5 tips to save you money when buying a car

Your car likely plays a big role in most parts of your life (your commute to work, picking up kids from school, weekend getaways, etc.) and your budget is no exception (especially if you’re taking on a car loan). To help you find a vehicle that fits your finances, CNBC Select breaks down the process of buying a car and offers tips on how to save on this important purchase.

First, you want to know how much you can spend on your next ride. Generally, it’s recommended to keep your auto expenses under 20% of your take-home pay, including insurance, gas and maintenance. But you also need to consider more than the monthly cost. According to Brian Moody, executive editor for Autotrader and Kelley Blue Book and auto-buying expert, you should also think about the length of the loan, depreciation and the interest rate you can expect to get.

“And key to all of that is for people to know their credit score,” he says. “If you know your credit score… it’s going to help you know what kind of a loan you can get because even when interest rates are high, the person with the better credit score is going to qualify for a better interest rate.”

You can check your credit score for free with credit monitoring services like Experian free credit monitoring and CreditWise from Capital One.

As for the length of the loan, the shorter you can make it, the better. While the most common auto loan term is 72 months (or six years), according to the online automotive resource Edmunds, you should keep the repayment term under 60 months (five years). A longer term means paying more in interest since you have more monthly payments to make.

To add to that, if you opt for a longer term length, the lender might give you a higher interest rate, resulting in an even higher interest total.

Depreciation is also essential to keep in mind when you’re thinking about the term. Depreciation is the decrease in a car’s value over time. With a long car loan, you risk going “underwater”, meaning your car will be worth less than what you still owe.

You can also search for vehicles based on the features you care about most. For instance, CarMax lets you look up cars based on just about anything, from body and fuel type, to transmission, drivetrain and more. Just plug in the desired price range and see what fits your parameters.

Generally, buying a used car makes more financial sense than buying a new one, as new cars lose a lot of their value in the first few years. According to Edmunds, new cars lose 23.5% of their manufacturer’s suggested retail price (MSRP) after a year and about 60% of their MSRP in the first five years. After that, the depreciation rate tends to slow down.

That said, do the math before deciding to go for a used vehicle. “The interest rate [on loans] for used cars is higher than the interest rate for a new car,” Moody notes. “If you’re looking for a lightly-used car, there’s a good chance that buying a new one may save you money in the end because of a lower interest rate.”

You can estimate the terms you’re likely to get on different cars using prequalification tools offered by some lenders. For example, Auto Navigator by Capital One allows you to browse used and new cars from participating dealers. You can prequalify with a soft credit check and see monthly payments and rates as you look at car offers.

It always pays to shop around and negotiate with your lender and dealer — not just when it comes to the purchase price, but the interest rate as well.

Moody recommends getting preapproved by your bank or credit union before heading to the dealership. Compared to prequalification, preapproval is a more formal offer from a lender and typically requires a hard credit check.

“When you correspond with a dealership, they have levers they can pull,” Moody says. “They have access to a broad network of lenders, [so] there’s a good chance they can beat the rate that your bank or credit union gave you.”

CNBC Select recommends PenFed Auto Loans as the best car loan provider and myAutoloan for easy rate shopping.

But before you sign that contract, make sure you read it carefully. Car dealers can sometimes include fees and products that you may not have agreed to (or had forgotten about). According to Consumer Reports, a Nissan dealership in New York charged consumers who shopped there from May 2010 to September 2013 as much as $5,000 for service contracts without their authorization.

So take your time with the contract and watch out for charges for anything you didn’t request, such as a service contract or undercoating and paint sealant. Make sure that all the numbers and terms are correct and ask questions about anything unclear.

Your monthly car payment isn’t your only ongoing auto expense. Car insurance can get expensive and it’s not something you can avoid.

At CNBC Select, we recommend Geico as the overall best auto insurance company and Farmers Insurance if you’re looking to take advantage of discounts.

Shopping for a car shouldn’t feel like a race. Take your time with your research to find a car that meets your needs at the price you can comfortably afford. Comparison-shop and negotiate to get the best deal you can — and double-check everything your dealership wants you to sign before you take your new ride home.

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