For many, buying a car is a rite of passage. It's often considered a symbol of responsibility and adulthood. But it’s also a major financial decision – cars don’t come cheap these days, and the cost of insurance, fuel, and maintenance are sure to leave a substantial dent in your budget.
As such, buying your first car requires a ton of research and preparation. To help you out, we’ve outlined the eight steps on how to buy your first car, from deciding between car financing options to tips for securing the best insurance plan.
1. Understand Your Finances And Credit
Before buying your first car, make sure to get your finances in order. Like we said, buying your first car is a major financial decision. You need to be prepared for all the costs that come with buying the first car – and we aren't just talking about the purchase price.
When you purchase a car, you have to compute for the following costs:
- Dealership fees: This may include pre-delivery inspection fees, sales tax, and administrative fees for processing your purchase.
- Down payment: It's always a good idea to pay a higher down payment on a car loan, as this can reduce the cost of your monthly payments and your loan term. Remember that new cars depreciate fast, so the shorter your car loan term, the more money you'll save in the long run.
- Monthly interest: If you're financing a car payment through a loan, you'll need to take interest in consideration too. Note that your credit score affects what kind of interest rate you'll get. More on that later.
- Fuel cost: Many first-time buyers forget that it takes money to operate and maintain a car. Figure out how much you're likely to spend on fuel per month by evaluating how often you might use your car and the distance you're likely to cover.
- Toll, parking, and fines: Another cost first-timers tend to forget is everyday fees like toll and parking, as well as potential fines for traffic violations. Be sure to set aside a budget for each one.
- Repairs and maintenance: Cars will inevitably break down, no matter if they're second-hand or brand new. Plus, they need to be maintained regularly too; with oil changes and tire replacements being among the most common types of maintenance.
- Title and registration: Vehicle permits and licenses vary depending on factors like the car's age and make or model.
- Insurance: Auto insurance is mandatory across Canada, so this is something you can't just opt-out of. In places like Ontario, insurance can cost up to $1,500.
Aside from computing the aforementioned costs, you should also make sure that you've got a good credit score. Having good credit makes you more trustworthy (or creditworthy) in the eyes of banks and lenders. This means you'll be more eligible for loans with low interest and longer terms since you don't pose as much risk as someone with bad credit.
2. Set The Right Budget
There are several budgeting "rules" and tips you can follow to make sure that you don't end up in the red. Firstly, when it comes to setting a down payment, try to put down at least 10 to 20 percent to minimize what you'll have to put out monthly.
Next, be sure not to spend more than 10 percent of your monthly interest on transportation. This might be difficult if you live a ways away from your workplace, or if your work requires a lot of travel that you'll need to cover out of pocket. At this point, you should be looking at fuel-efficient vehicles or multimodal commuting, wherein you only use your car for a segment of your daily commute.
When it comes to deciding how much you should spend to finance a vehicle, the 28/36 rule is a good rule of thumb. This rule dictates that you should spend no more than 36 percent of your gross income on debts, including your mortgage, credit card debts, and car loan. The remaining 28 percent should go to household expenses. This rule should help you determine how to buy the car that fits into your budget and lifestyle.
3. Decide Whether To Purchase Or Finance
You have three options when it comes to car financing: leasing, loaning and buying. We won't cover leasing here, since it's essentially a form of borrowing.
Buying and financing through an auto loan each have their own set of pros and cons. For one, taking out a loan makes it easier for someone to purchase a new car right away. If you don't have a lot of savings in the bank but are in desperate need of a car, a loan can easily help you score a car. However, most auto loans come with interest, so in the long run, you'll be paying more than if you had just paid in full upfront.
Additionally, if you buy a car outright, you won't have to worry about late fees and even possibly having your car repossessed if you can't meet your monthly repayments.
4. Identify The Type Of Car You Want
Once you've set a budget and know your financing options, you can begin your research. For many first-time buyers, choosing what type of car you should get is one of the toughest decisions to make. To narrow down your options, consider the following factors:
- Your vehicle's main purpose: Are you looking for a simple commuter vehicle, a hardy and spacious minivan to transport your kids to and from school, or an SUV you can take out on holidays? Think about why you want and need to buy a car in the first place, and look at the types of cars that can fulfill those requirements.
