6 Rules for Buying Your First Car

Recently I helped a family friend buy her first car. It reminded me what an overwhelming and intimidating experience it can be for first-time car buyers.

When Susan first called, she hadn’t decided whether to buy new or used or lease, and she had no idea what her credit score was. She didn’t know how to figure out what monthly payment she could afford.

All she knew was that she needed wheels, fast.

Here are the steps we went through that eventually led to a good deal on her first new car.

1. Set your budget

Luckily, Susan had a full-time job with a good salary. Unfortunately, she lived in Los Angeles, where the cost of rent is through the roof.

I told her that her car payment and all car expenses (insurance, registration, etc.) should total no more than 20% of her take-home pay.

She worked the numbers and came up with a monthly payment of $350 and said she had $5,000 for a down payment.

2. Get preapproved before you shop

The hardest thing to do, in my role as coach, was to keep Susan from just heading to a dealership and throwing herself at their mercy. Dealerships seem to have a gravitational pull because, after all, that’s where the cars are.

But I kept telling her that as a first-time car buyer — and particularly during a pandemic — she should do as much as possible remotely. That would mean using email, text and phone calls to shop and haggle with the dealer.

But the next step, after budgeting, was to apply for a loan before going car shopping. Here’s why:

• You find out what interest rate you qualify for.

• It unearths any problems on your credit report.

• Preapproval puts you in a stronger position to negotiate at the dealership because you’re not worried about financing.

The first lender turned Susan down. But it did give her a copy of her credit report along with her credit score. With this knowledge, she chose a lender that worked with mid-tier customers, and she asked for a smaller loan amount.

3. Decide on new, used or leased

Since Susan planned to move into a new apartment soon, she needed her savings for a security deposit. This made leasing attractive to her. Here are a few other things she liked about leasing:

• Leasing allows you to drive a more expensive car with lower monthly payments.

• A leased car is under an included factory warranty for three years.

• At the end of the lease, she had the option to buy the car at a predetermined price.

On the downside, I reminded her that with leasing:

• Mileage is often limited to a total of 36,000 miles over three years, but can be as low as 22,500 miles.

• She could be dinged for excess wear and tear at the end of the lease.

• After three years of making payments, she would have to either lease again or buy the car.

Leasing works for people who want to be driving a new car every three years. But in the long run, buying a good used car will save money.

4. Choose your car

Susan had no idea what she wanted other than a reliable, inexpensive car.

I suggested she use a car finder tool, such as the ones on Edmunds.com or Kelley Blue Book, found at KBB.com, and filter it for her preferences. Because she had strong environmental concerns and wanted to reduce emissions and save gas, she reviewed all the hybrids on the market and eventually chose the Toyota Prius.

This kind of basic research is useful because it puts guardrails around your search (so if space for the dog is a priority, you won't be distracted by a Miata).

5. Make your best deal

Susan ignored my advice about shopping remotely and, the next thing I knew, she was texting me from a local Toyota dealership. She had seen a used Prius advertised for $18,795, a fair price according to Kelley Blue Book. However, when she got there, the salesperson told her that the advertised price didn’t include “a whole lot of extras” and the true price was $28,000!

I told her this proved this dealership was untrustworthy and recommended she leave. However, she soon texted me a photo of a deal sheet for a lease on a new Prius. It was $1,500 in drive-off fees with a monthly payment of $298 and a total of 36,000 miles. I told her to make sure that sales tax and other fees were included in this monthly payment.

6. Keep your deal clean

I told Susan the Prius deal looked good as long as she said no to any extras in the finance and insurance office. I warned her she might be pressured to buy a lease protection plan — insurance against excess wear and tear — and wheel and tire warranties.

These are high profit items for the dealership that consumers rarely use.

Takeaways for first-timers

• Let your budget lead you to the right car rather than stretching to buy a more expensive car. The new wears off much quicker than the payments.

• Apply for preapproved financing. You’ll know what you can afford, and it just might net you a better rate at the dealership.

• Use the new online tools for car shopping to avoid being pressured at a dealership.

• If negotiating scares you, shop at CarMax or one of the no-haggle online retailers such as Carvana or Shift.

Above all else, try not to be intimidated by what some people might view as figures of authority, such as the sales manager or the finance officer. Instead, be prepared with solid research and let the knowledge empower you.