First-Time Car Buyer Tips & Terminology
When you’re purchasing a car for the first time, there are a lot of things to consider and a lot of things you won’t know. We’ve compiled 13 of the top tips to make your first-time car-buying experience as smooth as possible, along with the terminology you’ll want to know before stepping into the dealership. From setting a budget to researching reviews and ratings to understanding the finance process, you’ll be ready and confident to make your first car purchase. Here’s what you’ll find in this article:
- Know your budget
- Do your research
- Check reviews
- Check safety ratings
- Look into first-time car-buyer programs
- Get ready for the financing process
- Get preapproved for your auto loan
- Consider a cosigner
- Take someone along with you
- Take a test drive
- Get an inspection from a mechanic
- Be ready to negotiate
- Know your rights
Setting a reasonable budget is really the first step to creating a smooth car-buying experience. Using the 20/4/10 rule is a good place to start — that’s 20% down, finance for no more than 4 years and keep total transportation costs to 10% of your monthly income.
You’ll want to consider all your income and expenses, as well as all the costs associated with owning a car (like tax, fees, gas and insurance) so you have a realistic understanding of what your total transportation costs will be.
The bottom line is: Don’t buy more car than you can afford. Lots of people do, and they end up regretting it. Set a budget and you won’t have to learn this the hard way. Use LendingTree’s affordability calculator to help determine how much car you can afford or this auto loan calculator to estimate your monthly payments.
From sports cars to minivans to luxury vehicles, understanding a bit about the type of vehicle you want and why you want it is a good second step. Looking in your price range, check out the vehicle specifications. Know what type of mileage you want to get, understand the type of wheel drive you want and look at safety features. If reliability in a vehicle is important, look at reliability ratings online.
Hearing about a vehicle from car experts and real users is important. It will give you insights about what to look for when you get to the dealership and take it for a test drive. It may also provide you with a perspective you might not consider on your own.
Online reviews are the best for useful vehicle comparisons according to research by J.D. Power. In fact, the top three sites consumers access when researching a vehicle purchase are (listed in alphabetical order): Consumer Reports, Edmunds.com and Kelley Blue Book.
Safety is an important concern when choosing a vehicle. The National Highway Traffic Safety Association (NHTSA) provides a 5-Star Safety Ratings program based on frontal, side and rollover crash tests. The more stars, the safer the car. You may find more NHTSA information at safercar.gov.
The Insurance Institute for Highway Safety (IIHS) evaluates the crashworthiness, and crash avoidance and mitigation of vehicles. Vehicle crashworthiness is rated as good, acceptable, marginal or poor based on six tests, including driver-side small overlap front, passenger-side small overlap front, moderate overlap front, side, roof strength and head restraints.
Since the tests performed by each of these organizations are different, it’s worth looking at both when selecting the right vehicle for you.
Many lenders are willing to help first-time car buyers with little or no credit history. Banks and credit unions offer programs to make it easy to purchase your first vehicle without paying a high interest rate. These programs almost always have a list of requirements, so make sure to read carefully to see if you qualify. A few places that offer first-time car buyer programs include:
- Chrysler Capital
You may also be able to find local dealerships and credit unions that offer first-time car buyer programs. Doing a search for “first-time car-buyer programs” plus your location will provide you with the results you seek.
In addition, dealers often offer manufacturer incentives, rebates, discounts or special pricing. Be sure to ask your dealer and check the requirements to see if you qualify. But be careful of deceptive advertising, like teaser payments that start out low, but are higher for the rest of the term, or low APRs that only apply to a certain amount of money, not the entirety of the loan.
When you apply for financing, be prepared with the following information:
- Personal information. This includes your name, Social Security number, date of birth, current address, proof of identity and proof of residence.
- Employer information. This includes your job title, employer name, employer address and phone, manager’s name, the length of employment and your salary.
- Financial information. This may include other sources of income, proof of income like pay stubs or tax returns and other financial information on current credit accounts, including your debt obligations.
The lender will pull your credit to view your loan obligations and your payment history including any late payments, collections or bankruptcies. It’s always good to know your credit score going into the financing process.
Before you go to the dealership, you might consider shopping for financing. Getting preapproved for an auto loan is a straightforward process that could save you money and keep you from getting taken advantage of.
Simply contact a bank or credit union and ask to begin the pre-approval process. Banks are looking for strong credit ratings, proof of income and a consistent employment history to get you preapproved. Once you are, you’ll receive a pre-approval letter which you may take with you while shopping, or sometimes the lender may issue a coupon.
Some places to start include:
- Local credit unions
- Online lenders
- Online loan marketplaces like LendingTree
- Finance companies
If you’re unable to qualify for an auto loan on your own, having a cosigner can help get you approved. Make sure your cosigner has a strong credit rating, and is willing to assume the responsibilities and risks of cosigning your loan. When he does, he is equally responsible for the payments, and any late or missed payments will adversely affect his credit score.
The benefit to having a cosigner is that you’re able to qualify for a vehicle and improve your credit history as you make on-time payments. The drawback is that the cosigner will be held responsible if you default on the loan. Not only can this harm the cosigner’s credit, but it can put a real damper on your relationship. So don’t ask lightly.
It’s always good to have support, especially when it’s your first time doing something. Having a seasoned veteran on your side could really save you from giving in to high-pressure sales tactics. Someone who’s not attached to the purchase may also be the voice of reason when you’re tempted to break your budget.
Test-driving a car is a very important part of the car-buying process. In addition to making sure the car is comfortable, you’ll want to consider things like:
- Steering and handling
Some experts suggest requesting to take the vehicle home overnight so you can experience the headlights and interior lighting.
If you’re buying a used car, there may be things you miss with a vehicle inspection and test drive. Paying for a professional inspection from a certified mechanic is worth the time and money spent (usually around $100 and a few hours).
Getting a vehicle inspection from a mechanic can help you determine the reliability and mechanical condition of the vehicle you’re looking to purchase. Catching a potential issue early in the buying process will save you time, money and headaches later.
There are plenty of tactics for helping you to get the best price on a car. But if you are a first-time car buyer, you’re at a disadvantage. Our best advice? Bring someone along who’s good at negotiating and has done it before.
If you can’t do that, read up on some negotiating tips before going into the dealership. Know the price of the vehicle by looking at car pricing sites online. Make sure you’ve been preapproved for financing and have multiple quotes to compare auto loan rates and terms. That way, when it comes time to finance, you’re not caught off guard and have rates in hand to give you leverage in the negotiation.
Beware of sales tactics meant to throw you off balance. For example, a typical sales tactic is to focus on the monthly payment of the vehicle rather than the total cost. Understand that by extending the length of the loan, a salesperson can dramatically lower your monthly payments. However, you’re paying more for the vehicle and more interest over the life of the loan.
If you’re purchasing a used vehicle and you get an inspection from a mechanic (which you should), you can use the repair estimate to negotiate down the price of the vehicle or negotiate repairs prior to purchase. Make sure the report includes the make, model and VIN.
Most of all, don’t be afraid to walk away if you can’t get the deal you want.
Beware of add-ons
After you settle on a price for the vehicle, steel yourself for more negotiations. The dealer finance office will take you through add-ons that can greatly increase the final sale amount. These may include prepaid maintenance, extended warranties and gap insurance. If you allow it, the dealership will try to make these things easy to say yes to by offering to finance all the extras, putting you upside down on your vehicle. Read up on add-ons prior to going into the dealership, like the prepaid maintenance, to determine if you really need them and make sure they fit your budget. If not, you may want to just say no.
If you happen to buy a vehicle (usually used) that doesn’t run, each state has its own lemon laws that help you get an undrivable vehicle fixed, replaced or refunded. There are other ways to deal with problems you may have after purchasing a vehicle that doesn’t work as expected. Working with a dealership to resolve the issue is the easiest, but if that doesn’t work, you may need to contact your state Consumer Protection Office or attorney general. Taking the seller to small claims court may also be an option.
Car research abbreviations you should know:
- ABS. Anti-lock brakes
- AEB. Automatic emergency braking
- AWD. All-wheel drive
- BSW. Blind spot warning
- ESC. Electronic stability control
- FWD. Front-wheel drive
- FCW. Forward collision warning
- LATCH. Lower Anchors and Tethers for Children
- LDW. Lane departure warning
- MPG. Miles per gallon
- VSA. Vehicle stability assist
- 4WD. Four-wheel drive
- Credit score: A good credit score can help you qualify for a larger loan amount and a lower interest rate. If you don’t know your score, LendingTree will provide you with your credit score for free. If your score is less than optimal, follow these tips to improve your score prior to applying for an auto loan.
