Buying a new car can be a fun experience. It’s shiny and clean, smells great, and has the latest features. But did you know that new cars depreciate by a whopping 20 percent their first year?
If you bought a $15,000 base model, after a year it’d be worth $12,000. After five years, it will lose approximately 60 percent of its value.
If you’re short on cash or have student loans you want to focus on repaying, skipping the new vehicle and buying a used car can be a smart decision. It’s quite possible to get a great car at a budget price, as long as you do your homework.
Here’s a step-by-step guide on how to buy a used car.
How to buy a used car in 10 steps
Trying to find a used car that will last can be difficult, especially for first-time buyers. But by following these steps to buy a used car from a dealer, you can ensure you get a good deal and a reliable vehicle.
1. Set a budget
When you’re car shopping, it’s easy to be swept away by sleek design and performance. Before you know it, you’ve signed the paperwork for a sporty, gas-guzzling monster when you really needed a fuel-efficient sedan. That’s why it’s so important to know what you can afford and avoid looking at anything over that amount.
Before starting your research, create a budget for your money. List all of your recurring expenses and see how much you have leftover each month.
From that surplus, decide how much you want to use for a monthly car payment. You probably will regret spending all of your discretionary income on a car, so be realistic with how much you can actually afford to set aside.
When buying a used car, remember that the purchase price is only part of your expenses. Taxes, title, and registration fees can add approximately 10 percent to the car’s cost. If you’re buying a $15,000 car, that means you could need $16,500 to drive off the lot.
In addition, consider the cost of car insurance in your area and include that in your monthly budget. According to The Zebra, the average annual premium in 2016 was $1,323, or $110.25 a month. That cost can add to your transportation expenses and hurt your budget if you’re unprepared.
If you plan on using an auto loan to fund your purchase, evaluate the total cost of the debt, not just the monthly payment. Financial expert Suze Orman recommends that you buy a car that you can pay off in three years or less. If you need a five- or six-year loan, it’s likely more than you can afford.
Edmunds has a car loan affordability calculator to see how much you can budget for a car. For example, if you lived in Florida, had a down payment of $1,000 and could afford a monthly payment of $150 for 36 months, you could afford a used car that costs $5,700 or less.
2. Research makes and models
If you aren’t sure where to start, think about your needs for a vehicle. Some things to consider are:
- Fuel efficiency
- Cost of repairs
- Cargo space
- Transmission type
Once you identify your priorities, you can search for makes and models that fit your lifestyle on sites such as Edmunds or Kelley Blue Book. You can find detailed reviews of models and production years, with real drivers sharing their experiences.
3. Test drive your target vehicle (but don’t buy it)
Once you’ve narrowed down your list, look for used car dealers who have the year and model for the cars you want to test drive. How the car feels and how well it drives can help you decide on the exact car model you want to buy.
Contact dealers to let them know you’re researching your options and want to try driving the vehicle. Most dealers will be happy to have you come in for a drive, but be prepared for a strong sales pitch. Just keep reiterating that you are in no way going to make a deal that day. If they’re too pushy, don’t be afraid to walk out.
4. Check car prices
After doing your research and test driving your shortlist, compare your favorites’ prices. You can use a site such as Kelley Blue Book to find out how the make, model, and year of the car you’re considering is priced. The site also allows you to search within your zip code, so you know exactly how much other buyers are paying for the same car in your area.
Once you’ve narrowed down your selection and picked one model, pull the pricing from several different sources. Four good sites to look at include:
Having documentation about what the price should be from several sources will give you more negotiating power later on.
5. Find financing yourself
You will have more power at the dealership if you don’t need financing through them. You’ll be able to negotiate using the out-the-door cash price rather than monthly payments, so you’ll know exactly how much you’re spending.
Your local credit union is a great place to start. They often offer lower interest rates and more generous repayment terms than banks or large financial organizations. Also, they’re more likely to work with you if you have less than perfect credit. You could get a better deal on a loan with a credit union than a dealership.
Once a credit union has approved you for the amount you need, you can walk into any dealership and complete a deal quickly.
