Thinking about buying a car? Here’s what experts say you need to know


A customer is shown a 2022 Toyota Prius at Longo Toyota in El Monte, CA on Wednesday, March 23, 2022.

Medianews Group | Orange County Register via Getty Images

People spend a lot of money on their cars and trucks. In fact, about 16% of the average American’s total budget goes to transportation, including vehicle costs and fuel. That makes it the second-biggest expenditure after housing but before incidentals like food, education, and saving for retirement.

The scale of the expense can make shopping for a vehicle stressful – especially for younger, first-time buyers who tend to have less-established credit histories and lower savings.

And today’s market makes it even worse.

According to Kelley Blue Book, the average cost of a new vehicle (including cars, crossovers, vans, pickup trucks and SUVs) exceeded $47,000 at the end of 2021 – up more than 25% in just two years. Average used vehicle prices saw an even steeper rise, going up 42% from under $20,000 at the end of 2019 to over $28,000 two years later. These price increases exceed overall inflation over the same period. They’re due to a production slowdown caused by the pandemic, coupled with pent-up consumer demand and a global microchip shortage.

So, what’s the best way to buy a first vehicle in today’s marketplace?

Where to start the car-buying process

A new buyer’s first step is to determine the sort of vehicle they need, and their budget.

Selection takes some thought. A small sports car might work for a single person or couple, but not if they’re planning on starting a family. A large SUV might be great for camping and road-tripping with friends, but isn’t likely to be much fun when it comes time to fuel up, pay for insurance, or find street parking.

“Think about your actual needs, how long your commute is, how much you have to carry, and if you actually enjoy driving and might want something sporty,” said Ronald Montoya, the senior consumer advice editor and content strategist at Edmunds. “Avoid overbuying – you can probably get by with a smaller vehicle for most of your needs, and just rent something bigger once or twice a year, when you really need it.”

Choosing the type of vehicle to buy

These days, nearly half of auto shoppers choose crossovers – tall vehicles based on passenger cars that have an open back area (like a station wagon or SUV) rather than an enclosed trunk. Crossovers blend most of the efficiency and driving characteristics of a traditional car with a bit of the off-road and foul-weather capabilities of a four-wheel drive SUV.

If you don’t need a tall driving position and rarely travel in deep snow, a traditional car might be a better choice, however. Whether in the form of a sedan, coupe, convertible or station wagon, cars tend to be lighter and have a lower center of gravity than crossovers, which aids efficiency and handling.

Conversely, someone who regularly tows or travels on poorly-kept dirt roads might lean towards a traditional SUV or pickup, which are generally built on heavy-duty truck frames to take such abuse. Though most SUVs and pickups are gas hogs, there are a handful of efficient options, such as the hybrid version of the new Ford Maverick and diesel versions of the Ram 1500 and Chevrolet Tahoe. On top of this, a range of electric options including the Ford F-150 Lightning pickup are entering the market over the next year.

Anyone who doesn’t go off-road or tow much but does carry a lot or people or stuff should remember that minivans still exist. This oft-overlooked segment of the market is ideal for larger families and there’s a range of front- and all-wheel-drive minivan options that can seat up to eight people in car-like comfort.

Finally, those thinking of getting an electric vehicle might need to plan for a long search. Battery powered transportation may represent the future, but the vast majority of vehicles sold still use gasoline – electric vehicles accounted for only 3.4% of total vehicle sales in the fourth quarter of 2021, which is actually lower than diesel sales (4.6%, mostly pickups). Hybrid vehicles, which combine gas and electric power, made up another 7.5%. Manufacturers are trying to ramp up battery production, though, and some new electric vehicle purchases can still qualify for federal tax credits of $7,500 on top of state and local subsidies.

Once a shopper has a particular type of vehicle in mind, they should read professional reviews (e.g. Car and Driver, Jalopnik and Edmunds) and search owners’ reviews to determine which particular models interest them, then arrange for test drives.

New or used?

For many years, the fiscally smart move was to buy a low-mileage used vehicle – something two or three years old and in good condition. These might lack the latest infotainment equipment and a full factory warranty, but generally provided reliable transportation at a steep discount since vehicles would typically depreciate about 20% in the first year, and 10% annually for a few years after that.

The Covid pandemic has muted depreciation, however, and prices for used cars are growing faster than for new. As the price gap narrows, buying new becomes more appealing because the vehicles are in better condition, plus, they have a full warranty and can be financed at a lower rate.

Used Teslas have done particularly well of late, as gas prices have risen, spurring more interest in EVs and the economics of recharging versus filling up. The popular all-electric vehicles are now averaging $65,000 on the used marketplace, coming close to their cost when new.

