For most people, cars are your second biggest expense after housing. You either love cars or love to hate them, but either way, all of us spend a lot of money on them.
This car buying guide will help you navigate the process of buying (or selling) your next new-to-you car. You’ll learn how to find the best deal, whether you should buy new, used, or “certified pre-owned,” how to insure for less, how to sell your old car, and more.
Decide how much car you can afford to buy
Whether it’s your first time buying a car or your fiftieth, always begin the car-buying process by creating a budget. A good rule of thumb? The car’s sticker price should be at or below 20% of your annual pre-tax income.
Consider how much you can afford before what kind of car you want. From a financial point of view, the less you spend on a car, the more money you have leftover for everything else.
And remember: the price of a car doesn’t end at its sticker price; you’re also on the hook for licensing, registration fees, taxes, fuel, financing, depreciation, routine maintenance, parking, and more. Multiply a car’s sticker price by ~120% and you’ll have a better idea of its true cost to you.
Should you buy new or used?
New, used, or CPO is an age-old debate in the car-buying world. I’d say 98% of the time buying gently used is the best option, but check out this piece to see if you qualify for the 2% of cases where buying new might make sense.
The reason why buying used is right 98% of the time is because new cars depreciate faster than an open carton of milk. Even the most popular new cars will lose 10% of their value as soon as you drive them off the lot and up to 40% of their value after 12 months, according to Carfax.
Besides, if you buy a historically reliable car from Mazda, Toyota, or Hyundai, it’ll still feel new at 15,000 miles, only it’ll cost a whopping 20%-30% less.
Read more: How to buy a used car (and get a good deal)
Are “Certified Pre-Owned” (CPO) cars a good deal?
In short, no.
A certified pre-owned car is just a used car that’s passed some sort of inspection by the manufacturer or dealer and includes an extended warranty. They cost, on average, around $1,500 to $1,600 more than their used equivalents.
Shoppers value CPO cars because they trust them more; nobody wants a lemon (read: clunker), so we’re willing to pay quite a premium for peace of mind.
But the value for CPO cars simply isn’t there. The first half of the CPO value proposition, the two-year factory extended warranty, is worth $600 at most (but more on warranties later).
The second half of the CPO value proposition is that CPO cars are supposedly of higher quality and last longer. That’s because they’ve passed “a 161-point quality inspection,” according to… the people selling you the vehicle.
Yeah, that’s a conflict of interest, and dealer-made “quality inspections” are problematic on many levels. They’re prone to human error, fluctuating standards, and many sellers deliberately overlook known design flaws. So a seller’s “quality inspection” is worth about as much as a crocheted facemask during a pandemic.
Unless a CPO car is listed as just $200 more than its used equivalents, you’re probably better off ignoring CPO listings entirely.
Research the best car brands for you
I’ll let Consumer Reports’ list of the most reliable car brands speak for itself.
Generally speaking, anything that isn’t a Bugatti will have similar maintenance costs within its first five years. However, it’s between years 5 and 10 when things start to get expensive.
Car brands to buy
Mazda, Toyota, Lexus, Buick, Honda, and Hyundai vehicles will make you happier for longer. Mazda has not only toppled Toyota in recent reliability surveys, but they provide excellent value for money. Having tested eight versions of both (and bought one), I think that the Mazda MX-5 and CX-5 are the overall fun car and crossover on the market, respectively.
Car brands to avoid
I would never, ever buy a car made by [redacted]. Nah, I have PR friends in every car company so I won’t throw anyone under the bus. Instead, I’ll let Consumer Reports do the finger-pointing. Certain brands simply can’t make a car that lasts past 75,000 miles without falling apart like wet papier-mâché, and these brands are best avoided.
If reliability and affordability are your first two filters, your third should be how the car makes you feel. Don’t hesitate to schedule five or even 10 test drives before you make a purchase. A car is a huge investment, so take your time and don’t settle for anything that doesn’t make you feel happy.
Read more: How to Choose the Best Car for Your Budget
Get a pre-purchase inspection (PPI) before buying a car – no exceptions
PPIs are the most overlooked-yet-crucial step of the car-buying process. In my opinion, pre-purchase inspections should forever sit in the pantheon of essential money decisions alongside “open a Roth IRA account” and “match your employer’s 401k contributions.”
A pre-purchase inspection is when you pay an independent mechanic ~$150 to thoroughly inspect a vehicle before you buy it. They’ll test everything — all four corners of the suspension, every knob and button, every inch of the frame, and more.
A PPI is crucial because even a perfect-looking car (especially one labeled CPO) can be hiding damage that’s extremely expensive to repair, or worse, unsafe.
