How To Buy a Car the Smarter (and Cheaper) Way: 6 Steps
Ready for a new car? Learn how to buy a new car and snag the best auto loan rates with these straightforward steps. Consider this guide your fast track to affordable car ownership.
1. See how much car you can afford
2. Decide if you’re paying cash or getting a car loan
4. Compare loans and get preapproved
5. Handle business with the dealer
6. Finalize paperwork and buy your car
1. See how much car you can afford
Going car shopping without a firm budget in mind is a quick way to end up with a ride you can’t afford.
To figure out your down payment and what you can afford to pay monthly:
When you’re buying a car, you should follow the 20/4/10 rule.
- Make a down payment of at least 20%.
- Choose a loan term of four years or less.
- Make sure your monthly transportation costs don’t exceed 10% of your monthly income.
A down payment of 20% or more can help you get a lower annual percentage rate (APR) and protect you against an upside-down car loan. A four-year loan term could save you thousands of dollars of overall interest. And the monthly cost cap can help you afford your car over the long haul.
To figure out how much you can afford to spend on the car itself:
Use our car affordability calculator to see how much your car should cost. This tool considers factors like your current auto loan balance, your trade-in value and more.
To use the calculator, you need to have an idea of what your interest rate may be (if you’re financing). If you haven’t started rate shopping, see the average rates below and choose the one that fits you the best. And if you aren’t sure about your credit score, check it for free with LendingTree Spring.
| Credit score range | Average APR for new cars | Average APR for used cars |
|---|---|---|
| Super prime (781-850) | 4.77% | 7.67% |
| Prime (661-780) | 6.40% | 9.95% |
| Nonprime (601-660) | 9.59% | 14.46% |
| Subprime (501-600) | 13.08% | 19.38% |
| Deep subprime (300-500) | 15.75% | 21.81% |
Source: Experian’s State of the Automotive Finance Market Q4 2024
2. Decide if you’re paying cash or getting a car loan
Once you’ve nailed down your car budget, you need to decide whether you should pay in cash or get a car loan. Both are valid options.
Paying in cash
Living debt-free is the ultimate goal for some. Plus, buying a car in cash is quicker than financing. But it won’t work if you can’t pay for your car in full and up front.
Pros
- Won’t pay interest
- No dealer fees when buying from a private party
- Cash can give you negotiating power at the dealership
- Don’t have to carry comprehensive and collision on your car insurance
- More freedom since you’ll own your car outright
Cons
- Doesn’t help build credit
- May have to settle for a less reliable car
- Might need to deplete your emergency fund to have enough cash to pay
- Meeting up with a private seller with a large amount of cash can be dangerous
Getting a car loan
Getting a car loan can be a great move if you qualify for a low rate or if you don’t have enough cash on hand.
Pros
- On-time payments can help build or improve credit
- If you don’t already have one, a car loan can improve credit by diversifying your credit mix
- Monthly car payments can be easier to manage than paying cash out of pocket
- Can help you afford a bigger selection of cars
- Can help you buy a car without tapping into your emergency fund
Cons
- Interest adds up, even if you have a low rate
- Could qualify with bad credit, but the higher interest rate might not be worth it
- Late payments will hurt your credit
- Car isn’t technically yours until you pay it off
- Almost always need to carry comprehensive and collision insurance
Types of auto loans
There are several different types of auto loans. It’s best to check rates with each. Like with car insurance, every lender has its own way of calculating rates. You might get a lower rate with one type of loan than you would another.
- Manufacturer financing: Manufacturer (or captive) financing is when you get your car loan directly from your car’s maker. You could get 0% APR car deals and incentives like rebates and cash back with this option.
- Dealer financing: If you let your dealer set up your loan, then you’re getting dealer financing. This option is convenient, but the dealer has no obligation to shop for the lowest rate. Still, you could unlock lenders that only work with dealers, not car buyers.
- Bank and credit union auto loans: You might be able to get a car loan from a bank or credit union. Credit union auto loans, especially, tend to have low rates. Federal credit union rates are capped at 18.00%. Some credit unions work with rocky credit, but bank loans usually require good credit.
- Online auto loans: Whether you have good credit or bad, there’s probably an online auto loan lender out there for you. You won’t have in-person help, but getting a car loan online is usually as simple as filling out a quick form and uploading documents.
3. Shop for a car
Are you buying brand-new, used or certified pre-owned?
Buying a brand-new vehicle might be thrilling, but keep car depreciation in mind. Most models lose about 20% of their value during the first year of ownership. At the same time, you usually have to buy new to qualify for special financing through the manufacturer.
Outside of new or used, consider other priorities such as performance, style and cost of ownership. Also, remember to check safety ratings with the Insurance Institute of Highway Safety (IIHS) and the National Highway Traffic Safety Administration (NHTSA).
Once you know what you want to buy, a vehicle-comparison site like TrueCar can help you compare prices from dealers in your area.
More research is always better. I recently bought a car and I researched a lot — primarily on what kind of car to buy and how to pay for it.
I recommend starting the online research as much as six months in advance of buying, if possible. Get to know your favorite makes and models and don’t rush the test driving and rate shopping. Planning ahead lets you make the best decision without pressure.
– Jessica Sain-Baird, Senior managing editor
4. Get preapproved for some car loans and compare
One of the most powerful negotiating tools in the car-buying world is a preapproved car loan. It’s the closest thing to a car loan as you’re going to get without actually signing a contract. It shows what rate you could qualify for based on a hard credit pull.