The best move for consumers is to look around, because paying almost as much for used as new doesn’t make sense.

Used shoppers should also consider looking for a certified pre-owned vehicle, which most manufacturers offer through authorized dealers. CPO vehicles – generally low-mileage and of recent vintage – are thoroughly cleaned and inspected, then repaired if necessary. They offer a manufacturer-backed warranty on top of what’s left from the original coverage, and some include additional perks such as roadside assistance or trip insurance. CPO vehicles cost more than other used cars, but they can provide peace-of-mind.

How to pay for an automobile

Buying a vehicle outright – often called paying cash for the car, even though it’s more likely to involve a cashier’s check or credit card rather than a literal wad of cash – lets consumers avoid monthly payments and thousands in interest. But it’s not for everyone. Many people just don’t have the savings, plus dealers make money off of financing and are less likely to negotiate on price for buyers paying cash.

“Paying cash is usually your best option because it limits how much you have to pour into a depreciating asset,” said Greg McBride, the chief financial analyst at consumer finance site Bankrate.com. “But don’t deplete your emergency fund just to buy the car.”

Besides paying cash, shoppers can also turn to leasing or loans.

With leasing, consumers generally make lower monthly payments, but don’t own the vehicle at the end of the term – typically three years – unless they pony up a big lump-sum payment. “Leasing is often a treadmill of payments,” McBride said. “You’re essentially renting the vehicle and at the end of the lease you return the car and start over on a new one.”

Since leasees don’t own the car during the term of their lease, they can run into trouble if they make modifications such as sound system or engine upgrades. They also have to pay a penalty for excessive wear and tear, terminating the lease early, or driving more than a set amount (usually about 12,000 miles annually, though some newer leases are down to 10,000).

Besides cutting mileage allowances, lease providers have also been limiting the incentives they used to offer (such as cash rebates or subsidized interest rates). For these reasons, most people currently in the market for a vehicle should look to loans if they can’t pay cash. Loans usually end up costing less than leases – especially for consumers who hold onto vehicles for years. Also, those with loans don’t have to worry about mileage or wear, or pay a penalty for early termination. Most importantly, at the end of a loan term, the consumer owns the vehicle. Loan terms can run to 84 months, or even longer. But most experts recommend sticking to shorter loans with lower interest to keep overall costs down.

Loans usually end up costing less than leases, especially for consumers who hold onto vehicles for years. Since they own the vehicle once the loan is paid off, consumers don’t need to worry about mileage or wear, and there’s no penalty for early termination. “We recommend loans to most shoppers, and putting down at least 20% to keep monthly payments reasonable and avoid GAP insurance,” said Montoya.

GAP (short for Guaranteed Asset Protection) protects people who have a loan or lease on a car and owe more than its worth. If their car is totaled or stolen, it supplements regular insurance by paying the difference between what their vehicle is worth and what’s owed. 

McParland said that anyone financing should understand their credit score to know where they stand and then cross-shop lenders and lease providers. “It’s always wise to be pre-approved for a loan before you talk to the dealer,” he said. “That way, you do have some leverage for them to find you a rate that either matches or beats what you already have.”

Where to buy: Dealers or direct?

Most new and used car sales are still done through dealerships. Using a dealer lets you view and test drive multiple vehicles in a day, and provides access to financing and sometimes even useful services such as free oil changes or tire rotations. In many cases, a dealer will also accept a buyer’s old car on trade in – with used vehicle prices so high, that can be a big help.

Problems with using dealers include their often aggressive sales tactics and tendency to fold extra services into vehicle sales at inflated prices. For instance, etching a vehicle identification number (VIN) onto the windshield is a useful practice that can deter theft and lower insurance rates, but a dealer might charge more than $300 for the work, which consumers can do themselves with a $25 kit. To avoid paying excessive fees, it’s wise to ask about any dealer-installed options or markups, Montoya said. It’s a sellers market, and dealers might not waive any of the costs they tack on, but the buyer can always take their business elsewhere.

Another option is to use a no-haggle dealership, typified by CarMax, Vroom and Carvana. These companies can charge more than traditional dealerships, but generally score positive reviews from consumers. Each promises stress-free shopping with a non-negotiable price and money back guarantees, plus large and easy-to-search inventories. Each will also deliver a new car right to your door, in most instances. Unlike the others, CarMax also offers physical locations where shoppers can peruse cars.

Of course, you don’t have to deal with dealers. Buying from a private seller is usually cheaper – there’s less overhead to deal with and little chance for any inflated add-on costs. Buying privately can also be less of a hassle for consumers who don’t mind handling their own paperwork, arranging their own financing, and paying any applicable state sales tax when they register the vehicle.

When to buy a car



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