If you're considering purchasing a car, here are the key points to consider, according to auto experts.

Vehicle and fuel expenses account for approximately 16% of the average American's total budget, making it the second-largest expenditure after housing, but before incidentals such as food, education, and retirement savings.

Buying a vehicle can be stressful due to the high cost, especially for young, inexperienced buyers with limited credit history and savings.

And today’s market makes it even worse.

The cost of a new vehicle, including cars, crossovers, vans, pickup trucks, and SUVs, exceeded $47,000 at the end of 2021, up more than 25% in just two years. The average used vehicle price also saw a significant increase, going up 42% from under $20,000 at the end of 2019 to over $28,000 two years later. These price increases surpassed overall inflation over the same period. The reasons for these increases include a production slowdown caused by the pandemic, pent-up consumer demand, and a global microchip shortage.

What is the most effective method for purchasing a first car in the current marketplace?

Where to start the car-buying process

The initial action for a new car buyer is to assess their requirements and set a budget.

A small sports car may be suitable for a single person or couple, but not if they plan on starting a family. On the other hand, a large SUV could be ideal for camping and road-tripping with friends, but it may not be enjoyable when it comes to refueling, insurance payments, or finding parking spaces.

Ronald Montoya, the senior consumer advice editor and content strategist at Edmunds, advised considering one's actual needs, commute length, amount to carry, and enjoyment of driving when choosing a vehicle. He suggested avoiding overbuying and opting for a smaller vehicle for most needs, while renting something larger occasionally.

If car prices are too high, shoppers must monitor their budget closely. According to Tom McParland, founder of Automatch Consulting and author of Jalopnik's consumer and automotive industry articles, test driving a car is pointless if it turns out you can't afford it.

Experts recommend not spending more than 20% of take-home pay on a vehicle, including payments, insurance, and fuel or electricity. Online calculators are available to assist consumers in determining their affordable car budget.

Choosing the type of vehicle to buy

Nearly half of auto shoppers opt for crossovers, which combine the efficiency and driving characteristics of a traditional car with some of the off-road and foul-weather capabilities of a four-wheel drive SUV.

If you don't need a tall driving position and don't travel frequently in deep snow, a traditional car may be a better option. Cars, whether in the form of a sedan, coupe, convertible, or station wagon, are generally lighter and have a lower center of gravity than crossovers, which improves efficiency and handling.

Someone who frequently journeys on poorly maintained dirt roads may prefer a traditional SUV or pickup, which are typically constructed on heavy-duty truck frames to withstand such punishment. While most SUVs and pickups are gas guzzlers, there are some fuel-efficient options available, such as the hybrid version of the new Ford Maverick and diesel versions of the Ram 1500 and Chevrolet Tahoe. Additionally, a variety of electric options, including the Ford F-150 Lightning pickup, are set to enter the market in the near future.

If you don't go off-road or tow too much but carry a lot of people or stuff, remember that minivans still exist. This often overlooked market segment is ideal for larger families and there are various front- and all-wheel-drive minivan options that can seat up to eight people in car-like comfort.

Those considering purchasing an electric vehicle may need to prepare for a lengthy search, as the majority of vehicles sold still run on gasoline. Electric vehicles accounted for only 3.4% of total vehicle sales in the fourth quarter of 2021, which is lower than diesel sales (4.6%, mostly pickups). Hybrid vehicles, which combine gas and electric power, made up another 7.5%. Despite this, manufacturers are working to increase battery production, and some new electric vehicle purchases may still be eligible for federal tax credits of $7,500 on top of state and local subsidies.

To determine which particular models of a specific type of vehicle interest a shopper, they should read professional reviews and search for owners' reviews, then arrange for test drives.

New or used?

A sound financial decision for many years was purchasing a used vehicle that was two to three years old and in excellent condition. Although these vehicles may not have the most recent infotainment technology and a full factory warranty, they typically offered dependable transportation at a significant discount due to the depreciation of vehicles, which can lose up to 20% of their value in the first year and 10% annually for several years after that.

Despite the Covid pandemic, the price gap between used and new cars is narrowing, making buying new more appealing due to the vehicles' better condition, full warranty, and lower financing rates.

Recently, used Teslas have experienced a surge in demand as gas prices increase, leading to a rise in interest in electric vehicles and the cost-effectiveness of recharging versus gasoline refueling. On average, these popular all-electric vehicles are now selling for $65,000 on the used market, which is close to their original price.

It doesn't make sense to pay almost as much for used as new products, so consumers should look around.

