How to buy your first car: Tips for navigating an ‘unprecedented’ market, according to auto experts

This story is part of CNBC’s College Money Guide 2023, a series to help students and recent graduates understand their money and start their adult life off on a solid financial path.

Buying your first car as an adult is always a little daunting. But trying to buy in this current car market, with both vehicle prices and interest rates in the stratosphere, it can feel near impossible.

“It is, in so many ways, unprecedented,” said Joseph Yoon, consumer insights analyst for Edmunds. “You have a combination of terrible inventory, the highest interest rates since the Great Recession and no discounts or incentives because of the inventory situation and outsized demand.”

To put this market into perspective: The average new car transaction is around $48,000 right now, up a whopping 37% in the past five years, according to Edmunds data. The average used car price has jumped about 45% to $29,000 in that same amount of time.

The average interest rate on a car loan is around 6.5% for a new car and 7% to 8% for a used car, according to Bankrate. That’s up from around 4.5% for a new car and 5% for a used car five years ago.

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There are signs that the market may be starting to cool, but it’s still a tough time to be buying.

“Things are improving a bit for shoppers,” said Matt Degen, editor for Kelley Blue Book. “Prices have dipped a little bit for both new and used cars — but they’re still near historic highs.”

Both Yoon and Degen cautioned that buyers should still expect to pay more than the sticker price, and there aren’t many incentives out there right now. And that’s tough if you’re buying your first car on limited income and you don’t have an existing vehicle to trade in and drive down the cost a little.

That makes it even more important to do your research to know how much the car you want is worth so that you can get the best deal possible. Using sites such as KBB.com or Edmunds.com are a good place to start.

Here are three steps to take to make sure you’re getting a good value.

When you’re buying a car, Yoon said the most important factor is to “really, really, really know your budget.”

“Go online, run every single payment calculator you can find and really familiarize yourself with how the numbers are going to shake out every month,” Yoon said.

The average monthly car payment is now more than $730, compared to $527 five years ago, according to Edmunds.

But the cost of owning a car is much more than just the price you pay for it. It also includes:

• Interest on your car loan (unless you can pay all cash)
• Insurance
• Gas (or electric for charging)
• Maintenance and repair costs

When you add in insurance — which varies from state to state and is higher for younger, less experienced drivers — that will add another $100 or more to the monthly cost. For a 20-year-old driver, for example, the average minimum coverage is $110 a month and the average full coverage is $360 a month (about double the overall average), according to Bankrate.

“If you’re 23 years old, that [insurance] number might shock you,” Yoon said. “Know how much you can comfortably spend.”

Yoon suggests calling around to get quotes from several different auto insurance companies to try to find the best rate. If you haven’t decided what vehicle model you’re buying, ask the agents for quotes on each you’re considering.

With car prices so high, many people finance the purchase, taking on an auto loan. If you go this route, make sure you run the numbers carefully.

The amount of time you take to pay back that loan affects the rate, as does your credit score. If you have a lower credit score, that can drive your interest rate even higher. So, you want to make sure you take steps to improve your score first, to get the best deal possible.

Shop around for a loan before you walk into the dealership. A lot of people think the only way to finance a car is through the dealership, but that’s not true.

“We recommend getting pre-approved for a loan at your bank or credit union before even stepping foot into a dealership,” Degen said. “Then you won’t be at the mercy of the dealership’s financing department.”

Try to put down as big of a down payment as you can. That will lower the total amount of the loan — and your monthly payment.

“With interest rates so high, the one thing you can control is reducing the amount of the loan you get,” Yoon said.

Consider how the monthly payment on that loan and all the other costs associated with owning a car will fit into your overall budget. Make sure you can still pay your bills — and squirrel away some money for emergency expenses. You never want to overextend yourself.

And don’t just consider your current debt but debt you might have in the future, Degen said. There’s a chance you’ll have this car for 10 years or more, so you want to make sure you aren’t stretching your budget too thin with the car payment.

