Guide for First-Time Car Buyers

A big step toward feeling like an independent adult is buying your own car. However, it's important to know what you're doing — and what you're buying. There are plenty of cool-looking cars with great features, but which one is right for you? And how will you know that you're getting a good deal?

This buying guide is designed to help you get what you really want out of your first car purchase. From monthly payments and loan terms to used versus new, we'll walk you through all the tough choices and get you ready to make the best decision.

How Much Can I Afford?

The first part of buying a car is knowing your limits. What's the most you should spend on your monthly car payment? Schools of thought differ on this question, but the Edmunds view is that your car payment should be no more than 10% of your monthly take-home pay if you're buying used, or 15% if you're buying new.

Not sure what that translates to in a car price? Take a look at our affordability calculator for more information.

You'll also need to factor in the cost of insurance and fuel. Insurance costs vary widely depending on driver age, driving record, vehicle type, insurance provider and extent of coverage, so make sure you get quotes from multiple providers based on all those specifics. Fuel economy figures can be found at the EPA's fueleconomy.gov website. Together these two costs should be no more than 7% of your monthly take-home pay.

How Do I Get a Loan?

When it comes time to apply for a loan, you have a few options: your bank or credit union, the dealership or a third-party lender. Dealerships tend to have better rates, but that's not always the case, so it's worth getting preapproved by other lenders before visiting the dealership to give yourself a basis for comparison. Note that if you're shopping for a used car, the lender may expect you to know what vehicle you plan on buying. Also, make sure you get all your loan applications done within a couple of weeks so there is only one big impact on your credit score.

How Long Should My Loan Be?

More and more people are taking out long car loans to make their monthly payments more manageable, but that's not always the best idea. A longer loan will lower your monthly payment, but you will pay more in finance charges and it will take you longer to gain equity in the vehicle. These days, 72- and 84-month loans are increasingly common, but we recommend 60 months or lower — especially if you're financing a used car. 

There are other reasons to keep your loan as short as possible. For example, consider how soon you might get tired of the car. If you go for a 72- or 84-month loan, by the end of it you might be ready to unload your aging ride and jump straight into a new car. But if you choose a 60-month loan, you might enjoy the car for an extra year or two with no car payments. Or go ahead and get rid of it at the five-year mark — the car is fully paid for, and you've saved the equivalent of two years' depreciation versus waiting till the end of a seven-year loan. Check out our article on how long a car loan should be for more information on loan terms.

What About the Down Payment?

In an ideal world, we'd put down 20% on a new car and about 10% on a used car, to offset the initial depreciation. But not everyone can handle that with today's car prices. If you need to make a smaller down payment, our advice is to put down as much as you can without dipping into your emergency savings. If you put down less than 20% on a new car, it may be worth looking into gap insurance. See our detailed analysis of how much a down payment should be to learn more.

Should I Consider Leasing?

If you're into the latest tech and luxury, leasing may be a compelling option. Suppose that a $400 monthly payment is the most you can comfortably afford. If you're buying, that might get you into a mainstream SUV or sedan — but if you're leasing, you can choose from a variety of luxury models. At the end of the day, of course, you don't own the car, but you also get to skip the usual maintenance and repairs, paying only for routine procedures such as changing the oil and tires. There's no objective answer to whether buying or leasing is better, but for those who don't mind always having a car payment, it's easy to see why leasing holds appeal.

What Car Should I Get?

To answer this question, consider how well the models in your price range meet your needs. How many people can they hold? How do they drive? How's the fuel economy? What safety features do they have? How much cargo can they hold?  Do they offer "must-have" features such as Apple CarPlay, a sunroof or leather seats? Our article on finding the right car for you lays out this approach in more detail. If you already have an idea of what you're looking for, our car rankings and reviews will help you narrow it down.

Test-Drive and Inspect the Car

You've decided on a car. Great! Now it's time to take a closer look. Arrange for a test drive with the dealership or private seller. Pay attention to how the car feels on the road and whether it has enough room for your family or cargo. If the vehicle is used, we recommend getting it inspected by a trusted mechanic before making the deal. This kind of inspection usually costs somewhere between $100 and $200. You can forgo the inspection if the vehicle is a certified pre-owned vehicle since it will come with a limited warranty.

Settle on a Price and Close the Deal

If you're searching for new vehicles on Edmunds, you'll see that we list the suggested price to pay on each inventory listing. If you've already obtained a dealer quote, use Edmunds Price Checker tool to help determine if you're getting a fair price. For used vehicles, Edmunds has a "deal rating" that lets you know how a vehicle is priced relative to its market value. Use this data to help with the negotiation. Once you've agreed to a price, and if the seller is a dealer, you'll want to ask about any other fees or add-ons that haven't yet been disclosed. This means extended warranties, maintenance plans and so forth. Be sure to ask for the "out-the-door" price, which factors in all the taxes and fees and gives you your final monthly payment.

Even after all that, you should still carefully review the sales contract. You don't need to read the whole document, but make sure it's not filled with unknown charges or terms. Remember, there's no turning back once you sign.

That's It. You're Done!

Take the time to relax and drive. Enjoy your car. You've learned a lot, and you'll be that much more prepared for your next automotive transaction.