Smart First-Time Car Buying: Budgeting, Loans, and Avoiding Scams

Buying a car for the first time relies on realistic budgeting, understanding loan options, and avoiding common dealer scams in order to ensure you make a successful and well-informed purchase. Keep in mind, it costs $12,182 annually (or $1,015 monthly) on average to own and operate a new vehicle, so it’s essential you take time before heading to a dealership or online to understand how much you can afford and the key steps involved in the purchase process. This way, you’ll successfully navigate this significant milestone and enjoy a smooth and rewarding car-buying experience.

When taking on a car loan, it’s important you’re clear on what monthly payment amount fits your budget. Loan terms — aka the length of the repayment period — are usually either 24, 36, 48, 60, 72, or 84 months. Although you may be tempted to opt for a longer term as a way of lowering your monthly payment, this can end up costing you more in the long-term since you’ll be paying interest for longer. And, in addition to monthly payments and interest, you also need to take your other expenses (namely bills and emergency fund payments) into account when determining a sustainable budget. So, be careful not to spread your finances too thin.

Ideally, follow the 20/4/10 rule — make a 20% downpayment, opt for a loan term that doesn't exceed four years, and make sure your monthly car payment is below 10% of your monthly income. This ensures that your car expenses are manageable within your overall budget.

Car loans typically come from either direct lenders — like your bank, local credit union, or an online lender — or car dealership finance offices. Car dealership offices serve as a convenient central hub for buying and financing a vehicle. So, once you’ve chosen a car, you’ll immediately move onto discussing loan options, including terms, interest rates, monthly payments, and any additional financing products or warranties offered. Dealerships often offer special promotions like low or 0% interest rates for qualifying buyers. It's crucial to carefully review and understand your options, and ask any questions needed to better clarify loan terms and conditions.

Alternatively, getting a loan from a lender means you’ll be pre-approved for a loan before visiting a dealer — this means you’ll know your budget and interest rate in advance. Financing directly through a lender may help you avoid any potential markup on interest rates that can occur when financing is arranged through a dealership.

When buying from a car dealer, be careful to avoid scams and bad deals that may compromise your financial wellbeing and leave you dissatisfied with your purchase. So, for example, you may have successfully purchased your car, only to realize afterwards: “hey, the dealership didn't give me my title”. In this case, title jumping may potentially be occurring — a fraudulent activity in which the dealer sells the car without officially transferring the vehicle's title to the buyer. Discuss the issue immediately with the dealership, and consider seeking legal advice if needed. In some cases, what looks like title jumping is really just an administrative delay, so you may still receive your title in due course.

Another scam to steer clear of is dealer markup costs. The manufacturer’s suggested retail price (MSRP) typically includes basic car preparation costs (like removing plastic coverings and adding fluids), but some dealer’s may attempt to double-charge with an extra fee (sometimes $500+ or more). Additionally, be wary of an Additional Dealer Markup (ADM), often added to popular models, as it's simply a tactic to increase the overall price and boost the dealer's profit — don’t fall for this unnecessary charge. Also, don’t let yourself be pressured into purchasing unnecessary additional services you don’t need. These extras, for example, may include extended warranties the bank supposedly requires to approve your loan. Ask the dealership for the requirement in writing, and they’re bound to back down.

Although buying your first car is exciting, the various financial aspects can also be overwhelming and require careful consideration. By devising a realistic budget, understanding your loan options, and avoiding common scams, you’ll successfully navigate this significant milestone, make informed decisions, and ensure a smooth and rewarding car-buying experience.