Although PPIs are cheap and are strongly recommended by the Federal Trade Commission and the Bar Association, many young car buyers don’t get them either because they didn’t know to ask, felt awkward asking, or placed too much trust in the car.
Just get one.
Find the best price on a car
The internet’s full of car pricing information, so take advantage. At the very least, get competing price quotes online from a site like Edmunds.
In fact, Edmunds is just a great site in general to start your car-buying journey. The most helpful information you can find on Edmunds is the true value of your new car. Many car dealerships are getting better about price transparency, but most still try to push pricey — often unnecessary — add-ons, and you may still run into a shady salesperson.
Read more: How to beat the auto dealerships at their own game
If you can, always negotiate your price via phone or email. If you’re ever uncomfortable, simply stand up and walk out. They can’t hold you there.
Do your test driving first. Leave the dealership. Call back the next day and negotiate a price over the phone, or better yet, follow this trick that car dealers hate to secure a rock-bottom price.
Short on time or patience, and just want the best deal ASAP? Consider a service like TrueCar to find your car for you. TrueCar is a company that lets you shop and price your car online and matches you with a local partner dealer to deliver the car.
Once you select the car you want, TrueCar’s price is guaranteed so there are no surprises upon delivery.
Decide whether to finance, pay cash, or lease your car
Deciding how to pay for a new car is a personal choice, but it’s best to pay in cash when you can.
But there are exceptions. If you’ve already built some amount of wealth, financing or leasing can be advantageous if it allows you to keep cash invested and earn a higher rate of return.
Read more: When does it make sense to lease a car?
Financing a Car: Pros
- It’s more flexible than cash. Most folks aren’t liquid enough to plop down $20,000 cash for a car, and that’s totally normal. Financing lets you slowly pay for your car over time, with interest.
- It builds credit and equity. Financing a car means you’ll fully own it when you pay off your loan. Therefore, unlike leasing, you’ll be building equity in an asset and increasing your net worth (a depreciating asset, but an asset nonetheless). Plus, unlike paying with cash, financing with dozens of on-time monthly payments helps you build your credit score.
- Unlimited miles. Unlike with a lease, when you finance a car you’re not restricted by dealer limitations. You can drive as many miles as you like, modify your car, and let your dog scratch up the back seat.
Financing a car: Cons
- You’ll pay interest. 5% APR is a solid rate for a car loan, and on a $15,000 loan with a 36-month term, you’ll end up paying roughly $1,200 in interest. Not accounting for inflation, that’s money you would’ve saved by paying cash.
- It’s more expensive than leasing. While financing will result in you actually owning the car, leasing is almost always cheaper month-to-month. Plus, leasing will help you afford a newer car.
- You’re on the hook for repairs. When you finance a car, your costs don’t end at your monthly payment; there’s still insurance, maintenance, repairs, tires, gas, depreciation, and more. If you’re considering a historically unreliable car, consider that under a lease agreement the dealership handles routine maintenance.
You should finance a car if… You lack the savings to pay cash for a car but have the consistent monthly income to make monthly payments affordable. If you secure a low enough interest rate, it may also make sense to finance versus pay cash since 36-48 months of on-time car payments are a great way to build credit before buying a house.
Read more: How to finance a car the smart way
Paying cash for a car: Pros
- You’ll save thousands on interest. Even under the most favorable loan terms, you’ll end up paying thousands in interest if you finance a car; thousands you’ll keep if you just pay cash upfront.
- No monthly payment. Having no monthly payment means you can sleep easier, save faster, and live debt-free (or closer to it).
- It forces you to spend less. Paying cash for a car makes you realize what you can truly afford. If you can’t afford to pay cash for a car, you probably need to lower your budget, save for a while, or even consider not buying a car at all.
Paying cash for a car: Cons
- It can deplete your savings. Wiping out some or most of your savings to buy a car can leave you vulnerable. Be sure not to touch your emergency fund when considering a big purchase like a car.
- You’ll miss out on a chance to build credit. Financing a car, as long as you can make payments on time, can be a big help to your credit. You’ll miss out on that chance by paying cash for a car.
- It may be better spent investing or consolidating debt. Under good loan terms, the price difference between financing and paying cash for a $10,000 car is “only” around $1,000-$1,500. Therefore, it may make financial sense to finance the car and apply the $10,000 cash to your existing, high-interest debt. You might also consider investing it.
You should pay cash for a car if… You can afford to pay a lump sum without affecting your emergency fund or needing to consolidate other debt first. You’ll miss out on the credit boost of financing, but paying cash will save you thousands in interest.
Leasing a car: Pros
- You’re off the hook for maintenance and repairs. Most lease agreements include a manufacturer’s new car warranty plus free checkups and routine maintenance, all of which you’re liable for if you pay cash or finance a car.
