Buying a car is exciting and typically a necessity for you to get from Point A to Point B. Whether you’re looking for a new or used car, there are certain things you should know about buying a car before jumping in headfirst.

Getting Ready to Buy a Car 

Before you buy a car, you should prepare yourself financially. The better your qualifying factors are, the easier it will be to qualify for a loan, and you’ll get better terms. 

Preparing yourself for Car Financing

Auto loan financing is fairly easy to get whether you have good or bad credit. That’s the good news.

The bad news is rates and fees can get pretty high if you don’t have good credit or you have a lot of outstanding debt already. Fortunately, there are ways to prepare your credit and debt ratio before you shop for a car loan.

Fix your Credit

Start by fixing your credit. Everyone gets free access to their credit report here. Pull your credit report and look for any of the following:

Late payments

If you have any payments reporting over 30 days late, it hurts your credit score considerably. Bring any payments current as fast as you can and continue making your payments on time. Your payment history makes up the largest part of your credit score.

High credit card balances

Your credit utilization rate is a measure of your outstanding credit to your credit limit. If you have over 30% of your credit line outstanding it can hurt your credit. Pay your credit card balances down as much as you can to keep your credit utilization rate down.

Don’t close old accounts

Keep old accounts open if possible. The older your credit is, the better your credit score will be. If you have accounts you no longer use, just lock up the credit cards, but keep them open.

Save Money for a Down Payment

You’ll need to put some money down on a car. It can be as little as 5% if you want and you have good credit, but some money down is good. Plus, you must pay the title, tax, and registration fees when you buy the car.

If you don’t have a trade-in, your entire down payment will be cash. If you have a trade-in, you may not need any cash for the down payment, but must cover the tax, title, and registration fees charged.

Know-How much Can You Afford

Every auto loan lender allows a different debt-to-income ratio. If you shop for a loan with an auto loan aggregator, for example, you may find lenders that allow DTIs up to 70%. But if you shop for a car loan at your local banks, you may only be able to have a DTI of 40%.

Despite what a lender will approve you for, know how much you can afford. Look at your budget and see how a car payment will fit into it.

Act like you have the car payment and physically pay the bill even if you just put the money in your savings account to see what it does to your everyday spending and your other bills.

Get Pre-Approved

It’s a good idea to get pre-approved from a couple of lenders. Just because you know what you can afford doesn’t mean a lender will agree.

You can get quotes from several lenders within a short time and not hurt your credit. Most lenders do a soft credit pull when they pre-approve you for a loan. It’s not until you decide to accept their loan that they will do a hard credit pull, which hurts your credit.

Compare the pre-approvals you receive side-by-side. Look at the interest rate, loan fees, and total cost of the loan over the term. 

It’s not always the loan with the lowest interest rate that’s the cheapest. Look at the loan’s terms and ask what the loan will cost in its entirety to help you decide.

With your pre-approval in hand, you’re ready to buy a car.

7 Steps to Buy a Car

When you have your pre-approval, you’re ready to start looking at cars and to buy your dream car. Here’s what you should do.

1. Do your Research Online

Before you step foot in a dealership or talk to a private seller, do your research. Look at the different makes and models available and see what’s right for you. is a great source, but you can also visit each manufacturer’s website to get more details too.

Compare the features to your needs and wants for a car and of course the starting price. When you’re at the dealership, you’ll do some haggling, but knowing the base price of the car is important to see if it’s within your budget.

2. Decide if You’ll Trade-In or Sell your Car

If you have a car now that you’ll sell or trade-in, decide which option is best for you. Check out Kelley Blue Book for current values to see where you stand. You can ask the dealer for a quote, but it’s not a bad idea to try to sell it privately too.

If you have time, selling privately will likely earn you more money than a dealer will pay, but as long as you know the Blue Book value, you can negotiate with your dealer too.

If you’ll sell privately, sell your car first and then look at cars. If you’ll do a trade-in, look at cars first and then talk about your trade-in.

3. Find the Car you Want and Test Drive It

Once you’ve narrowed down your options to about 3 cars, get out there and test drive them. You may find that you love a car online, but when you drive it, the car doesn’t meet your expectations.

Think about what you’ll use the car for and how long you’ll keep it. If you have kids now, think about how much space they’ll have when they grow. If you don’t have kids, but might keep that in mind as you look at the space you have and how easy it is to maneuver in and out of the car.

You can test drive as many cars as you want, so don’t be shy as you try to find the perfect car.

4. Shop Around for the Best Price

Once you find the right car, it’s time to shop around for the best price. Remember, you can negotiate all you want when you buy a car.

It’s a good idea to get quotes from several dealers because then you can pitch them against one another so you get the best deal. You aren’t obligated to buy a car from the dealership you test drove the car at, and you can get quotes online from dealers anywhere.

5. Figure out How You’ll Pay for It

Once you agree on a price and sign a contract, you must finalize your financing. You can pay cash for a car or get financing. If you need a loan, you can get it from a local bank, online lender, auto loan marketplace (like, or the dealer.

No matter who you get financing from, make sure the terms are attractive and you can afford the payment. Pay close attention to the term (how long you have to pay the loan off), any prepayment penalties, and the loan’s total cost.

6. Get Car Insurance

You won’t be able to drive the car off the lot unless you have car insurance. Your dealer will require a paid-in-full receipt for car insurance for the required amount in your state. If you’re financing the car, your lender will also require their name to be on the policy should anything happen to the car. 

7. Finalize the Sale

Once you have your financing, you’ll finalize the paperwork, and close the deal. Remember, you’ll pay tax, title, and registration fees in addition to any other fees the lender or dealer charges.

Once you complete the sale, you take the keys and are the proud owner of a new car!

Key Takeaway

Buying a car is exciting, but you must take it slow. Prepare yourself so you get the best financing options and can find the best deal. Shop around for the right car at the best price, and don’t be afraid to negotiate for an even better deal. Work with your bank, the dealership, or a private lender to get the financing and enjoy your new car!

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