There is a common guideline in car buying called the 20/4/10 rule — put 20% down, sign a loan for no more than four years and make sure your monthly payment is no more than 10% of your salary.

You might be tempted in a market like this to overextend yourself a little, thinking — “Oh, I’ll get a raise and then I’ll have more money and it will work out.” But if the last few years has taught us anything, it’s how unpredictable the economy can be. So, make sure you can afford it right now — don’t factor in money you haven’t earned yet. Nothing is guaranteed.

“Your next raise might come later than you expect,” Yoon said. “Don’t take that for granted.”

Should you buy a new or used car?

“This depends on your personal budget and situation,” Degen said. “A new car brings benefits like a factory warranty and the knowledge that no one has abused the car before you.

“But new cars are expensive, and finding models in the lower price range can be a challenge,” he added. “A used car is cheaper but has its own unknowns.”

And, between the high prices and interest rates, you’re going to be paying a lot for that used car.

A bank might not even give you a loan for a used car if it’s too old — they would see it as too much of a risk. And, if you do finance an older car, think about how old that car will be when you are finished paying the loan. Degen notes that you might run the risk of being underwater — where your car is worth less than what you’re paying on the loan — and that isn’t a place you want to be.

Another option is to consider a certified pre-owned vehicle. “These bring the best of both worlds: It’s a used car but one that has been vetted and combed over by mechanics and comes with a warranty just like a new car,” Degan said. “They are a bit more expensive than a used car of the same make and model, but a wise option.”

What about leasing? Leasing can, when the timing is right, be a great option to get a new car while putting down less than you would on a new car then having the option of trading it in down the line.

But Yoon said now isn’t a great time to lease. A good lease deal hinges on two things: things: incentives and low interest rates — and you don’t have either right now.

“You’d have to bring a much bigger down payment to that deal” to make it worthwhile, Yoon said. “And, if you’re going to do that, you might as well just put that into a loan for a new car.”

Beyond making sure a car fits into your budget, and whether you want to buy a new or used car, here are few other questions first-time buyers navigating this market ought to ask themselves:

1. Am I willing to compromise? Consider an older or smaller car than you originally wanted — that will save you some money. Though do your research to know which brands are reliable.
2. Do I know anyone selling a vehicle? Consider whether anyone in your network is selling their old car, instead of going to a dealership. “They’re more likely to cut you a deal,” Yoon said. But it is important that you know and trust them.
3. Am I OK not having the latest technology and safety features? If you are buying an older model to save a little money, understand that they might not have rear cameras, Apple Car Play, or other features of some of the newer models.
4. How does this feel to drive? When you’re test-driving the car, make sure it feels OK for you personally.
5. Is this car in good shape? If you’re buying a used car, get a local mechanic — maybe someone your family knows or has worked with before — to do a pre-inspection on the car to make sure nothing is wrong with it. That might cost $150-$200 but Yoon said it is worth it.

There are signs of improvement in the car market but Yoon said wait a little longer if you can.

“If you don’t absolutely need a car right away, you should wait it out as long as possible,” Yoon said.

What could move the needle in this car market is the Federal Reserve’s latest interest rate hike. That will push auto loan rates higher, which could deter more buyers, Yoon said, prompting dealers and manufacturers to start offering discounts to lure them back.

“We’re all waiting for the dominos to start falling on the discount front,” Yoon said. “As soon as somebody starts doing that aggressively, others will follow.”

They’re seeing signs of that happening, Yoon said, but at the moment it’s limited to one or two models here and there. He said maybe by fall you’ll see more noticeable discounts — hopefully even sooner.

And finally, don’t feel pressured to sign anything. Take your time to comparison shop and make sure that what you’re buying will fit into your budget.

Remember: “It’s your hard-earned money,” Yoon said. “It’s a ton of money and you should feel comfortable spending it.”

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