The Financial Nitty-Gritty: Buying a Car

Ahh, buying a car — one of the most exciting and financially stressful things you’ll do as an adult. No matter who you are, buying a car will most likely be part of your life in young adulthood — and, if you know a little bit more about the details and the process, you may be able to save some money and ensure that you’re making the right financial decision.

According to Fortunly, Americans owe more than $1 trillion in car loan debt — and the average car payment consistently increases year to year. More than 85% of new cars are financed, the average American owes almost $30,000 on their car loan, and millennials — specifically borrowers under 30 — are 50% more likely to default on their car loans than those older. It’s no question that buying a car is a common financial pressure, especially for young people. Here’s what you need to know.

Before you walk into the dealership

First financial rule of buying a car? Do. Your. Research. Before you ever walk into a dealership, do your due diligence to determine what you can afford, what features you want, and what your non-negotiables are. Our biggest recommendation? Work through this pre-dealership checklist: 

  • Understand financially what you can afford and what you can’t, and stick to it. This car payment calculator is a great resource when it’s approached using a budget as a guide. (Psst — remember that the sticker price on a car can always be negotiated, and that things like tax, title, license, and extended warranties will add to a car payment — so be careful!)
  • Make a list of your non-negotiable car features, and hold yourself accountable to them AND to the price you decided upon. No matter how nice a car seems, stay true to what you want — you’ll regret buying a fancy new car that doesn’t have all of your desired features over an older, more loaded car that does.
  • Consider buying a used car over a new one. New cars instantly lose some value when driving off of the lot, and a certified pre-owned car can often be a much better financial decision.
  • Get pre-approved for a car loan (if you’re taking one out) before ever visiting a dealership. This gives you greater parameters for negotiation, protects you from high dealership-provided interest rates, and may save you money in interest down the road.
  • Research trade-in value. If you’re planning on trading in an existing vehicle before purchasing your new one, be sure to shop around. A dealership often won’t offer as high of a trade-in value as a business like CarMax or Carvana, so get multiple quotes and offers so you can maximize your trade-in.

Down payment or no down payment?

Depending on who you ask, a car down payment can be a great idea or an unnecessary one. Depending on the price of your car, a down payment may lower monthly payments or interest rates, and may give you a better chance of loan approval. However, there is also a benefit to paying your so-called down payment directly to the principal of your car loan. 

Choosing whether or not to put money down at signing is up to you, but it is a good idea to have some money saved up regardless of whether or not you put it down or pay it directly to the loan. 10% of the car loan is typically a good rule of thumb when it comes to a smart down payment, and you can go up to 20%.

What else to know about buying a car

The best financial advice we can give you while you work on purchasing a car is to remember that you are the one driving the car — no one else. Car payments can be a massive drain on your financial health, and cars have also long since been seen as a status symbol. Before you ever walk into a dealership, do the work with yourself to make sure you’re making a smart financial decision, as well as a smart life one. Remember: it’s just a car.

At CIFS, it’s our job to help millennials (and everyone else) access information and advice to help them improve their financial health and do so equitably. Whether you’re a financial services professional or not, we’re here for you. Access more resources here.