NerdWallet’s Guide to Buying a Car

The car-buying process can be draining and daunting, from navigating auto loans to determining affordability and ownership costs. And the process can get even more difficult in the current market, where low inventory and higher-than-usual prices can make it hard to find the exact car you’re looking for.

Here’s a NerdWallet car-buying guide to help simplify the process and assist you with making the smartest financial decisions throughout the journey.

1. Set your budget

Setting a budget is the first step to take when buying a car — before you even start looking for a vehicle or set foot in a dealership. If you’re paying cash, this step will be easier and faster for you. Even then, you'll still want to be aware and prepared for the other costs associated with buying a car, like registration fees, taxes and insurance.

Most Americans finance their vehicle purchases. In 2022, 80% of new vehicles were financed and 40% of used cars were financed, according to research from Experian Automotive, an auto data research company. Setting a budget means determining how much you can afford for a down payment and for monthly car payments.

Here are the basics for setting a budget:

• Determine the price of the vehicle you can afford based on your income and budget.

• Use our auto loan calculator to see an estimate of your monthly car payment and total loan amount based on the vehicle price, interest rate, loan term, down payment and more. Try entering different vehicle prices and see how the loan payment changes.

• Use our reverse auto loan calculator to determine your potential loan total, if you have a set monthly car payment already in mind.

2. Shop for a loan

After you’ve determined your budget, it's time to find the right loan for you. The loan amount and interest rate you’ll get will largely be based on your credit score and income. If you have a higher credit score, you’ll usually have a lower interest rate. On the flip side, those with poor credit scores typically qualify for loans with higher interest rates.

To completely understand what you qualify for, get a preapproved offer for a car loan. This is beneficial even if you plan to finance through a car dealership because it’ll give you negotiating power. For example, if the dealership tries to offer you a loan with 8% interest, you can show a preapproved offer for 5% interest for the dealership to match.

Compare the following lenders and get a preapproved offer.

• Compare auto loans, rates and lenders: Find the right lender for your vehicle purchase.

• Bad credit auto loan options: These loan options are for those with lower credit scores, in the mid-600s or below.

• Loan options for first-time car buyers: See your finance options if you’re buying your first car.

• Private-party auto loans: These lenders will finance cars purchased from a private seller. 

3. Determine other ownership costs

Car costs go beyond just making loan payments. There are additional costs that increase how much you might have to shell out monthly, including registration fees, depreciation, interest, gas, insurance, maintenance and other fees.

Here are some resources to help you calculate the ongoing costs of owning a car:

• Determine monthly ownership costs with this detailed breakdown.

• Understand how much routine car maintenance usually costs.

• Estimate your car insurance costs with our car insurance calculator.

• Compare car insurance rates to make sure you’re not overpaying or overinsured.

4. Find the right car for you

Once you’ve analyzed the costs associated with buying a car, you can start to look for options based on the budget you’ve set. Depending on whether you’re looking for new, used or certified pre-owned options, you can shop with a trusted and reliable dealer in person or online through car-shopping marketplaces. You can also purchase used cars from private-party sellers on platforms like Craigslist and Facebook Marketplace.

Regardless of how you decide to shop, if you’re buying a used car, the first step to determine if a car is suitable is to look at its vehicle history report. These reports provide information about a car’s record of major accidents, previous owners and usage, mileage and more. They can even sometimes give you insight into a car’s past, like its maintenance record.

The following guides can help you during the car-buying process, based on what type of car you’re looking for.

• How to buy a new car: These steps can help make the car-buying process for a new vehicle easier.

• How to buy a used car: Whether you purchase from a dealer, a private-party seller or an online retailer, finding the exact used car you’re looking for can be rough in the current market. This checklist can make the process smoother.

• Comparing car-buying apps: Apps like Autolist, Autotrader, CarFax and more can help you compare cars in your budget or even buy your car completely online. 

5. Contact the seller or visit a dealership

After you’ve selected some options you’re ready to pursue, you can contact the seller or visit the dealership to see the car(s). This might be a matter of physically driving to the dealership and talking with a salesperson or entering data to receive an exact price online.

Here’s what to do once you’re ready to contact a seller or dealer:

• Request a quote from a car dealer by email, phone or by filling out an online form to compare prices and costs across dealerships or sellers. 

6. Inspect and test-drive the car, if applicable

If you’re buying a new car, it’s not necessary to have it inspected because there were no previous owners. But you should always test-drive a car to get a feel for how it moves on the road. However, if you’re buying a used car, there are additional steps you need to take to make sure you’re not paying more than a car is worth or buying a damaged vehicle.

Even after viewing a car’s vehicle history report, it's still important to view a car in person if you're able to and also have it inspected by a trusted and reliable mechanic. Pre-purchase inspections typically include test drives and can help to make sure there are no underlying problems with the car in question. Note that if you’re buying a car online, test driving may not be an option, but you should receive inspection documents at the very least.

Here’s what you need to know about a used car inspection:

• Getting a third-party car inspection before you buy a used vehicle can help ensure it's in good condition. 

7. Determine which warranties are right for you

Warranties and maintenance plans are not right for every buyer. But sometimes having the additional protection can make you feel safer and give you peace of mind. To determine if a warranty is right for you when buying, consider how long you expect to keep the car, how reliable the car is, and if it makes sense to waive a warranty at the time of buying and opt for it later on in the car’s life.

Note that you can buy other types of coverage — such as gap coverage and road hazard protection — from your auto insurer, which can often be cheaper.

Consider the following when deciding on a warranty plan:

• Determine if you need an extended car warranty at all. If you have a reliable car and have some money saved to cover the cost of unexpected repairs, for example, you might not need one.

• You can cancel your extended car warranty if you determine that it's not right for you. 

8. Negotiate the best price

Deals are harder to find in the current market, but buyers can still try to negotiate down car prices to stay within their budget. Note that dealers might often charge more than the sticker price by adding fees and dealer options. Because of this, you'll want to compare the dealer’s asking price with the average market price.

When negotiating, be clear about whether you’re discussing the car’s “out-the-door” price, which includes taxes and fees, or only the sale price of the car. The following guide can help you while you negotiate.

• How to negotiate car prices: Knowing your budget and doing research about the current market value of a car can help you during negotiations and potentially help you pay less than the manufacturer's suggested retail price (MSRP).

9. Maximize trade-in value, if applicable

If you’re trading in a car to purchase another, make sure you're getting the best trade-in price for your vehicle. The trade-in value is how much you’ll get toward the cost of another car when you trade in your car at a dealership. To get the best price for your trade-in, negotiate the trade-in value and the new car price separately.

Keep the following in mind as well, when trading in your car:

• Determine what your car is worth before going to a dealer by using online retailers and pricing guides.

• It's possible to trade in a car you owe money on, but it can be costly to do so. Learn more about negative equity to determine if it’s worth trading in the car right now.

10. Make the purchase

Now that you've decided on a car, it's time to make the purchase. This process includes reviewing and understanding your loan terms, questioning any unnecessary fees like dealer add-ons or advertising fees, understanding who your loan servicer is, where and how to make your payments, then signing to complete the process.

Before signing the contract, make sure to do the following: