To save the most when buying a car, focus on these three main categories — the cost of the car itself, the interest you pay for a loan and ongoing payments for insurance coverage.
The best time to negotiate and control these expenses is before you commit to them. Too often, excited car buyers jump into a purchase and realize they could have spent less. The same can be true for car buyers simply desperate for transportation.
The financial commitment you make when buying a car — for loan payments, car upkeep and auto insurance — will most likely span many years. Here’s how to save money when buying a car and possibly save thousands of dollars in the long run.
1. Find the lowest-rate auto loan
Auto dealers make money off of arranging auto loans. So, if you sign on the dotted line for a loan at the dealership without first shopping around for other lenders, you will most likely pay too much interest.
Before engaging with a car dealer, take time to get loan offers with interest rate estimates from other sources — such as banks, credit unions or online lenders. Many lenders offer pre-qualification, which gives you an idea of the rate you might qualify for without affecting your credit score.
Pre-qualification isn’t a firm offer of credit, but it can help you pinpoint the lender with the lowest rates. With that knowledge, you can apply to that lender for loan preapproval or approval, which will require a hard credit inquiry and cause a slight but temporary decrease in your credit score.
Present your preapproved loan to the dealer, giving them a rate to beat. Then, if they can’t or won’t, you will still have a lower-rate loan to fall back on.
Lowering your interest rate by a few percentage points can make a big difference in what you pay. For example, a $40,000 car loan with an 8% annual percentage rate or APR and a 60-month term would result in a total interest paid of $8,664. An APR of 6% on the same loan amount and term would reduce total interest to $6,399, a savings of $2,265 over the life of the loan.
If you end up with a high-rate auto loan, you might still have the option to lower the rate. Refinancing your car loan with a different lender may be a way to start over with a lower rate and monthly payment.
2. Don’t buy the first car you find
When you see a car you like, with the features you want, it’s tempting to buy it. But an overeager buyer who hasn’t shopped around is a prime target for a seller’s overpriced car. Also, if you don’t consider other vehicles, you won’t know whether you could have found the same or a similar model for less.
While negotiating has been more difficult with recent car shortages, supplies are improving. Knowing what you should be paying for a car can give you the leverage to suggest less to the seller or dealer or to know you might pay less elsewhere.
Before you buy a car, check pricing guides like Edmunds or Kelley Blue Book to see what other people are paying for the car you want. You can also use car-buying apps, like TrueCar, to browse new- and used-car listings from online retailers and local dealers for pricing and other information. Online research can also be a way to enter your must-have features and possibly find a similar make and model that sells for less.
Keep in mind that the car you choose has numerous cost implications:
If you finance a car, the vehicle type, mileage, age and other factors can affect the interest rate and the total amount of interest you pay.
The car you buy can affect what you pay in sales tax (as a percentage of the car price) and registration fees.
Also, knowing the maximum amount you can afford on a car can help you stay within a budget. With NerdWallet’s auto affordability calculator, you can set a price limit based on the monthly payment that fits your budget.
3. Get more than one car insurance quote
When buying a car, it’s also a good time to get insurance quotes. Insurance companies have different ways of determining rates, so premiums for the same driver and vehicle can vary greatly. You will pay for full coverage car insurance (a combination of comprehensive, collision and liability coverage) at least until you pay off any loan, so shopping for the cheapest insurance upfront can result in significant savings.
A new insurance carrier may offer you a lower rate to get your business. But, if you have an existing insurance company, give them the opportunity to beat a new carrier’s price. Some offer loyalty discounts, and you might end up saving even more.
NerdWallet can help you compare car insurance rates from some of the nation’s biggest insurers based on factors such as age and driving history.
While talking to insurers about coverage, ask about gap insurance if you financed your car. Gap insurance pays the difference if your vehicle is declared a total loss and the balance on your loan is greater than the value of your vehicle. Car dealers will usually try to sell you gap insurance and include the cost in your loan. But gap insurance through your insurance carrier tends to be less expensive, and you won’t pay interest on your coverage.