- It makes driving new cars more affordable. The average new car will cost $37,000 cash or $1,000+ a month to finance, but only half that per month to lease.
- It’s much more convenient. Leasing removes the headache of having to sell your old car before upgrading. Some folks just like the efficiency and convenience of simply bringing in their car every three years, signing a few forms, and driving out in the newest model, regardless of cost.
Leasing a car: Cons
- It’ll cost you more in the long run than financing. Leasing is cheaper month-to-month than financing the same car, but financing leaves you with a sellable asset worth more than your collective monthly savings.
- You’ll have to pay for every scratch larger than three inches. When you turn in your leased vehicle you’ll have to pay to repair every nick, scratch that’s significant. On newer luxury cars, depending on the body panel, a single scratch can cost over $1,000 to repair.
- Fees and restrictions galore. When you lease a car you’re effectively renting it, and renting comes with tons of restrictions. You can’t modify a leased car, and any stickers will have to be carefully removed so as not to harm the paint. Plus, most leases require additional comprehensive and gap insurance, and cannot be driven past 12,000 miles annually without incurring fees.
You should lease a car if… You absolutely, unequivocally want a brand new car and can’t afford to finance one month-to-month. It may also make sense to lease if you can secure a government incentive like the Clean Vehicle Rebate Program.
Should I buy an extended warranty?
Like certified pre-owned cars, extended warranties are rarely worth the money. To channel my inner Nancy Reagan, Just Say No to third-party extended warranties.
Most extended warranties provide peace of mind without backing it up with actual value. If you comb through the finer details of the terms and conditions, you’ll notice several loopholes and backdoors through which they can worm out of paying you.
For example, when my ex-roommate’s infotainment system suddenly died in his 2014 BMW 4 Series, he learned that his expensive warranty wouldn’t cover it because it was “the result of aftermarket/non-OEM additions to the vehicle.” For the non-car-savvy, implying that his new cold air intake would cause the infotainment system to fail is like implying that stubbing your toe causes you to forget algebra.
That being said, warranties can add value in some cases. If you have the option of buying an extended warranty directly from the manufacturer (Ford, Toyota, BMW, etc.) and you plan to drive the car for many years beyond the expiration of the factory warranty, it might be a good idea.
A warranty is a kind of insurance. When you buy it, you’re insured against the cost of major repairs. When you don’t buy it, you assume that risk yourself.
Does it matter which car insurance company I use?
Yes! Finding the car insurance company that can offer you the most favorable rates can, as the ads promise, save you hundreds of dollars a year.
Not only do you want to compare quotes and shop around, but you also need to understand what insurance you’re buying so you don’t pay for coverage you don’t need or get into an accident only to discover you didn’t have the coverage you thought you did.
Determine how much insurance you really need
Purchasing the right amount of insurance can save you a lot of money. You’ll be much better off going line-by-line, understanding each type of insurance, and deciding how much you need. That way, you’ll design a policy perfectly tailored to you that saves you money.
Read more: What type of car insurance do you need?
Get at least five quotes
A great place to start is on reputable aggregator websites; think Kayak.com, but instead of shopping for flights you’re browsing car insurance.
Now, while you’re shopping for quotes on aggregator sites, it would also behoove you to collect a few quotes directly from the providers themselves. Not only can you collect the most accurate quotes there, but you can discover provider-specific perks not always visible from aggregator sites.
I’m a fan of online-only providers since they tend to provide the lowest premiums and best websites/apps.
Now, once you’ve made a list of potential providers I strongly recommend collecting at least five quotes online. Each provider will see your situation differently, and your potential premiums can vary wildly.
Thankfully, most providers’ online quote tools are extremely quick and easy to use (and you can fudge some of your personal information to collect accurate quotes without forking over your cellphone number).
Consider a pay-per-mile insurance policy
If you drive fewer than 10,000 miles annually you might consider a new type of insurance called pay-per-mile. As the name implies, under a pay-per-mile insurance policy you’ll pay an extremely low base rate per month, plus a few cents per mile that you actually drive.
Should I sell or trade in my used car?
Selling your car can happen at any stage of the new car-buying process. Don’t let a dealer rush you into a trade-in since you will always get more money for your used car by selling it on your own rather than trading it in at the dealership.
Expect to get an average of 20% more for your old car by selling it yourself. If you’d prefer the convenience of simply handing the keys to the dealer, you can still eke out a good deal on a trade-in.
Read more: How to Be Confident You’re Getting a Fair Deal on Your Trade-In
The bottom line
First-time car buying can be a daunting prospect at first, but taking the methodical, strategic approach will absolutely pay off for all the years you own your car.
Take your time, negotiate a good deal, and get a pre-purchase inspection, and soon you’ll drive off into the sunset in a car you love for a price you couldn’t believe.