How to prepare for buying a new car on any budget

Buying a new car is a big decision—not so much the make and model, but more about the financial responsibility that accompanies it. Unfortunately, what we want and what we need are often at odds with each other, and car buyers end up purchasing a vehicle with a price tag that exceeds their budget…and then some.

Here are a few tips that can help keep your next car purchase in line with what you need, want, and can afford:

Understand how the car-buying process works

New to the car-buying process? Use this checklist to stay on track and know what to expect:

1. Set your budget

First thing’s first: you’ll need to determine how much you can afford (more on that later) and check your credit score if you’re financing. Higher scores often mean better interest rates.

2. Research your options

Identify the type of car that fits your needs (sedan, SUV, truck, etc.) and compare models, features, and reliability ratings. Read reviews and check safety ratings from trusted sources like Edmunds, Kelley Blue Book, or Consumer Reports.

3. Explore financing options

Get pre-approved for an auto loan from a credit union or bank before car shopping. If leasing, understand mileage limits, fees, and end-of-lease options.

4. Shop around for the best price

Check online listings, dealership websites, and local ads to get the best price. Request quotes from multiple dealerships and look for manufacturer incentives, rebates, or special financing offers.

5. Test drive and inspect

Schedule test drives to compare comfort, performance, and features. If you’re buying used, get a vehicle history report.

6. Negotiate the deal

Know the fair market value of the car before you negotiate the car price. Focus on the total price, not just the monthly payment—be ready to walk away if the deal isn’t right.

7. Review the final paperwork

You’ll need to read all terms carefully before signing. Check for hidden fees or add-ons you didn’t agree to. Verify your loan terms, interest rates, and warranty details if applicable.

8. Finalize and enjoy your new ride

Time to hit the road! Make sure you have insurance before driving off the dealer’s lot, and register the vehicle and transfer the title (if buying used).

All purchases are not created equal

You may have purchased a pair of Manolo Blahnik shoes that were more than a month’s rent or a new, state-of-the-art gaming system that set you back a few bills—but those splurges can be contained and could be considered short-term lapses in smart financial judgment. They busted your budget, but over the next few grueling months, you can probably get back on track by skipping your daily Starbucks run, clearing your calendar, and eating ramen noodles.

Purchasing a car that’s too expensive for your wallet could possibly tie up your finances for the next 60 months—that’s five years of monthly payments that you may or may not consistently afford. The golden rule of car buying is to never ignore the total price of the car. Regardless of how they package the financing, it won’t change the actual cost. Consider purchasing a vehicle that’s below your means, unless of course, what you’re driving means more to you than your financial sanity.

Create a realistic car budget

As stated above, you need to consider the total price of the car when you decide what you can afford. Preparing before you visit the car dealership will help you get the car you want, at the price you want. Here’s how you can set a realistic car budget for your financial situation:

1. Consider your income

Before you get started, you’ll want to add up your take-home pay then list your monthly expenses, like rent, utilities, groceries, and other bills. Once you subtract your expenses from your monthly income, you’ll have an idea of how much you can budget for a car. A good rule of thumb is to budget 10% of your monthly income towards your car payment and another 10% for extras, like maintenance, insurance, and gas. You can use an auto loan calculator to figure out how much your monthly car payment will be.

2. Think beyond the price tag

Owning a car involves more than just the sticker price. You’ll need to consider other recurring expenses, such as:

• Car insurance: Rates vary greatly depending on the driver’s age, location, vehicle type, and driving record.
• Gas: You’ll need to think about your car’s fuel efficiency, how much you’re driving, where you’re driving (highway vs. city), and the type of gas your car will take (regular vs. premium).
• Maintenance and repairs: Generally, more expensive cars cost more to maintain. If you’re buying a new car, you’ll likely have a warranty period, but used cars might require more frequent repairs.
• Taxes and registration fees: Taxes and registration fees vary per state, but they still add to your car’s purchase price. In Georgia, you’ll pay a one-time Title Ad Valorem Tax (TAVT) and a registration fee. The TAVT is 7% of your car’s fair market value, and the registration fee is a flat rate of $20.

3. Figure out your down payment

Ask most car salespeople and they’re likely to say the percentage of buyers who put down a substantial down payment is pretty low. Whether you fund it with your car’s trade-in value or cash that you’ve been saving, a down payment will lower the amount of money you’ll have to pay over time and help secure better new car financing. It’ll decrease your monthly payment and (hopefully) bring it in line with your budget.

4. Come up with a realistic price range

Once you’ve figured out your budget, set a price range and stick to it. It’s tempting to go for the latest model with all the bells and whistles, but going over your budget could cause issues in the long run.

Consider what you really need in a vehicle

Make a list of your “must have” and “nice to have” options before you begin car shopping or take a test drive at the car dealership. Everyone wants the newest and coolest features, and for just a few hundred or a couple thousand more dollars, you can have it all…heated seats, parking assist, Wi-Fi, keyless entry, and a navigation system. They’re nice to have, but you have to determine what you need and what you want because it all leads back to the golden rule: don’t purchase above your means.

Don’t roll over debt

Don’t trade one financial problem for another. For those who get tired of their cars after a few years or want to upgrade their ride every other model year, the idea of holding onto their vehicle until the loan is repaid seems preposterous. To keep themselves in a new car and avoid any down payment, they simply roll one purchase into the next without considering the impact on the loan terms or interest rates. The deficiency on their current car, because it was worth less than they owed, is added to the new car loan. It’s an ugly cycle that is truly detrimental to your financial health.

Watch for hidden costs

Another thing to consider beyond the price of the car is car insurance, repair, and maintenance costs, all of which can add to your monthly payment. Generally, the pricier the car, the more expensive it is to insure and take care of. Talk with your insurance agent to determine how much your monthly insurance premium will increase. Research costs so you can plan for routine maintenance and repairs. Some of the results might lead you away from certain makes and models and toward more reasonably priced alternatives.

Figure out your financing options

When buying a new or used car, you typically have three financing options: credit unions, banks, and dealership financing. Credit unions often offer lower interest rates and more flexible terms, while banks may have competitive rates but stricter lending criteria. Dealer financing can be convenient, but it may come with higher interest rates or hidden fees.

To secure the best deal, compare loan offers from multiple sources and check the annual percentage rate (APR), loan terms, and additional fees. Getting pre-approved for a loan—especially through a credit union—can give you more negotiating power at the dealership, helping you focus on the total price rather than just the monthly payment.

Key takeaways:

• Set a realistic budget: Factor in other costs besides the purchase price, like insurance, maintenance, and gas, to ensure long-term affordability.
• Compare financing options: Credit unions often offer lower interest rates than banks and dealerships, and getting pre-approved can give you more negotiating power.
• Research and shop around: Check multiple dealerships, online listings, and manufacturer incentives to find the best price before committing.
• Negotiate with confidence: Focus on the total price, not just monthly payments, and be prepared to walk away if the deal doesn’t meet your budget or needs.

Hopefully, these tips will keep your next car purchase from wreaking havoc on your finances. Do your research, consider your budget, and keep your emotions in check. Remember, the decision to buy a car isn’t a “one day and it’s done” choice. It’ll impact the way you manage your financial life for year…and that’s a long time to eat ramen noodles.