Introduction To Buying A Car

For most people, a car is the third-largest purchase they'll ever make, next to a house and an education. For this reason, it's worthwhile to spend a substantial amount of time on the process, to confirm that you end up with the best car for you at the best price you can get. Before you start, however, it's a good idea to ask yourself whether you really need a car. If you already have a car and just think it's time to get a new (or newer) one, be sure that the purchase really makes sense before proceeding. Is there anything else you could do with the money that would provide you with more value? If you're borrowing in order to pay for the car (as most car buyers do), do you really want to go into debt (or further into debt) in order to get a better vehicle?

Once you've decided to get a car, be sure that you understand that the car is NOT an investment. There are exceptions to this rule, such as some antique and collectible cars which can appreciate in value (although rarely as fast as stock investments). But for virtually all other cars, their value depreciates with every mile you put on them. So look at the car as an expense rather than an investment.

Before deciding how much you want to spend on the car, first determine how much you can afford to spend. This calculation will depend on your overall financial condition, which you can determine by putting together a budget (see InvestorGuide University: Budgeting). Also factor in the estimated value of a trade-in, if you have one. When calculating the cost of the car, include not just the purchase price, but all of the associated and ongoing costs: property taxes, insurance, repairs, gas, oil changes, parking meters, tolls, registration, and other miscellaneous expenses. Once you know how much you can afford to spend, you should look at this as a maximum; don't feel compelled to buy the most expensive car you can afford, if something significantly less expensive meets your needs. Most people spend 10-15% of their total monthly budget on all their car-related expenses, but we recommend aiming for 10% or below unless there's a good reason to do otherwise.

We're not trying to persuade you not to buy a car, or to buy a less expensive car than you have been planning to. But given that many people spend more money on cars than they should, and end up regretting it (or worse, not even realizing how much it's costing them), we want you to be confident that you've fully thought through the decision when you decide to take the plunge.

Once you've decided that you definitely want to buy a car and you have an idea of your budget, you should follow these 7 steps:

  • Decide whether to get a new or used car.
  • Decide whether to buy or lease.
  • Arrange for financing, if necessary.
  • Research your options.
  • Conduct test drives.
  • Decide where you'll buy the car.
  • Buy the car.

We explore each of those options in detail in this section.