Buying a car is a major financial decision, and the more prepared you are, the smoother the process will be. Without proper research, it’s easy to overpay or end up with a vehicle that needs costly repairs down the road. The experience can also feel overwhelming when you’re dealing with high-pressure car dealers, financing options, trade-in values, insurance, and other details.
This car-buying guide breaks down what you need to know before signing on the dotted line. We'll cover practical car-buying tips to help you compare vehicles, understand financing options, and avoid costly mistakes. Let’s break it down so you can drive off the lot with a car you love and a payment you can afford.
Table of Contents
Choosing the Right Car
Should You Buy New, Used, or Certified Pre-Owned?
Should You Buy From a Dealership or Private Seller?
How to Finance a New or Used Car
Common Car-Buying Terms to Know
Understanding Car Insurance and Protection Plans
A Better Way to Shop for Your Next Car
When Refinancing Makes Sense
Before You Finance Your Next Car
Before you start shopping for the perfect car, take time to figure out what you really want. This will help you narrow your search and focus on cars that meet your needs and budget.
Here are some things to consider:
Determine the Vehicle Size You’ll Need
First, think about who and what you’ll be transporting:
- Passengers: Will it mainly be you and your family?
- Cargo needs: Do you travel with pets, sports gear, or large cargo?
- Accessibility: Do you or a family member need a vehicle with a lower or higher entry point, or a trunk that’s easier to load and unload?
Larger vehicles may offer more space, but they're usually less fuel-efficient and cost more to insure. Smaller vehicles are generally more affordable to own and operate. If you only need extra space occasionally to haul items or for trips, consider renting a larger vehicle instead. The rental cost is often offset by the money you'll save on fuel, insurance, and maintenance with a smaller car.
Be Realistic About What You Can Afford
It's easy to get caught up in the features, but knowing your budget can help you avoid problems later. Consider the total cost of the car, not just the monthly payment the dealer quotes you.
In addition to the sticker price, also factor in taxes, registration fees, insurance, fuel, and maintenance. These costs will be higher for large SUVs, luxury models, and sports cars. A good rule of thumb is that your total car expenses should be no more than 20% of your take-home pay.
Compare Fuel Efficiency and Operating Costs
If you have a long commute or want to reduce your environmental impact, gas mileage should be a priority. Many hybrids and electric vehicles (EVs) get anywhere from 40 to over 100 miles per gallon equivalent (MPGe), which helps you save hundreds—or even thousands—of dollars each year on gas.
When you buy new, you'll get a full warranty, but you'll also pay a higher price. New cars also lose value quickly, especially during the first two years.
Used cars are often more affordable, but they may have hidden issues or need costly repairs. Before buying, always research the title and service records, and check the vehicle history report to see if there have been any accidents or other issues.
Certified Pre-Owned (CPO) vehicles are another option to consider. These vehicles have passed a comprehensive inspection and come with extended warranties. Although they may cost more than standard used cars, the peace of mind they offer might be worth it.
Buying from a dealership is convenient. They offer financing options, warranties, and you can also trade your vehicle for a newer one. However, they often have higher prices than private sellers because of overhead costs and commissions. Financing through a dealership also tends to cost more than with a bank or credit union.
There's no middleman with a private seller. However, you'll need to pay cash or arrange your own car loan. You’ll also need to take care of the paperwork yourself.
Here are some questions to ask when buying a used car:
- Why are you selling the car?
- Has the car ever been in an accident?
- How many previous owners has it had?
- Do you have service and maintenance records?
- Do you have the vehicle title?
- Is the title clean, rebuilt, or salvage?
- Is there any remaining factory warranty coverage?
Before you make an offer on any car, be sure to find out its Kelley Blue Book value to see what it’s worth. This can help you know when you’re getting a good deal or whether you should walk away. It's also a good idea to take the car for a test drive and to have a mechanic inspect it. This small investment could save you from expensive surprises later.
You can get a great deal on a vehicle at a dealership or with a private seller. The best option depends on your needs and budget. A dealership might be the better choice if you prefer convenience and you want to buy a new vehicle with a warranty. If you’re looking for a lower price and don’t mind handling everything yourself, buying from a private seller could save you money on a used vehicle.
It's a good idea to shop for financing before you shop for a car. Start by checking your credit score, since it impacts your interest rate. Then, get pre-approved. Pre-approval is when a lender does a preliminary review of your finances and gives you an estimate of how much you qualify to borrow. It helps you know which cars you can afford, and it can also give you an edge when negotiating the price of the car.
When comparing car financing offers, look at the annual percentage rate (APR), loan term, and the total interest you’ll pay over the life of the loan. A 72-month loan might seem attractive because it gives you lower payments, but you'll pay much more interest than with a shorter loan term. You can use an auto loan calculator to see how different rates and terms affect your total cost.