Preapproved car loans are powerful because they let the dealer know how much you’re approved to spend. Say you’re looking at a $42,000 vehicle but you’re preapproved for $40,000. In that case, maybe the dealer will budge by $2,000 to make a sale. They might also try to beat your preapproved rate.
Aim for at least five preapprovals so you have plenty of APRs and monthly payments to compare. You can apply on many lenders’ websites. Just be sure to get your loan shopping done within 14 days. If you do, only one hard credit pull will count against your credit score.
If you aren’t ready for a hard credit hit, compare multiple offers at once with LendingTree. Our service is free and doesn’t impact your credit. Fill out one quick form to gain access to our lender network (America’s largest).
How to get a lower car loan rate
Improving your credit score is often the best way to get cheap car loan rates, but that takes time. Here are some practical ways to save on your car loan right away.
- Skip 72- and 84-month car loans. Long car loans can make a car loan look cheaper because monthly payments are lower. But generally, the longer your loan, the higher your rate. Try to stick to 60 months or less for a new car and 36 months or less for a used car.
- Add a cosigner. An auto loan cosigner has equal responsibility to the loan as you, so it’s a safety net for the lender. Late payments will affect your credit score as much as your cosigner’s, so always pay on time to avoid a damaged relationship. For best results, your cosigner should have a 740+ credit score.
- Make a big down payment. Making a big down payment on your car shows the lender that you could be more capable of handling your loan payments. In return, it may offer you a better rate to get your business. A bigger down payment will also let you borrow less money and pay less overall interest.
- Use a car-buying service. Some lenders (such as PenFed Credit Union) offer an APR discount for using its car-buying service. You might get a discount on your car, too. Car-buying services also help you compare purchase prices in your area since they’re usually linked to TrueCar.
5. Handle business with the dealer
Buying a car at a dealership is sort of like playing poker — don’t show your hand and stay cool, calm and collected. The less info you give at the start, the better.
Negotiate the sticker price before mentioning a trade-in. Some dealers mark up their prices when you’re trading in to make up for what they’re paying for your old car. And definitely don’t mention if your current car is broken down. Dealers know that a desperate buyer is more likely to accept bad loan terms.
You should also:
- Maximize your trade-in. Before you trade in, find out how much your car is worth. You can do this with Kelley Blue Book’s online appraisal tool. You could also sell your car on Craigslist. You’ll typically make more money on a private sale.
- Ask for the out-the-door sale price. Don’t focus on the cost of the car itself. Depending on where you live, sales tax alone can add nearly 10% to your final bill. Also, make sure the price includes any dealer fees.
- Consider negotiating. If you’re up for it, negotiating a car price can be worth it. During negotiations, you might learn that you qualify for a car rebate. Or you may get the dealer to come down on price to compensate for a mandatory dealer fee.
6. Finalize paperwork and buy your car
The last step when buying a car from a dealership is finalizing paperwork with the finance manager.
One of the finance manager’s jobs is to sell you add-ons like extended warranties and cleaning packages. Even if it doesn’t feel like it, these add-ons are optional, and prices are negotiable. Any extras you agree to will be rolled into your loan, which means you’ll pay interest on it.
Consider declining the dealer’s extended warranty and check prices with third-party warranty companies when you get home. If the dealer’s warranty turns out cheaper, you should be able to add it after the fact, within a certain amount of time.
Also, some insurance companies (like Allstate and Geico) offer extended warranty coverage, usually at a fraction of the cost.
Keep in mind that you will likely have to show proof of insurance before you can leave. Add or swap vehicles by calling your insurance company while you’re at the dealer. However, get quotes a couple of days beforehand to make sure you can afford your new premium.
At the end of the process, the dealer will give you a temporary tag so you can drive off of the lot. The dealer may handle the entire registration process for you, or they might send you home with documents that you must file yourself.
Frequently asked questions
If you make $1,000 a month, you shouldn’t spend more than $100 a month on your car. Generally, your transportation costs shouldn’t take up more than 10% of your total monthly income. This includes your car payment, gas, insurance and parking fees.
You’ll probably need to buy an older car with cash, watch how much you drive and shop around for cheap car insurance.
Every auto loan lender sets its own minimum income requirements. For instance, Westlake Financial (which offers bad credit car loans) doesn’t have a minimum income requirement. Loan marketplace Autopay, on the other hand, requires that you make at least $2,500 a month. Because requirements vary, the best way to see if you’re eligible for a loan is to prequalify.
There is no minimum income to buy a car in cash.
There’s no right or wrong answer when it comes to financing a car versus paying cash.
Financing a car means you’ll pay interest, but it’s not always a bad idea. Financing can help you avoid dipping too far into your savings, and on-time payments can boost your credit score. A car loan can also help you afford a more reliable ride.
Paying cash has its merits, too. You won’t pay interest and, since you’ll own the car outright, you get to choose what insurance coverage to carry. When you finance, you typically need to have full coverage (comprehensive and collision).
Promotions fluctuate, but you can find good deals by shopping toward the end of the year (the last weeks in December, in particular). At the end of the year, dealers work on making room for next year’s models. Dealerships also tend to run promotions during major holidays, like Christmas and New Year’s.
It can also be a good idea to hit the dealership at the beginning of the week, but at the end of the month. You’ll skip some chaos by going on a weekday, and dealers tend to offer deals at the end of the month so they can meet a sales quota.
One of the worst times to buy a car is during tax season. Many people have a tax refund to spend, so it’s usually a seller’s market during March and April.
If you’re buying a car from a dealer, expect to be on the lot for a few hours, if not all day. You can speed up the process (and maybe get a better deal) by coming in with a preapproved car loan instead of letting the dealer handle your financing.
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