- Debt-to-income ratio: Also known as DTI, this helps lenders understand how your monthly debt payments compare to your income to demonstrate you can take on additional debt (such as an auto loan).
- Asking price: This is the price the seller is asking for the car. This price is always negotiable.
- Base price: This is the price of the vehicle without any options. It does include the warranty and is printed on the Monroney sticker.
- Blue Book: The Blue Book value of a vehicle is the industry standard for vehicle pricing.
- CARFAX Report: A CARFAX report provides the vehicle’s history, including accidents, service and repairs, salvage titles and recall info.
- Dealer invoice: This is the amount the dealer paid for the vehicle and by knowing this amount, you position yourself to better negotiate.
- Dealer sticker price: This is the Monroney sticker price plus the suggested retail price of dealer-installed options, including additional dealer markup (ADM) or additional dealer profit (ADP), dealer preparation and undercoating.
- Monroney Sticker Price (MSRP): The MSRP can be found attached to the vehicle window. It shows the base price, the manufacturer’s installed options with the manufacturer’s suggested retail price, the manufacturer’s transportation charge and the fuel economy (MPG).
- Vehicle Identification Number (VIN): A vehicle’s VIN is a unique identifier meant to help prevent theft and usually etched onto the vehicle’s dash or window and printed on the vehicle title and registration.
Comparing auto loans
- APR: The annual percentage rate (APR) is more than just the interest rate. It’s the true cost of credit, including interest and fees expressed as a percentage.
- Cosigner: An individual who signs the loan agreement with you, agreeing to pay the loan in the case that you default.
- Fixed rate: A fixed-rate loan means your interest rate will not change and your loan payments will stay the same throughout the life of the loan.
- Prepayment penalty: Some auto loans come with a penalty for paying off the loan early. Be sure to read the fine print to make sure you won’t have to pay a fee if you choose to do that.
- Term: This is how long you will pay on loan, usually expressed in months (48, 60, 72). Choosing a shorter loan term increases your monthly payment, but lowers the total amount of interest you will pay on the loan, while choosing a longer term lowers your monthly payment amount but increases the total interest you’ll pay on the loan.
- Variable rate: A variable-rate loan means the interest rate will change as market rates change. This can change your payment amount either up or down.
During negotiations with the lender/dealer
- Add-ons: When it comes time to finance your vehicle, the dealer will offer add-ons, which may include things like prepaid maintenance, extended warranties and gap insurance. These are optional and will increase the cost of purchasing the vehicle. Often, this is where first-time car buyers break their budget.
- Delivery Charge: Also known as destination and delivery, this is the amount a dealer charges to deliver the car from the manufacturer. This amount is usually included in the invoice price and if it is, you should make sure it doesn’t appear again in the contract (essentially double-charging you for freight).
- Extended warranty: An extended warranty covers repair costs for your car after the standard warranty expires. The terms and conditions vary, so be sure to read the fine print.
- GAP insurance: GAP stands for Guaranteed Auto Protection. GAP insurance covers the difference between what you owe on a vehicle and what the insurance company pays if your vehicle is stolen or totaled.
- Prepaid maintenance: Prepaid maintenance plans are sold by dealers to presell the regularly scheduled maintenance listed in your owner’s manual. Things like oil changes, filter changes, tire rotations and checkups.
- Service Contract: Similar to an extended warranty, this is an optional purchase with a dealership to perform service on a vehicle should it need repair.
- Trade-in: Dealerships will often offer to purchase your vehicle at a trade-in value and apply that to the cost of the new vehicle you are purchasing. Check the value of your car on sites like Kelley Blue Book to make sure you’re getting a fair deal. You may always sell the vehicle (usually for more money) through a private sale.
When it’s time to close the loan
- Certificate of Title: This is a certificate that serves as proof of ownership of a vehicle. If you finance the vehicle, the lienholders will be listed on the title.
- Truth-in-Lending Disclosure: The federal Truth-in-Lending Act requires that as a borrower, you receive a disclosure statement which includes important information about your loan, the APR, finance charges, number of payments, the monthly payment amount, late fees and prepayment penalties.
- Upside Down: When you owe more on a car than you can sell it for, this is known as negative equity or being upside down. One of the best ways to avoid being upside down is to make a larger down payment.