When purchasing a used vehicle, it is recommended to consider a certified pre-owned (CPO) vehicle, which most manufacturers offer through authorized dealers. CPO vehicles are typically low-mileage and of recent vintage, and are thoroughly cleaned, inspected, and repaired if necessary. They come with a manufacturer-backed warranty on top of the remaining original coverage, and some include additional perks such as roadside assistance or trip insurance. While CPO vehicles cost more than other used cars, they can provide peace-of-mind.

How to pay for an automobile

Purchasing a car outright, which may involve a cashier's check or credit card instead of cash, allows consumers to avoid monthly payments and interest. However, this option may not be suitable for everyone as many individuals lack the savings and dealers profit from financing, making it less likely for them to negotiate on price with cash buyers.

According to Greg McBride, the chief financial analyst at Bankrate.com, using cash to make a purchase is typically the most advantageous option as it restricts the amount of money that is invested in a depreciating asset. However, it is crucial not to drain one's emergency fund in order to purchase a car.

Besides paying cash, shoppers can also turn to leasing or loans.

Leasing a vehicle typically involves making lower monthly payments, but the consumer does not own the vehicle at the end of the term, which is usually three years. To own the vehicle, a large sum payment is required. McBride stated that leasing can be a cycle of payments, where the consumer rents the vehicle and then returns it at the end of the lease to start a new one.

Leasees may face issues if they modify their car, such as upgrading the sound system or engine, during the lease term since they do not own the vehicle. Additionally, they must pay a penalty for excessive wear and tear, early lease termination, or driving more than the agreed-upon mileage (usually around 12,000 miles annually, though some newer leases have a lower mileage limit).

Lease providers have been limiting incentives, such as cash rebates or subsidized interest rates, in addition to cutting mileage allowances. As a result, individuals looking for a vehicle should consider loans instead of leases. Loans typically cost less than leases, especially for those who keep their vehicles for an extended period. With loans, consumers do not have to worry about mileage or wear and tear, or pay a penalty for early termination. At the end of a loan term, the consumer owns the vehicle. Loan terms can last up to 84 months, but experts recommend shorter loans with lower interest rates to keep overall costs down.

Montoya advised most shoppers to opt for loans instead of leases, as loans typically result in lower overall costs, particularly for those who keep their vehicles for an extended period. By owning the vehicle outright once the loan is paid off, consumers do not have to worry about mileage or wear, and there are no penalties for early termination. Additionally, putting down at least 20% of the purchase price can help keep monthly payments manageable and avoid the need for GAP insurance.

GAP insurance covers individuals who have a car loan or lease and owe more than their vehicle's worth. In the event of a total loss or theft, it supplements regular insurance by paying the difference between the car's value and the amount owed.

To make an informed decision when financing, it is crucial to understand one's credit score and compare rates from various lenders and lease providers. McParland advised that being pre-approved for a loan prior to negotiating with the dealer can provide leverage for better rates.

Where to buy: Dealers or direct?

Dealerships are still the most common place for buying both new and used cars. By using a dealer, you can see and test drive multiple vehicles in one day, get financing, and sometimes receive additional services such as free oil changes or tire rotations. Additionally, many dealerships will accept a buyer's old car as a trade-in, which can be especially helpful with the high prices of used vehicles.

Dealing with car dealers can be problematic due to their pushy sales tactics and tendency to add extra services at inflated prices. For example, etching a VIN onto the windshield can help prevent theft and lower insurance rates, but a dealer may charge over $300 for the service, which a consumer can do themselves for $25. To avoid paying excessive fees, it is recommended to inquire about any dealer-installed options or markups. It is a seller's market, and dealers may not waver on their costs, but the buyer always has the option to take their business elsewhere.

Instead of traditional dealerships, consumers can opt for no-haggle dealerships such as CarMax, Vroom, and Carvana. These companies charge more but receive positive reviews from customers. They provide a stress-free shopping experience with a non-negotiable price, money-back guarantees, and large inventories that are easy to search. Additionally, they deliver a new car right to your door in most cases. Unlike the others, CarMax also has physical locations where shoppers can examine cars.

Dealing with dealers is not necessary as buying from a private seller is usually cheaper due to lower overhead costs and less chance of inflated add-on costs. Additionally, private buying can be less of a hassle for consumers who are comfortable handling their own paperwork, arranging financing, and paying state sales tax when registering the vehicle.

When to buy a car

A car shopper may be advised to wait until the end of the month to take advantage of dealers' desire to meet quotas and negotiate better deals. Additionally, they may be advised to look for cars that are being discontinued or redesigned as dealers try to get rid of them.

These aren’t normal circumstances though.

It may be wise to delay purchasing a vehicle if you already have a dependable one or reside in an area with efficient public transportation, as prices are currently at their highest and are not anticipated to decrease until at least 2023.

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