- Number of passengers: How many people are you looking to transport? If you're single and you live alone, a sedan or a hatchback might do. But if you're a family man with three kids, a minivan or an SUV might be more suited to you.
- Your location: Where you live (and where you commute to) should come into consideration as well, since certain cars do well in certain road conditions and climates. For example, if you like in a more rural area that experiences a lot of snow, you might want to get a car with AWD or 4WD, like an SUV or a pickup.
- Fuel efficiency and budget: If you've got a long commute to work (or if you need to travel a lot) you might want to consider a more fuel-efficient vehicle to help with your budget.
Aside from these factors, you should also take a look at a car's safety features, along with any manufacturer recalls and common accidents associated with the make and model. You should also look up which make and model is usually stolen in your area, as purchasing such a vehicle might make it harder for you to secure loans or insurance.
Of course, it’s important that you’re choosing a type of car that you like! At the end of the day, you’ll be the one driving it the most, so you want to make sure it’s a vehicle you would want to drive.
5. Choosing A New Or Used Vehicle
The decision of buying new or used is a dilemma that plagues almost every first-time buyer. Generally, used cars come much cheaper than new cars due to depreciation. As they say, a car loses value once it's driven off the lot! A one-year-old car can be up to 20 percent cheaper than a brand new vehicle of the same make and model. For those on a tight budget, a used car is often a practical choice.
However, you should be wary of a couple of things. Used cars do tend to be harder to finance via loans since used cars are considered riskier than new cars, as they're more likely to break down and require repairs. And when it comes to safety and fuel-efficiency, a new car will typically trump a used car since newer cars come with better technology.
If you are interested in buying a used car, keep the following tips in mind:
- Never settle a deal with a private seller without meeting in person first, especially if you're looking at online listings on places like Kijiji and Facebook Marketplace. In the same vein, never make your car payment without meeting your seller or dealer first. Always do your research on credible sites like Carpages.ca.
- Always ask for the vehicle identification number (VIN) and order a vehicle history report to check for title changes, existing liens, and repair and service history. Information about the car such as the mileage, number of accidents and repairs can affect the cost of the car.
- Whether purchasing a used vehicle through a dealership or a private seller, always do a thorough inspection of the vehicle before settling the deal. If possible, bring a mechanic along for a professional assessment.
6. Test Drive And Inspect The Car
There is one last thing to learn before buying a car: how to inspect and test the vehicle prior to closing the deal. For the inspection, we highly suggest hiring a mechanic or any authorized professional to conduct a thorough pre-purchase inspection of the vehicle's overall condition. A mechanic will be able to spot red flags that could pose safety issues or require major repairs in the future. They can also tell you if a car has been in a significant accident or a flood.
It's also a good idea to take a mechanic along for the test drive. During the drive, they can listen for tell-tale signs of engine problems, belts that need replacement, gearbox issues, as well as braking and other safety concerns.
7. Negotiate The Car Deal
Finally, it's time to negotiate the deal. Before you even meet with your seller or dealer, be sure to research the average selling price of the car so you know whether you're being lowballed or you're getting a fair deal.
When negotiating a deal, don't fixate on the purchase price alone, especially if you're looking to take out a loan. Think about your down payment, loan term, and interest rate as well. Typically, it's better to get a shorter loan at a higher price, as vehicles depreciate quickly. With a long loan, you may fall into the trap of negative equity, or owing more than your car is worth.
You should also be wary of add-ons and extra offers that dealers may try to throw in, such as a service contract or an extended warranty. Finally, always read the fine print before signing anything!
8. Insure Your First Car
As mentioned earlier, auto insurance is mandatory in Canada. There are four types of insurance – third-party liability, statutory accident benefits, direct compensation and property damage coverage, and uninsured automobile coverage. Provincial laws dictate the minimum required amount for each type, but most insurers recommend upgrading just to be sure.
When choosing an insurance company, be sure to do your research on prospective providers and work with a licensed broker.
Start Shopping For Your First Car
Buying your first car may seem like a daunting endeavor, but with enough research and preparation, you can find a great deal. Follow these eight simple steps and you’ll find yourself behind the steering wheel of your dream car in no time.