Financial planning for first-time car buyers

Before you rush out and buy your first car, it’s a good idea to learn about all of the costs involved with car ownership first. Here at Plenty, we help modern couples invest and plan their future together including saving for your first car. Today we’ll teach you:

• How to buy a car in simple steps

• Pros and cons of car leases versus loans

How to buy your first car step-by-step

Buying your first car is an exciting right of passage, but it can also feel a little overwhelming if you don’t know what to do. No need to worry, we’ve got you covered. Here are some simple steps we suggest you take once you’re ready to get you behind the wheel of your own car. 

1) Get pre-approved for a loan.

Many first-time car buyers choose to get pre-approved for an auto loan before they start seriously car shopping. This way, you'll know exactly how much you're approved to spend and can pull the trigger when you find something you love. We recommend comparing auto loans from multiple lenders so you can choose the lowest rate.

• Tip 1: Banks and credit unions typically offer better rates than car dealerships. 

• Tip 2: First-time car buyers who have healthy credit scores and can pay a 20% down payment or more for the car helps with getting access to the lowest interest rates. The higher your FICO credit score, the lower the interest rate.

2) Shop around and test drive.

Once you have secured a car loan, it's time to shop for your car! Remember, just because you can afford a luxury car doesn’t mean it’s the best use of your hard-earned money. Know your budget and bring your list of must-have features and see which models fit the bill.

• Tip 1: The five car manufacturers with the lowest annual maintenance costs are Toyota, Mitsubishi, Honda, Mazda, and Nissan (Source: CarEdge, 2023).To save money on future potential car ownership expenses, you may want to stick with these brands.

• Tip 2: If you’re planning to hold on to your car for a few years and then sell it, you may want to look at cars that best maintain their value, such as Volkswagen, Subaru, Honda, Mazda, and Toyota (Source: CarEdge, 2023). Ideally, you own a car with the lowest annual maintenance and the highest resale value. Luxury brands such as Range Rover, BMW, and Mercedes are attractive. However, if you’re trying to build wealth, luxury cars are the most expensive to maintain. 

• Tip 3: Test drive. Every car feels different on the road and in a way they have their own personalities, so it’s good to make sure you two get along. And if you’re buying used, we recommend to check closely for any defects or issues that could get worse over time. You can even ask to get a used car inspected by a mechanic before you purchase it.

3) Negotiate on price.

While some costs, like taxes, aren’t negotiable, you may be able to haggle a bit to get the overall price of a car lower than its sticker price.

• Tip 1: Know the MSRP (“Manufacturer’s Suggested Retail Price”) of any car you’re interested in buying. While the dealership may charge more than this, it’s a good benchmark to use in negotiations.

• Tip 2: When you speak with a car salesperson, there’s no need to reveal the details of your budget. We suggest you focus on the overall cost of the vehicle and lowering that amount to save money. Remember, car dealerships can almost always go lower than the advertised price.

• Tip 3: Create a reason to ask their manager for a discount: If you've picked the car, visit two locations of the same car ie. Toyota Place A and Toyota Place B. Ask them each for pricing and don't be afraid to say the other place is lower.

• Tip 4: Create urgency: tell them you're ready to make a decision by X day. That gives them a reason to speed up the discounting. 

• Tip 5: Be ready to walk away. Once you’re out the door, the car salesperson knows the likelihood of selling you a car goes way down. As the car buyer, the less you care about wanting to buy the car, ironically, the better deal you’ll likely get. 

4) Buy the car and jingle those keys.

If you got a loan from a bank or credit union, you can get a cashier’s check made out to the dealership for the final price of your car. Simply hand it over, sign some paperwork, and drive home with your new car! With all your excitement though, don’t forget to look both ways on your way out.

Is it better to lease a car or buy one with a loan?

A common decision many first-time car buyers make is whether to lease a car or purchase one with a loan. Here’s a simple explanation of both options along with some pros and cons of each.

Leasing a car

A car lease allows you to drive a new vehicle by making monthly payments for a set period of time (often 2-4 years), instead of buying the car. At the end of the lease, you return the car rather than keeping it or paying off a loan. 

Down payments are usually not required on car leases unless you have bad credit. However, you may have to pay a security deposit, acquisition fee, and the first month’s payment up front. 

Like renting an apartment or a house, leasing a car requires a security deposit at the beginning of the lease term. This deposit serves the same function as it does in a house or apartment lease in that it covers any damage you may do to your leased car. If you return the car free of damage, you’ll get your entire security deposit back. This fee is usually equivalent to the cost of one month’s lease payment.

Depending on the cost of the car, an acquisition fee could range from $600 - $1,000 according to Cars.com. Can you believe it? 

Lease payments are typically cheaper per month than an auto loan since you are essentially renting the vehicle. However, leasing limits mileage driven and you don't build any equity in the car over time like when financing a purchase.

Is leasing popular? With the average new-vehicle price increasing to over $49,000 and high interest rates post-pandemic, consumers are leasing fewer cars according to Forbes. It’s simply less affordable now to lease a car. 

