profit margin requirements as a dealership.

Private sellers may be quite motivated to get rid of the car and be willing to part with it for a lower price. You’re usually able to get a much better deal buying from a private seller than from a dealership.The issue of trustworthiness is a major deterrent for purchasing a car from a private seller. Here are the steps you can take for a smooth transaction.

Pay for a vehicle history report. You then can see if it has been in any major accidents and take the car to your mechanic for an inspection. Ask for maintenance records. Also, have a long talk with the seller to go over any questions or concerns. A private sale means buying the car “as-is,” unless the written purchase agreement states otherwise.

Check to see if the warranty is still active. If the car is still covered by a manufacturer’s warranty or service contract, check with the contract holder or manufacturer to see if it’s transferable. Do your research. Research the process for transferring a car title and registering it in your state, as well as any fees you’ll need to pay. Check your state’s DMV website to run a lien search to check for a clear title.

Write up a bill of sale. Do this after you’ve reached an agreement, noting the date, purchase price, car year, make and model, vehicle identification number (VIN) and odometer reading.

If the seller still owes money on the car and a bank has the title, then you will have a few added hoops to jump through. The seller will need to contact his bank to determine the process to pay off the car and transfer the title. It’s risky to write a check for the car without a clear title (since the bank has a lien on it), so wait for the bank to release the lien and send the title to the seller to sign over to you.

Transfer the title. If the seller uses a local bank, you may be able to go to the bank with the seller to transfer the money for the title. You could also use an auto escrow service for a nominal fee to hold your payment for the car and not release the funds to the seller until the title is cleared.

The seller will have you sign the back of the car title to transfer ownership to you. Before you sign, have a notary witness the transfer of title, then take the title to the DMV to register it and pay tax on the sale.

Step 5: Finance or Pay in Full

There are two primary options for purchasing a car: You can pay cash up front or get a loan.

Cash Upfront

Choosing to pay cash for your car has several perks. It’s like helping your favorite budgeting app in that it allows you to save thousands of dollars you would have paid in interest on a car loan.

You may be able to get a cash discount when you negotiate a car loan, but many dealerships make money off of financing so they may not throw in any discount or incentive for paying in cash.

The other benefit to paying cash upfront is that you won’t drag down your monthly budget with a big car payment.

Finance Your Car

You can still buy a car by financing it, even if you only have a small down payment. Financing means you take a loan out on the car and make monthly payments. These payments include interest on the loan over a period of time, usually 5 or 6 years.

Depending on your credit and dealership promotional offers, you may be able to get a low-interest rate loan or even a zero-interest loan on a new car.

You may be eligible for more favorable loan rates if you put down a hefty down payment, so save as much as you can before you get ready to buy. When you’re ready, your best bet for a low-interest rate loan is to go to your local bank or credit union rather than the dealership.

You might want to consider getting your loan through a bank or credit union instead of through the dealership in order to avoid dealer reserve.

Step 6: Add-Ons

There’s more to buying a car than just the price on the window sticker or the finance charges you pay.

Extended Warranty or Service Contract

Dealerships often offer you all sorts of additional add-on items. Often, dealers offer an extended warranty, especially if you buy a used car. In general, the warranty may not be worth the cost.

There are often a lot of exclusions on the warranty, and if the car you buy is only a couple of years old, it might still be covered by its original manufacturer warranty.

If buying an extended warranty gives you peace of mind, compare prices and coverage with other companies not tied to the dealership to see if you can get a better deal.

Taxes, Titles and Tags

Final costs will include state and local fees, DMV registration fees, documentation fees and dealer fees. The dealership will often roll these fees into the cost of the car and can tack on over $1,000 to your purchase.

Make sure the dealership explains the fees to you and you do your research on your state taxes and registration fees so you know what to expect.

Selecting the Right Car for Your Needs

Car buying can be an overwhelming process. There is so much to consider, so many cars to choose from and so many ways to buy. Whether you choose new or used, lease or buy, pay cash or finance, be sure that you’ve thoroughly mapped out your choices so you make the best financial decision for you.

Looking to insure your new purchase? Benzinga breaks down what you need to know about finding affordable and reliable car insurance coverage.

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