Credit Unions, like Credit Union of America, typically offer the best rates for auto loans. They are often 1-2% lower than banks or dealers. Their rates are lower because they are nonprofit financial institutions that are focused on serving their members instead of earning profits for investors. Even just a one-point difference in the interest rate could result in significant savings over the life of the loan.
Knowing some common terms can help you spot hidden costs and negotiate the best deal on a car purchase.
Here are some essential car-buying terms:
- Annual Percentage Rate (APR): The yearly interest rate charged on a car loan, including lender fees.
- Down Payment: The amount of money you pay up front when buying a car.
- Loan Term: The length of time you’ll take to repay your loan.
- Depreciation: The decrease in a car’s value over time.
- Manufacturer's Suggested Retail Price (MSRP): The price the manufacturer recommends a dealer sell the car for.
- Out-the-Door Price: The total cost you’ll pay, including taxes, title, registration, and all dealer fees.
- Dealer Markup: The amount a dealer adds to the car’s cost.
- Documentation Fee (Doc Fee): A charge for processing the sales paperwork.
- Demo Car: A vehicle that’s been used by a dealership for test drives.
- Odometer Disclosure: A statement of a vehicle’s mileage at the time of sale.
Being prepared for the unexpected is an important part of car ownership. Before you drive off the lot, make sure you have the right coverage in place to protect yourself financially if something goes wrong.
Here are a few things to consider:
Vehicle Insurance
Car insurance isn’t just a good idea. In many states, it’s required by law. Without coverage, you could face significant expenses if you're involved in an accident or your car is stolen. You may also be liable for others’ medical expenses and other accident-related costs.
Be sure to get quotes from several insurance companies for any car you are thinking about buying. Insurance premiums change all the time, and you may find a better deal with another provider. Bundling your vehicle, homeowners, and other policies can also help you save.
Guaranteed Asset Protection (GAP)
Guaranteed Asset Protection (GAP) insurance can be a financial lifesaver if your car is ever totaled or stolen. It covers the “gap” between what your car insurance pays for the vehicle and what you still owe on your loan. GAP insurance helps ensure you’re not left paying off a loan for a car you no longer have.
Extended Warranty
An extended warranty is a smart way to protect used cars that are no longer covered by the manufacturer’s warranty. With the Route 66 Extended Warranty that’s offered by Credit Union of America, there’s no deductible, and it also includes emergency roadside service, a rental car allowance, and battery coverage.
Credit Life Insurance
Credit life insurance pays off the remainder of your car loan if you pass away. It protects your loved ones from having to cover the remaining balance themselves or sell the vehicle.
Credit Disability Insurance
Similar to credit life insurance, credit disability insurance pays off the remainder of your car loan if you become disabled and you’re unable to work.
Car shopping can be time-consuming and stressful when you’re trying to find the best car for your needs and get the best deal. That’s why we offer AutoSMART, an online resource that can help you compare vehicles, explore pricing, and connect directly with trusted dealers.
Here’s how AutoSMART makes car shopping easier:
Search New and Used Cars
Shop for new or used cars by model or location and contact dealers anytime for pricing. Some partners offer virtual appointments, home test drives, and home delivery, which can simplify your car search and save you time.
Customize Your Search
Find exactly what you want in a vehicle. Search by trim, style, color, and features, then filter the results by price, mileage, year, and condition. Each listing includes standard features and estimated MSRP for easy comparison. When you find a car you like, you can contact the dealer directly or save it to your favorites for later.
Shop with Trusted Dealers
Each of AutoSMART’s Preferred Dealer Partners has been carefully vetted to ensure they meet quality standards for service and reliability. You can also obtain a Member Purchase Certificate to lock in your price online before visiting the dealership.
Take Advantage of Educational Resources
Explore AutoSMART’s educational resources to learn more about credit reports, rebates, and financing options, including low-rate and 0% offers.
If you’re thinking about trading in your car to take advantage of a lower interest rate, refinancing your car might be a better option. Refinancing often makes sense when your vehicle is still in good condition and you want to reduce your monthly payment without taking on new debt.
Refinancing your car means taking out a new auto loan to replace your current one, usually with a lower interest rate or a different term. It can reduce your monthly payment or help you pay off your loan sooner. The interest rate you receive when refinancing depends on several factors, including your credit score, loan term, and the age of your vehicle.
Before you apply for car financing, it's important to understand how interest works on a car loan. Knowing how the rate and term affect your total cost can help you compare offers to find the best deal.
The right car loan can have a big impact on your budget. It helps you spend less on interest, so you can keep more money in your pocket. Check out our guide to understanding car loan interest rates to find out how they work and how you can qualify for the best rate.
HOW DOES INTEREST WORK ON A CAR LOAN?
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