Whether you crave the freedom to pick up and go, or just want to simplify things like getting to work, when you’re ready to buy a car, you may be eager to hit the gas on the process and buy the first one you see.
You may want to slow down. (Or pump the brakes, but we’re trying not to overdo it on the car puns.)
Why? For one, the car you snap up is probably one you’re going to have for a while (average ownership is about six years), so you want it to fit your needs and lifestyle. And being too hasty could literally cost you if you end up with a car that eats up more cash than you expected.
OK, so where should you start? With colors? Options like a sunroof? Scouting out dealers?
You might be surprised to find out that these things come later. First, you want to have one of these two items handy: a recent bank statement or a paycheck. We explain how these come into play (and what steps to take next) below.
Before you dive into four-wheeled freedom and debate the ideal number of cup holders, here are two money-related things to think about:
To figure out what you can afford for the sticker price and maintenance, you can use your net income as a guide. If you don’t know your net income off the top of your head, you can calculate it by looking at your recent paystub. And if you’re earning about the same amount as you did last year, check out last year’s tax return for your annual net income.
Here’s how net income comes in handy:
It’s generally recommended that the sticker price of your future car come to around 10% to 15% of your net annual income. So if you bring in $100,000 after taxes, ideally you wouldn’t spend more than $15,000 on the car.
Cars can eat up money. And the spending, as you’re probably aware, doesn’t stop with the sticker price. There’s also insurance, gas, maintenance and, inevitably, potential repairs to pay for. Guidelines suggest that you should budget to spend at most 20% of your annual net income on all car-related costs.
These numbers give you a general sense of how much you can spend on a car. But there are a few more things to check off before you start chatting with car dealers.
This part of the car hunt is like Goldilocks – you don’t want to buy a car that’s too big or too small, has too many or too few features, or requires so much help from a mechanic that it spends more time in the shop than on the road.
Focusing on why you’re buying a car can help you zero in on what you really need. If you’re only planning on driving a few miles and then parking, you may not need or want massive cargo space and the ability to go off-roading. Now, if you’ve got a bit of a commute, plan to use the car for road trips or to cart people (or stuff) around, you may want something roomier and more comfortable, with great gas mileage.
Something else to keep in mind: Kids – and in particular, their car seats – take up a surprising amount of space. So if an expanding family is one of your reasons for getting a car, your need for space might actually be bigger than you realize.
You may also want to consider your surroundings. Just as driving a too-light car in a windswept area may not be not ideal, trying to park a beast-sized vehicle on city streets could get tiresome pretty quickly.
You may feel like you just know which car you want. Maybe it was an incredible vacation rental, or you drove a friend’s car and it seemed like the perfect car to buy.
You may be right, and your search for the perfect car may end there. But it could still be a good idea to compare a few other options. Your research could highlight things that may not come through with a few drives, like how often this particular model breaks down (if at all).
It could also help you understand if features that may feel like an “extra” are actually standard. For us, one surprise was learning that rearview cameras have been required in new cars since 2018.
It’s also a good idea to check out some reviews and customer feedback. (Friends can also be good resources.) Some things to look out for: car reliability, how the car “drives,” and if the features that may look great on a dealer’s site are as good as they claim, fall short or come with drawbacks.
You may be able to pay less than the invoice price and/or less than the MSRP.
You can check out car-only sites for information, and some news sites review cars like they do movies – they compare, praise and gripe. You can also look at resources like Consumer Reports; their focus is testing and analyzing products.
While you’re digging into the details, make a note of the prices. You’ll probably see ranges that include Manufacturer’s Suggested Retail Price (MSRP). You may even see something called a “market value” or suggested price. It could be worth jotting these down; they could help with negotiations later on.
Good to know: Although dealers may want to use the MSRP as a starting price and work down from there, the recommendation is to have a look at the car’s invoice price. In theory, the invoice price is what the dealer paid for the car. In reality, it’s an estimate and the dealer may have paid less. Regardless, the recommendation is to use the invoice price for reference, and you could find it a few ways: you could ask dealers if they’ll share it and you could also look for invoices online to get a sense of what dealers may have paid. Depending how heated the demand is for cars – and specifically the car you’re interested in buying– you may be able to pay less than the invoice price and/or less than the MSRP.
If you’re chatting with a salesperson, you may feel pressure to buy a car right after test driving it. So we say this: Take. Your. Time. Try out different cars. This way you’ll get a sense of what might set them apart – how they take turns, handle speed changes and how smoothly they move or brake, among other things. This is literally the touchy-feely part of the car buying process, and it’s very important that you choose a car you can confidently drive (and park).
So what should you look for in a test drive? JDPower suggests using the drive to check out things like blind spots and what visibility’s like on all sides of the car. Another rec: See how each car fits with your life. For example, if you have small kids, Edmunds suggests bringing a car seat with you to see if it fits.
If a car loan is part of your plan, the general recommendation is to get preapproved for a loan before you meet with a dealer.
There are a few benefits of being preapproved:
With some purchases, long term loans make sense (30-year mortgage anyone?), but when it comes to cars, our research shows shorter – as in 60 months or fewer-- could be better.
These are three reasons:
Lastly, if it feels like you need this amount of time to put monthly payments in reach it could be worth reassessing whether the car fits with your finances; you’ll pay less per month in the short term but a lot more interest overall.
Good to know: Some personal loans, like the ones offered by Marcus, cannot be used to finance a car. It's a good idea to check with your lender to see what rules may apply.
Paying in cash may not be a bad idea, but it could be worth weighing the pros and cons first.
Some benefits are pretty clear: If you pay in cash, there’s no nagging monthly payment to budget for and you just need to cover costs like gas, insurance and repairs. When you pay cash, you may even get a lower price because the dealer gets money up front.
But you may want to reconsider using cash if it means taking a bite out of your emergency fund (or savings you rely on for unexpected expenses); being without a financial cushion could be risky.
Guidelines suggest that you should budget to spend at most 20% of your annual net income on all car-related costs.
If your emergency fund is solid, you could check in on your retirement and investment accounts and see if those could be topped off to meet your financial goals, before you use the cash to buy a car.
Lastly – and maybe surprisingly – you may get a better deal with a loan than if you pay cash. Obviously, you’ll want to run the numbers, but dealers could offer rebates and an APR that’s low enough that you could pay less than if you used cash. To figure this out, you want to calculate how much interest you’d pay over the life of the loan, subtract any cash rebate you may get, and see if you come out ahead.
Once you know your budget, have a sense of your financing options and know the car you want to buy – it’s time to check out dealers.
For those of us who don’t really like to negotiate in person, or just like to shop for things from the couch, buying a car online could be a comfortable option.
It’s not yet clear if you could get the same amount shaved off of a car’s price as you would in person – online car shopping is still in its early days.
One perk of in-person car shopping: If you go to a dealer (or two or three) you can compare and contrast several cars at once, and take a few out for a spin. If your goal is to do everything at home, the process could take a little longer, since some dealers may only be able to deliver a single car to your door. Or a test drive could require buying a car and then asking for a refund if you’ve changed your mind, depending on the site’s policy.
Phew, right? There’s definitely a lot to think about when shopping for a car. But the groundwork could be worth if you drive off with a car that fits your lifestyle and your budget. Then, once you have your keys, insurance info in the glove compartment and a destination, there’s one more thing left: buckle up and enjoy your new wheels.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
Join our Marcus social media community, where we share content and inspiration to help improve your financial health. See you there!