As a result, car leases have dropped from roughly 33% of all transactions down to only 17% today. Even if you don’t plan on leasing a car, it’s helpful to understand how car leases work.

You could also lease a Certified Pre-Owned car to save money. Just make sure if you lease a used car, you have warranties in place to cover any potential future maintenance costs. 

As a first-time car buyer, here are a few pros and cons of leasing a car. 

Car lease pros: 

• Lower monthly payments. Some drivers prefer leases because they can afford to drive a more expensive car than they could buy.

• Drive a new car every few years. Leasing is a great way to access the latest technology and features every few years because you can trade in for a new model when your lease is up.

• Walk away when it’s done. When a car lease expires, there’s no obligation to purchase it, sell it, trade it in, or renew the lease. You can simply return the car and walk away.

• Warranty protection with little to no repair costs. Most manufacturers offer limited bumper-to-bumper warranties with terms like 3-year/36,000-miles, 4-year/50,000 miles, or 5-year/60,000 miles. These types of warranties usually cover all repairs except for worn parts such as brake pads and tires (Source: Marketwatch, 2023).

  
  
  

Car lease cons:

• You don’t own the car. When you lease a car, you simply do not own it because it still belongs to the dealership. This is why a car lease is essentially like renting.

• Mileage restrictions. Car leases are less favorable to drivers who put on a lot of mileage each year since leases often come with mileage restrictions. If you exceed them, it can get quite expensive.

• Wear-and-tear penalties. When you return a leased car at the end of the term, you may owe fees for excessive wear-and-tear, modifications, or damage.

• Extra charges and fees. If you need to break a lease before it’s set to expire, you could face costly early termination fees. There may also be disposition fees, which are meant to offset the costs of putting a used car back on the market. And if you get into an accident or the car is vandalized, you could face charges for excessive damage when you return it.

• More expensive long term. Between fees, mileage restrictions, and not being able to sell the car when you're ready for a new one, you may end up paying more in the long run compared to buying a car outright.

Car Loans

A car loan is a type of loan specifically designed for purchasing a new or used car. When you buy a car using a loan, you work with a lender to borrow enough money to pay the dealership for the car outright.

In other words, the lender gives you the requested amount for the car's total price, while you agree to pay back the cost of the car plus interest over an agreed upon time period (usually 3-6 years). 

Once all loan payments are completed, you then own the car, unlike with leasing. Monthly payments on a car loan tend to be higher than lease payments because you are paying off the entire car price, but equity builds with each payment. 

Be aware that if you miss payments and default on an auto loan, the car can be repossessed. Car loans lead to vehicle ownership eventually but require paying the full car price plus interest charges over time.

To summarize, a car loan provides financing to purchase and take ownership of a car through monthly payments for 3-6 years.

Car loan pros:

• Build equity and ownership. Once you pay off a car loan, it’s yours to keep, sell, or do as you please.

• No mileage restrictions. You can put on as many or as few miles as you want and don’t have to worry about any overage fees.

• Customize to your heart's content. Since you don’t have to return your car to the dealership after you pay off a loan, you can modify the car however you like indefinitely.

• Establish credit history. Part of building a strong credit score is having a history of good credit. Getting a car loan and demonstrating the responsibility of making regular monthly payments can help increase your credit score over time.

• Access lower interest rates. Car loans usually offer lower interest rates than leases.

Car loan cons:

• Higher monthly payments. Monthly payments can be higher because you are paying off the entire purchase price of a car over time compared to just using a car like a rental with leasing.

• Must pay for the entire car value. A car loan requires paying the full car value plus interest charges, unlike leases where you just cover depreciation costs.

• You may need a larger down payment. Depending on the lending terms, you may have to put more money down versus a lease.

• Stuck with the car after the loan ends. Once a car loan is fully paid off, you retain ownership rights on the car, so are "stuck" with the used car after making the last payment.

• You're responsible for maintenance and repairs. Unless you pay for a warranty, you will be on the hook for major repair costs on an aging vehicle.

• Potential repossession. If you default on your loan payments, the lender can prompt legal repossession of the car.

• Upside down on your loan. You could end up owing more on your loan than the car is worth. In the event you have to sell the car, you may have to come up with cash to sell your car. 

To recap, leases can have lower short-term costs but you never own the car. Loans tend to have higher monthly payments but establish eventual ownership rights after the loan is paid off in full. 

Each option has trade-offs to weigh based on budget, driving needs, and lifestyle.

Create a car savings goal with Plenty

Ready to start saving for your first car? Create a car goal with Plenty, it’s easy! We’ll ask you a few simple questions about what you're looking for. 

And we can even help you estimate how much the car you're looking for will cost and help you save for a down payment if you're looking to finance, or the full amount if you’re looking to buy with cash.

Whatever path you take toward buying your first car, we can help you make it happen.

Start your free trial with Plenty today.

  – Team Plenty