When you start thinking about buying a car, there are a lot of things to consider.
First of all, don’t rush it! Once the deal is done, it is NOT something that can easily be undone — at least not without you losing a bunch of money.
A study found that one in five car buyers regret their decision within minutes — not days, weeks, months — but minutes. And once you drive that thing off the lot, there’s no more oops or never mind.
How to get a great deal on a car for your budget
A car is typically the second-biggest purchase most people make in their lifetime, behind purchasing a house.
Buying a car is a big deal – and involves a lot of money – so you want to be sure you know exactly what you’re getting into and that you’re making the best decision for your budget and your life.
And getting a great deal on car isn’t just about the sale price, you also have to consider what you will have to pay each month and the total amount the car will cost you over time.
Step 1: Prequalify for a car loan
The first step is to prequalify for a loan, so you’ll know how much money the lender will give you and what your monthly payments will look like. Then you can figure out what your budget will allow you to afford.
There are a lot of solicitations out there for “great” deals on car loans, including offers available to people with poor credit, including people who couldn’t get a loan just a few months ago. But what that’s done is allow people to buy more car than they can afford, which is a really bad idea.
When you’re going through the financing process and realize that your monthly payments will be too high for you to be able to pay off the loan in 42 months, then you’re trying to buy a car that’s more expensive than you can afford.
Read more: Where to get the best deal on a car loan
Forget about those 60 month or 72 month (sometimes even longer) loans that people have been getting. When you stretch the loan out that long, that’s when you end up owing more than the car is worth and the payments will just continue to eat away at your budget and savings.
So try to keep the length of the loan as short as possible.
Step 2: Figure out how much car you can really afford (regardless of what the bank will give you)
There are two parts to this: how much you can afford for the down payment and how much you can afford to pay each month toward the car loan.
And one thing to always keep in mind throughout the car buying process: don’t max out your budget! If you aren’t quite ready to buy a car, wait a few months, reevaluate your budget and then start the process when your budget can handle it!
1. Down payment
A down payment is the money you pay upfront for a car. Ideally, you want to have 20% of the car’s sale price in cash to pay upfront at the time you buy it.
For example, if you want to buy a $20,000 car, the ideal down payment would be $4,000. When you put down more cash upfront, it will reduce how much money you have to borrow — and it will also allow you to pay off the car loan quicker!
A down payment doesn’t necessarily have to be cash in the bank. If you’re trading in your old car, that money can be used toward the down payment. You can also sell the old car yourself and use the cash to help you cover the down payment. And you’ll actually probably get more money for the old car if you sell it yourself!
If you don’t have 20% to put down, try to have as close to that amount in cash as you can before it comes time to buy a car.
You may see offers out there that require you to put very little to even no money down, but that’s a really bad idea. That’s how people end up owing more on a car than it’s even worth.
After you put cash down upfront, you’ll need to borrow money to cover the remaining cost of the car.
2. Monthly car loan payments
Regardless of how much the bank is willing to lend you, it’s crucial that you figure out how much you can actually afford to pay each month. Because if you take out a loan to buy a super expensive car — that comes with huge monthly payments that you can’t afford — you could get into some very big financial trouble, very quickly.
Bottom line: if the monthly payments are too high for the car you want — then you’re trying to buy a car that’s too expensive — think buyer’s remorse … DON’T DO IT. Reevaluate the list of cars you’re considering to include models that don’t require you to borrow more money than you can afford to pay off.
Also, to stay within budget, you really don’t want any more than 20% of your monthly take-home pay to go toward a monthly car payment.