If a bank or credit union won’t approve you for a loan, you will likely need to lower your car budget or put down a larger down payment. If you have poor credit, you might be able to get a loan with a reliable co-signer.
6. Search local inventory
Cars.com is a helpful place to find the make, model, and year you’re looking for near you. While you can buy from an individual, doing so is riskier than buying from a large dealership. Most reputable dealers offer warranties on their used cars, whereas an individual will not.
Since you’re shopping for a used car, it’s helpful to be flexible on things like color or sound system. If you’re willing to compromise for a less desirable color or a lower caliber radio, you can save hundreds or even thousands.
7. Look up each car’s history
Once you’ve found cars nearby, do your research on each vehicle’s past. Unless you’re buying a car from someone you know and trust, it’s a good idea to purchase a copy of the vehicle history report.
Ordering a report can be an added expense, but it’s well worth the investment. The vehicle history report will show if the car has been in major accidents or gone through significant repairs. It will identify red flags such as a bent frame, recall information, or if the car was ever salvaged. That vital info can stop you from buying a lemon.
CarFax is one of the most well-known vehicle history report companies. You can purchase one report for $39.99, or pay $69.99 for unlimited reports within a 60-day timeframe. To get a report, enter the car’s vehicle identification number (VIN) or license plate number into CarFax’s website.
8. Contact the dealership
When you’ve found a car you like, reach out to the dealer via phone or email before showing up in person. Contacting them ahead of time ensures the car is still in stock, and you might get additional information that might cause you to change your mind.
Here are some questions you can ask that might impact your decision:
- Do you have the service records for the vehicle?
- Are any repairs needed?
- Does it need new tires?
- Has it ever been in an accident?
If the dealer can answer the questions to your satisfaction, don’t jump to negotiating price. Instead, make an appointment to see the car in person and do a pre-purchase inspection. The car’s condition might look different when you’re on the lot, and that can affect what pricing you think is fair.
9. Schedule a pre-purchase inspection
If at all possible, hire a mechanic to do a pre-purchase inspection. An inspection can cost about $100, but it can save you money in the long run.
A skilled mechanic can find issues that already exist, but can also identify repairs that you’ll need to make soon. That can help you budget accordingly or, if they find major issues, give you a chance to walk away.
Most dealerships will have no problem with you bringing in an outside mechanic for an inspection at the dealership. If a dealer tries to discourage you or says they won’t allow it, look for another dealer. Skipping the inspection could lead you to buy a money pit instead of the reliable car you hoped for.
10. Be prepared for paperwork and a hard sell
If the car passes it’s pre-purchase exam and you’re happy with its condition, it’s time to negotiate the price. From your budget and the research you did on sales in your area via Kelley Blue Book, you should have a strong case for the price you want.
For example, let’s say you’re planning on buying a 2015 Nissan Versa SV that’s in good condition. The median price for it is $10,702; some people were able to get a great price of $9,409, while others paid a much higher price of $11,934. In this case, it would be a good idea to hold to the median price of $10,702.
You could try negotiating toward the lower end, but know that you might not be able to get that price. However, if a dealer tries to charge you $11,000 or more, it’s reasonable to refuse their offer.
As long as your goal price is in the middle range, it’s likely the deal will go through. If the dealer won’t budge on the price, save time by walking out the door — it’s unlikely you’ll get a deal you’re satisfied with in that situation. Many times, you’ll have a message on your phone by the time you get home that says they’re willing to make the deal.
Once you‘ve agreed on the total cost, you’ll have to complete a mountain of paperwork. During this time, the dealership will likely try to sell you extra warranties and services, which can add thousands to your costs. If that happens, repeatedly say no and stick to the price you agreed to with the dealer.
Review the paperwork carefully and make sure the price on the contract matches what you discussed with the salesman before signing. When you’re satisfied, sign the paperwork and go collect your new car.
Owning your (kind of) new car
After all that hard work, you finally have the car you wanted. Figuring out how to buy a used car can be overwhelming, but by doing your homework ahead of time, you’ll know exactly what to look for and how much you should pay.
Take care of your new baby and keep up with its maintenance, and it will last you for years.
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