How to Buy a Car - Investopedia

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Buying a car can offer some advantages over leasing a vehicle but if you've never purchased a car before, you may not know what to expect. There are different ways to buy a car as well as different ways to pay for it and of course, it's important to make sure that the purchase is legal. If you're gearing up to buy a car for the first time, here's a closer look at what's involved in the process.

Key Takeaways

• Buying a car can be preferable to leasing a vehicle if you'd like to have ownership of what you drive and you don't want to deal with mileage or wear and tear restrictions.
• There are different ways to pay for a car purchase, including cash, auto loans or even a credit card.
• When buying a car out of state, it's important to ensure that you're registered the vehicle properly so it's legal to drive.
• If you're buying a new or used car from a dealership, the dealer should take care of getting the vehicle registered for you.

How to Buy a Car Basics

When buying a car, there are a few preliminaries to cover to make sure you're prepared for the purchase. That includes:

• Calculating your car-buying budget
• Deciding how you'll pay (i.e. cash or financing)
• Estimating what you'll put down if you're financing the purchase
• Deciding what type of car you want to buy
• Where you want to buy a car from (i.e. private seller versus dealership)
• Knowing what you can (and can't) negotiate when making the purchase
• Understanding what's required after the purchase to register and insure the vehicle

If you plan to finance a vehicle purchase you'll also want to check your credit scores and reports. This can help you gauge what type of loan terms you're most likely to qualify for. From there, you can compare the best car loan rates online to find the right lender. Sources: L1, L2

Tip

Consider getting auto insurance quotes online as well, which can help with calculating your car-buying budget.

How to Buy a Car Online

Traditionally, if you wanted to buy a car you'd head out to a car lot and start kicking tires. But today it's easier than ever to shop for and buy a car online. And that may be preferable, given the social distancing requirements associated with the COVID-19 pandemic.

There are different avenues for purchasing a car online, depending on whether you want to buy a new or used vehicle and whether you'll pay cash or use financing. But generally, you can explore these avenues for buying a car online:

• Facebook Marketplace
• Local Facebook bargain groups
• Craigslist
• Online auto trader magazines
• Car-buying concierge services
• Dealership websites

Any of these options could be suitable if you're looking for used vehicles to buy. But if you're interested in buying a brand-new car then you may need to head straight to the dealership website or use a concierge service.

When buying a car online, keep in mind that some parts of the process may require you to go offline. For example, you may want to test drive the vehicle to see how it runs or have it inspected by a trusted mechanic. But other things, such as negotiating a sales price, discussing add-ons or extras such as a warranty package, and applying for a car loan can be done virtually.

Tip

Concierge services like Carvana allow you to shop for used vehicles online, apply for financing, complete the purchase and have the vehicle delivered to your door, in exchange for a fee. Source: L3

How to Buy a Car With Cash

Buying a car with cash offers some advantages. For one thing, you don't have to worry about a monthly loan payment. For another, using cash to buy a car means it's easier to stick to your original budget.

If you're interested in buying a car in cash, it's important to know how much you can afford to spend first. Then, you'll need to know where the money is coming from. For instance, this could be funds you have tucked away in a high yield savings account, money you anticipate getting from a tax refund or stimulus check or cash you'll receive by selling something you own.

Once you have cash at the ready, the final step is negotiating the purchase of a vehicle and arranging for payment. Paying in actual cash may only be a possibility if you're buying a car from a private dealer and even then, using a certified check or cashier's check may be preferable. Official bank checks help to create a paper trail documenting the purchase and they're more secure since cash could be lost or stolen.

Important

If you plan to pay cash to purchase a vehicle from a private seller, consider meeting in a public place to finalize the sale to minimize safety concerns.

Can You Buy a Car With a Credit Card?

If you don't have cash on hand to buy a car, you could choose a car loan instead. But you may be wondering if you can use a credit card to make the purchase.

The short answer is possible, depending on the card you plan to use, your card limit and what the card issuer allows. It's possible that you may be able to charge the down payment to your card or the entire vehicle purchase if you have a high enough credit limit. Source: L4

So what's the advantage of using a credit to buy a car?

You may be able to earn rewards on the amount you charge, which could save you money. For example, say you have a rewards card that pays 1% cashback on purchases. If you were to charge a $10,000 vehicle purchase you could earn $100 back in rewards.

What you have to consider, however, is the trade-off you might be making when it comes to interest. If you have good credit, then you may be able to qualify for a car loan at a lower interest rate than what you'll pay for credit card purchases. If the card also has an annual fee, then the costs involved could easily outweigh any benefits you'd get in terms of rewards or convenience.

Note

If you're thinking of using a credit card to buy a car, first contact your card issuer to see if this is possible and what interest rate you'll pay for the purchase.

How to Buy a Car Out of State

It's possible that an online search for a new or used vehicle may take you of your home state. While there's no law against buying a car out of state, there are some requirements you may need to meet to ensure that the purchase is legal.

For example, as the buyer, you'll pay sales tax on the purchase but it's important to know which state this is paid to. In most instances, you'd pay sales tax to the state in which the vehicle will be registered. Depending on where you live, you may also pay local taxes as well. Source: L5

You'll also need to know what's required to register and insure the vehicle in your home state. This can involve paying registration fees to the Department of Motor Vehicles, obtaining license plates, completing a safety inspection and getting at least the minimum amount of liability coverage required under state law. Sources: L6, L7

All of this happens once you get the vehicle to your home state. One more thing you'll have to factor in when buying a car out of state is how you'll get it back. Depending on the distance involved, you may be able to pick it up yourself or you may need to pay to have it transported to where you live.

Important

Failing to register a vehicle, insure it or get a required safety inspection could constitute a traffic violation and result in fines or penalties.

How to Buy a Used Car From a Dealer

Buying a used car from a dealer involves many of the same steps already outlined here. For instance, you'll need to decide what type of used car you're interested in, how much you can afford to spend on monthly payments, what you're willing to put down and whether you plan to seek financing to pay for your purchase.

If you're interested in financing a used car, you'll also have to decide whether to use the dealer's financing or find a lender on your own. Dealership financing can be convenient but it doesn't necessarily guarantee that you'll receive the best terms. "Buy here, pay here" financing, for instance, is designed for people with poor credit and it can often be much more expensive than traditional used vehicle financing.

When buying a used car from a dealership, take time to do a visual inspection and complete a test drive of the vehicle. You may also want to have a mechanic look it over to determine whether there are any major issues present. If the dealership offers a CarFax report, it's also helpful to review that thoroughly so you're aware of whether the car has been in an accident or suffered major damage at some point.

If you know what type of vehicle you're interested in, do some research to get an idea of what it's worth. You can then compare that to what a dealership is asking for a used car to get a sense of whether the price is fair.

Tip

If you're offered a warranty on a used car through the dealership, read the fine print as coverage options may be more limited compared to what you might get with a new vehicle.

Do Dealerships Register Cars for You?

Registering a new or used vehicle you've recently purchased can be time-consuming and you may be wondering whether this is a service the dealer provides for you. The answer is, it depends.

Some dealers may offer you a temporary registration and handle the rest of the paperwork filing for you. This means you can legally drive the car off the lot the same day you purchase it and your permanent registration will come in the mail. Others may require you to register the vehicle yourself before you can leave with your new-to-you car.

Taking that into account may influence where you decide to purchase your car from. And remember that if you're purchasing a vehicle from a private seller, handling things like paying sales tax, registering the vehicle and getting tags is entirely your responsibility.

Sources:

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