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Preparing to Buy a Car

Many people see purchasing a car as one of the biggest financial commitments of their lives. The car itself often comes with a hefty price tag, but that’s not the only cost. First time car buyers might be shocked to find out how much it actually costs to own a car. It’s hard enough to find an affordable monthly payment, but once you take into account insurance, maintenance, gas, and all the other hidden figures, the total cost might be double the monthly payment.

Whether you are buying your first car or your tenth car, there are several things you can do to be prepared to make the commitment. First, it’s important to understand the financial aspects of owning a car, such as how interest works on an auto loan and how the vehicle price relates to the monthly payment. Second, it’s important to know how to research a car before buying it to make sure you’re getting something reliable, and not something that will cost you down the road.

Prepare Financially

Pay Cash

Generally speaking, there are two ways to pay for a car: pay cash or get a loan. 

Paying cash for a car is the simplest way to buy. In this case, “cash” doesn’t refer specifically to paper money. Rather, it refers to the concept of making the purchase upfront, all in one complete payment. To pay cash for a car, you simply save up enough money to pay for it. There are no credit checks, loan applications, interest costs, or monthly payments. But keep in mind there are still the recurring costs such as maintenance and insurance.

Get an Auto Loan

When timing is a factor and you need a car before you can save up enough to pay cash, you can choose to get an auto loan. This is a common option, but unfortunately, most people do not know how to use the debt wisely. There are simple steps you can take to get educated before taking out a loan. It’s important to fully understand how the debt works and how to use it to your greatest advantage. 

Learn how interest works for auto loans and find out what expenses you’ll have in addition to loan payments. Auto loans are amortized and the interest is front-loaded. In other words, payments at the beginning of the loan will cover more interest costs, and payments made toward the end of the loan will cover more of the principal balance.

Determine your monthly budget for a vehicle. A general rule of thumb is to budget 10-15% of your net income for transportation costs. Only a portion of that budget should go to the car payment, while the rest can be used to cover gas, insurance, and so on. For example, if you budget $500 per month for transportation, find a car with a much lower monthly payment, such as $300, since the rest of the costs will quickly add up to $500. Use a Car Payment Calculator to help you figure out the monthly payments you can afford. Understand that regardless of the purchase price, if you can’t afford the monthly payments, you can’t afford the car.

If you’re financing your vehicle, be sure you understand the terms of financing. What is the length of the loan? How much will you pay in interest? What happens if you’re late on a payment? If you miss several payments? Are there penalties for paying off the loan early? Are there options for refinancing the loan later? Loan documents can be daunting, but read them thoroughly or ask your lender to explain them to you.

Research the Vehicle


In addition to the price of a car, there are many costs to vehicle ownership. Each car comes with interest costs, taxes, a down payment, maintenance, repairs, insurance, registration, gas, and more. Part of researching a vehicle is discovering what specific costs are associated with the car. Auto insurance rates are often determined by the vehicle type and the driver demographics. Maintenance and repair costs vary widely by make and model, and are affected by the level of care taken by previous owners. You can save a lot of money by finding a car that requires low maintenance and has a long operating life. 


Generally, it costs less to have higher monthly payments and lower maintenance costs than it does to have lower monthly payments and risk higher maintenance costs. Maintenance and repair costs can be unpredictable. By buying a “cheap” car with a small loan and low monthly payments, you might risk landing a high bill of unexpected repairs that will be hard to pay off. It’s usually worth getting the highest quality vehicle you can afford. 

To help with budgeting for maintenance costs, Investopedia recommends planning for $0.09 per mile. For example, if you drive the average 12,000 miles per year, you should budget approximately $1,080 for maintenance per year. Work this into your monthly budget and save aside what you don’t use each month so you have the funds ready when it’s time to go to the mechanic.

Used Cars

If you are purchasing a used car, research the exact vehicle as thoroughly as possible. Look up the estimated value on Kelley Blue Book. This gives you a ballpark figure of what the price should look like. If the price is too high, you can walk away from the deal. If the price is too low, this could be a red flag that there’s something wrong with the vehicle. 

You can search the VIN online for accident history, but you should also inspect the car in person. In this detailed checklist, Chris Fix teaches car buyers how to inspect a used car before purchasing it. Similarly, there are several video walkthroughs for inspecting a used car. If you’re not comfortable performing the inspection yourself, take the vehicle to an auto shop for a multi-point inspection. You can also perform an internet search for the make and model to find out the estimated life of the car, and to find out if there are unique maintenance issues or recalls. 

In addition to researching the car, always test drive before buying. If you come across the deal of a lifetime, but can’t test drive the car, chances are it wasn’t the deal of a lifetime.


Whether you are a first-time car buyer or you have years of experience, buying a car is not something to rush into. It takes time to research the car and prepare financially. The most important aspect of buying a car is understanding where you stand financially.

Find out how 101 Financial’s Workplace Wellness program helps car buyers save thousands of dollars in interest costs.