Among the many milestones that come with being a young adult, buying your first car is a big one. Sure, it's exciting...but it's also pretty intimidating, because your options seem limitless. (And those price tags are so high!) Luckily, buying your first car is not as hard as it seems. You just need to arm yourself with the right information.
Whether you decide to buy a new or used car, take the same approach: do your research and know your budget.
Finding the right car
Even if you're only looking for The Cheapest, being as informed as possible is your best defense against paying too much for a car, not to mention getting something decent and road-worthy.
Use the consumer reports provided by websites or magazines to determine just how much the cars you’re considering are worth. “You better know the price you should be paying,” says Jeff Ostroff, author and founder of CarBuyingTips.com. “Use a folder and stuff all your research in there. All of their scams are going to be put to a skid.”
Though there are many car search websites to choose from, some perennial favorites like Autotrader, Kelley Blue Book, Cars.com, and Edmunds.com are usually pretty dependable. Relative newbie AutoTempest brings together a bunch of used car sites' findings too. You’ll find payment calculators, reader reviews, and industry reports, making it easy to find the most fuel-efficient/safest/most popular car in your price range. Then it's a matter of turning on those location parameters and tracking down a car in your area!
So, what car should you buy? It depends on your budget (see below) and what you'll be primarily using the car for. If you have a side hustle doing yard work, you can probably justify a truck. But if you're just driving from your apartment to your job 10 miles away, something basic will do. And it's a smart move to prioritize high safety ratings.
Never forget: a car is, for the most part, a necessity, not an investment. It starts depreciating in value the moment your drive it off the lot! So you should be good n' practical in your car-buying choices—at least for your first car. Low-maintenance, dependable cars like the Toyota Camry and the Honda Civic make good first cars and are often worthy purchases, even when used. Provided you change the oil and perform regular maintenance, both can last as many as 300,000 miles. If you average 15,000 miles per year, that’s 20 years!
As for new versus used cars, again, it really depends on what you can afford and if/how you want to finance, as interest rates vary for new and used cars. Going the used route, you also need to get a vehicle history report, available through the dealer or websites like VehicleHistory.gov (the National Motor Vehicle Title Information System). And really pay attention when you're reviewing your potential car’s history. If it was in the shop six times in one year for the same problem, then perhaps you should reconsider. It also doesn’t hurt to read up on your state’s “lemon laws,” which pertain to excessive vehicle repairs.
Your car-buying budget
Your total car-related expenses (including loan or lease payment, insurance, and any savings for repairs) should be no more than 15%–20% of your monthly budget, assuming you're out in the "real world" and paying rent and other expenses. If you're still in college and lucky enough to have your room and board covered, you may be able to allocate a bigger percentage of your budget to car expenses. Of course, if you're still in class, you're probably working and earning less too. Just make sure you have a clear picture of what you're earning and spending every month. That's the only way to determine your true car-buying budget.
Also, as you're probably aware, there’s a lot more to buying a car than paying the monthly bill. Obviously there’s gas, and with a fluctuating market, you should make allowances for spiking fuel costs in your budget. Then there’s oil changes, new wiper fluid, a broken headlight, etc. You also need to replace your tires every five years or so. Four new, high-quality tires cost about $600. You should set money aside for bigger repairs as well. Also, will you be responsible for taxes? Registration fees? And the big one: insurance? Make sure you factor these things into your budget as well.
At the dealership
When you’re working with dealers, keep in mind that they want to get you excited about a car, to fall in love with their potential sale. “But you have to look at a car as a piece of metal,” says Brian Munroe, author of Car Buying Revealed: How to Buy A Car and Not Get Taken for a Ride. “You can always trade it in down the road.” Bring a parent or friend along to act as the voice of reason, he advises, and don’t buy anything on your first trip to the dealership. “Have the ability to walk away.”
And whatever you do, always, always, always stick to your car-buying budget. You came up with that number in the clarity of your own home (or dorm). Don't let your excitement in the moment—or a persuasive car salesperson—carry you away.
You need credit
Unless you're paying 100% in cash (and if you are, high five to you, you little saver!), you will need to finance your car. And your greatest asset when financing your car—when buying most big-ticket items, really—is your credit score. “Make sure your credit is clean before you apply. Make sure your financing is straightened out before you even get to the dealer,” says Ostroff.
As a young adult, you might have some credit history, however short. But if you don’t, it doesn’t take long to build some. “You never want to make a car loan your very first type of credit,” says Ostroff. Instead, have at least six months of credit history behind you before you go car shopping. You can start with a credit card from your bank or a gas card from a local gas station, but be wary of store credit cards, which generally have high interest rates (18%–22%). Pay your bills on time and in full every month, and you will soon have a solid credit score.
“With first-time buyers, you have to go through a little bit more of a process,” Munroe says. When you’re finally filling out the paperwork at the car dealership, you will need to prove you’re employed, either through a letter of employment (if you have yet to start) or with a pay stub. Unfortunately, you’re not going to get the best rates out there because you are automatically considered “higher risk” as a young person—remember, you only have a limited credit score to back you up. However, some car companies offer special discounts or lower interest rates for recent college graduates. Just be aware that anything negative on your credit score can potentially knock you out of the program.
If you’re saddled with monthly student loans payments, you may actually have an advantage here. They show you are responsible with installment payments, the same kind used with any car financing (assuming, of course, you've been paying them on time...). This makes you a more reliable buyer than recent grads without any loans.
Buy or lease?
Leasing can be oh-so-tempting, because it makes shiny new cars that much more accessible, especially to recent college grads on a tight budget. However, though leasing may make getting a new car more accessible for you, it's only ideal for a small group of people. “You really need to examine your future three years out before you sign a lease,” Ostroff says. A lease is a contract, and if you suddenly decide it’s not the car for you...too bad.
For example: not all dealerships allow you to move to a different state with your leased car (due to taxes), making relocation a problem. You are also given a set amount of miles to drive, such as 12,000 a year for three years. If you drive more than that, you need to pay for the overage—by the mile. You can terminate your lease early, but you will have to pay a pretty sizable fee, sometimes thousands of dollars. Make sure you read the lease very carefully and iron out details with the dealer before you sign.
If you still think leasing is the best option for you, then lease away. If not, finance the car. Since the Great Recession, many online lenders have stopped offering auto loans, making financing your first car a little more difficult. But there is still your neighborhood bank or credit union. Ostroff recommends the latter. “Credit unions tend to be a lot kinder to you than your bank; you tend to get favorable rates,” he says.
Whether you end up taking out a loan from a bank or financing through the dealership itself, having a sizable down payment will always help offset the interest you'll pay over time. Save up about 20% of the car’s price, at least. “Be conservative, know what you can afford, and don’t overspend,” Munroe advises. “Follow that and be strict with it.”
Driving it home
It’s not all paperwork and finances—shopping for your first car will be a fun experience too. Soon enough you will be test driving, checking out sound systems, and deciding whether you’d look best in cobalt blue or fire engine red. There are a lot of cars out there, and you are guaranteed to see plenty that you love and can afford.
Need more financial advice? Check out our content on all things money.