The Definitive 5 Step Car Buying Guide

The only thing that might take up less of your monthly budget than your mortgage or rent is a car payment. For some, the expenses of car payments, insurance, gas and maintenance can reach up to 20 percent of monthly income. That's why making informed decisions about large purchases is so important. When buying a car, be sure it will fit into your budget. Use the following as a car buying guide to get you a great car for your money.

Step 1: Decide What Kind of Car You Need

Do you truly need an off-road, four-wheel drive model to get across town on your daily commute? Do you really need a full-size truck capable of hauling a 30-foot boat (that you do not own)? Here are a few more questions to guide you in your buying decision:

• Do you need a manual or automatic transmission?
• What safety features are you looking for?
• Do you need a lot of cargo capacity?
• Will you need to tow anything?
• Does your height require a lot of headroom?
• How many passengers will you be carrying?
• What kind of gas mileage would you like?

When you've put together a description of your dream car, it can help you make decisions about cars that might not fit all the requirements you have. Are you willing to part with great gas mileage for better headroom? Are you willing to take an automatic so that you can have more towing capacity? You may want to prioritize your list of "wants" to narrow things down further.

Step 2: Decide How Much You Can Spend on a New Car

Not only does the car you choose have to meet your needs, but it must also fit into your budget. Many people don't know how to manage budgets and end up spending far more monthly income on those loans than is recommended.

So, how do you decide on a budget? Here are some tips:

• Choose a car payment that is between 15 and 20 percent of your monthly take-home pay, but no more.
• The amount you have saved for a down payment will also determine the total car budget you can afford. If you don't have the full 20 percent available for a down payment on a particular car that meets your needs, you may want to consider less expensive models in order to secure lower monthly payments.
• Remember that your credit score will determine the interest rate you receive if you finance the purchase of your car. A lower credit score will leave you paying higher interest rates, while a great score can get you lower rates. It's important to research your credit history. Clear up any negative accounts, and try to unload any easily paid debts before securing a new loan for your car.

Getting a better credit score will help with your car insurance rates, too. Statistically, those with lower credit scores are more likely to make claims, so the premiums insurance companies charge are higher, to make up the difference in risk. Especially if you have had a change in your credit history, make sure you work with an independent agent. Independent agents can shop around to different companies to show you several quotes before you buy, which can help you save no matter what your financial situation is.

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Step 3: Decide Whether You Should Lease or Buy Your Next Car

Choosing whether to buy or lease a car can be a difficult choice. Leasing cars allows you to drive a much nicer vehicle than you may be able to afford otherwise. Veteran sales representative Terry Berg said leasing makes sense if you are the type of consumer who trades your vehicle every few years for the newest model.

"They're putting so many incentives on leasing right now, you're able to get a much nicer vehicle," Berg said.

If you're the type of consumer who enjoys those last several years of a car's life without making monthly payments, buying your next car is probably the better choice. If you plan on driving it until the wheels fall off, leasing doesn't give you that chance.

Step 4: Decide Whether You Should Buy New or Used

The advantage of buying a used vehicle is that you let someone else take the depreciation hit. Mechanic and self-proclaimed car enthusiast Nate Benoit says finding a car as little as a year old will save you thousands of dollars in depreciation.

"You may have to visit guys like me more often, though," he said.

There's the tradeoff. Used cars require more maintenance and repairs than new ones do. If you enjoy tooling around under the hood of your car as much as Benoit, that may be perfectly OK. However, if the only time you want to see your mechanic is when you need the oil changed and the tires rotated, a new car with fewer needs may be a better choice.

When you're thinking of buying a used car, the Kelley Blue Book can help. It can guide you as to the value of the model given its year and mileage. If the seller is asking for a much higher price than the Blue Book lists, chances are it's a raw deal.

Step 5: Brush Up on Your Negotiation Skills

Whether you choose to lease, buy new or buy used, comparison-shopping at this point is a must. With this car buying guide, you have an idea of what kind of car and price range you can afford, and you can see what your local dealers have to offer. Take a look at their websites: you may be able to do that from the comfort of your own home. 

Once you've located a few cars that have caught your eye, you can compare prices and features from various dealers. Don't be afraid to show them what you've found across town.

"We try to match or offer an even lower price than our competitors whenever someone tells us they've found a similar car cheaper," Berg said.

Be wary of the selling that goes on at the finance officer's desk as well. Many dealers will try to sell you all sorts of "extended warranties" and other packages that may not be worth the added costs. "Half the time, those warranties have so many loopholes that the repairs I make aren't covered," Benoit cautions.

So, be prepared, and remember to follow the steps in this guide and get an affordable car insurance policy before you take the plunge on your next car.