There’s nothing quite like the scent of a new automobile — whether it’s fresh from the factory or just newly yours. But alongside that pleasant aroma often comes a not-so-pleasant stint in the dealership’s finance-and-insurance office.
You may find yourself confined to a small office for what feels like an eternity while the dealer runs credit checks and other tedious verifications to decide if you qualify for a loan.
Once you have a sense of the loan you might receive, you’ll still need to haggle with the F&I manager to secure the most favorable terms based on your credit profile.
Honestly, buying a car can be draining and stressful. It’s no surprise many people delay the purchase and keep driving their aging, increasingly unreliable vehicles.
If you’re shopping for a new set of wheels, be sure you’re financially prepared before you step onto the lot. Here’s what to understand ahead of time.
Figure Out Your Budget
Before you walk into a dealership, determine how much you can realistically afford to spend on a new vehicle.
DMV.org suggests a practical guideline: try not to allocate more than 15% of your monthly take-home pay to your car payment. That rule may need to be adjusted depending on other monthly obligations. If you’re repaying student loans or building an emergency fund, aim to keep your car expenses well below 15% of your income.
Your monthly payment will shrink if you can make a sizeable down payment. DMV.org also notes that putting more money down often helps you qualify for a lower interest rate.
Another crucial piece of information is your credit score. Bankrate.com reports that borrowers with scores between 781 and 850 typically receive an average APR of 2.6% for new-car loans. For used vehicles, those borrowers might see around 3.4%.
As expected, rates climb as credit scores fall. Buyers with scores from 661 to 780 can expect roughly 3.59% APR on a new car loan. That average rises to about 6.39% for scores in the 601–660 range, and to approximately 13.53% for scores between 300 and 500.
After you’ve assessed your budget and credit standing, talk to your bank about loan possibilities. While the dealership’s F&I office might offer competitive terms, having a preapproval from your bank helps speed up the buying process because you’ll understand your affordability and preferences. It also gives you leverage to negotiate the vehicle’s price as if you were a cash buyer and strengthens your negotiating position for the loan.
Documents to Bring
By this point you probably know your price range and may even have a specific model in mind. But what paperwork should you bring to the dealership? Lending Tree outlines several documents you should have on hand if you’re ready to drive off in a new car.
Proof of Income
This can be as straightforward as recent pay stubs from an employer or tax returns if you’re self-employed. It’s better to be overly prepared, so bring anything you think might be relevant.
Credit and Banking Records
If you have documentation of your credit or banking activity, bring it along. The dealership will pull your credit when exploring loan options, but these documents can streamline paperwork or serve as proof for the lender. Examples include credit card statements, mortgage or lease contracts, bank statements, and records of alimony or child support.
Proof of Residence
Lenders sometimes need to confirm your address, so bring a recent proof of residence. This could be a utility bill, bank statement, or other mail that shows your address. Make sure it’s current — ideally from the past month.
Vehicle Details
In the age of internet research, you may know precisely which vehicle you want before visiting the dealership. Between online searches, reviews and price checks, modern buyers are more informed than ever.
Write down key details about the car you’re targeting, like the purchase price, VIN and stock number, and bring that information with you. Dealership websites often list these specifics.
Proof of Insurance
You’ll need to demonstrate you have car insurance before you drive your new vehicle off the lot. You can call your insurer from the dealership to report the purchase — many insurers can provide instant proof of coverage through their mobile apps.
Key Terms to Understand
Dealerships and F&I departments use a lot of jargon and acronyms that aren’t part of everyday conversation. Here are several common terms you’ll likely encounter:
Manufacturer’s Suggested Retail Price
Also called MSRP, this is the price the automaker recommends for the vehicle. A dealer’s selling price may be higher or lower than MSRP depending on demand and any manufacturer or dealer promotions.
Sticker Price
The sticker price refers to the figure shown on a new car’s window label, also known as the Monroney sticker. Federal law requires new vehicles to display this sticker, which lists the base MSRP, optional equipment costs, destination fee and the vehicle’s fuel economy ratings.
You might also see an addendum sticker near the Monroney that shows dealer-installed options or pricing changes related to demand.
Invoice Price
The invoice price is what the dealer supposedly paid the manufacturer for the car. It typically includes the destination charge, which is often excluded from the MSRP. Keep in mind the invoice price may not reflect the actual net cost to the dealer, as manufacturers frequently provide dealers with rebates and incentives not shown on the invoice.
Destination Charge
This fee covers shipping the vehicle from the factory to the dealership and is set by the manufacturer. You can usually find this fee in the manufacturer’s disclaimers. Add it to the MSRP to calculate the total pre-tax price of the car.
Annual Percentage Rate
APR represents the true cost of borrowing and includes the interest rate plus any fees the lender charges over the life of the loan. As noted earlier, APR tends to be higher for borrowers with poorer credit and lower for those with better credit.
Extended Warranty
The F&I manager will likely suggest buying an extended warranty. While it can seem appealing, it will increase your monthly payment and may not be worthwhile for everyone.
For instance, my partner purchased one for his car a few years ago that we never used, so I declined the offer when buying my own vehicle last year. Whether to buy an extended plan is a personal decision. New cars come with factory warranties, but extended policies can provide extra reassurance if you plan to keep the car long-term.
Prepayment Penalty
This is crucial if you intend to pay off your loan early. For example, I aim to eliminate my loan quickly, applying extra funds from tax refunds, bonuses or freelance earnings.
Some lenders charge a fee for paying off a loan ahead of schedule. Ask your dealer whether the proposed loan includes a prepayment penalty. If it does and you want the flexibility to repay early, consider seeking financing elsewhere.
Trade-In Value
Trade-in value is what the dealer offers for your current vehicle. You can apply that amount toward the down payment on your new car. Keep in mind, if there’s an outstanding loan on your trade-in, the dealer will pay off the lender and apply any remaining balance to your new purchase.
If your trade-in is financed or leased, contact your lender to determine your payoff amount before you visit the dealership.
Buying a car doesn’t have to be overwhelming. If you prepare in advance and understand what to expect, you’ll make smarter choices and find the process less intimidating and more rewarding.
Jordan Blake has purchased several new cars and a fair share of older hand-me-downs. One of the most memorable — and maddening — was an old Jeep Wrangler that was entertaining to drive but a constant project to repair.
