Introduction to car buying | Car buying | Financial Literacy | Khan Academy

So, you're looking to buy a car. So, I'll at least tell you how I would approach buying a car. The first thing is thinking about what you can afford, and I would think about that before you even look at the types of cars you might want to buy. Because it could be very tempting to get some car and then somehow rationalize that you can afford it.

So, look at your budget. Look at how much money you think you can put aside, let's say, every month either for a payment on a car, to lease a car, or to save up for a car. And if you're going to be financing the car or getting it on a lease, you're also going to have to put some money down there. But think about that—what you can budget. And then whatever amount that is, remember it's not just going to be for the payments on the car or the cost of the car.

It's also going to be needed for things like gas, insurance, maintenance, and maybe even a parking spot if you need to pay for where you're going to actually keep your car. So, keep all of those things in mind. Now, once you have that in place, you can think about what kind of car you're going to buy.

I really encourage you to think about the car that you need versus some dream about what you might want. I think all of us, as human beings, we are very susceptible to marketing. We imagine, "Hey, if I had this car, my friends are going to say this and that." Usually, they won't care, and almost any car you buy—even if it's a super fancy, exotic sports car—within a week or two, it's going to get old.

You're going to realize it's just a piece of metal to get from point A to point B. So, think about what you need—how much capacity, storage, how many people are you going to be transporting, in terms of costs, gas, how much gas is it using. And it's not just the cost of the gas, but the convenience or the inconvenience of having to stop for gas if you're driving a lot.

When you think about the cost of the car, don't just think about how much you're paying for it, or don't just think about the payment that you're making on either the financing or a lease. Think about what that car might be worth in five years or ten years, however long you're taking it.

There are definitely scenarios where Car A might cost more than Car B, but the amount that they have depreciated over, say, five years—the more expensive car has depreciated less. So, the cost of owning it, if you sell either car after five years, the cost of owning the more expensive car, in some cases—it's not always the case—but sometimes it is. The more expensive car could actually be cheaper because it has a higher resale value.

Once you figure out the type of car you're getting, and even if you can afford more car, I do encourage you to get the car you need. If you have surplus money, put it into your savings, invest it, like in all the other videos that we've talked about. But now you're ready to go to actually get the car itself.

Now, when you're selecting a car, be sure to test drive, think about the warranty if you're getting a used car. Make sure you get the vehicle identification number (VIN), so that you can make sure that it hasn't been damaged, it hasn't been in an accident before. There isn't some shady history associated with the car that you don't know about.

And then once you identify a car, everything looks good, and it looks like a car you can afford—the car that you need—then you have to think about how you're going to pay for it. Of course, if you've saved up money for a car, maybe you could pay with cash or make a significant down payment and finance the rest.

Financing, as we talked about in another video, is going to be dependent on your credit score. Definitely look carefully at the interest rate. Leasing could also be an option. Now, leasing—if you own a business of some kind, especially a business that requires a car—a lease can be interesting because it might be tax-deductible. So, it helps reduce your tax burden.

But, in most cases, a lease ends up, when you do the math, actually becoming more expensive than financing it. There are some limitations to leasing as well. You can only drive it so many miles over the course of a year, and beyond that, the company might charge you.

Then, you might lease it for two or three years, and then after that point, you have to get into another lease. Sometimes they will allow you to buy that car at a discounted price, but once again, usually you should do the numbers. It's going to cost a little bit more than if you just bought it outright or if you were to finance the car.

But think about how you're going to pay for the car. It's a very important consideration there. Then you get the car, and the paperwork can be really involved sometimes. I just got a minivan; I encourage you to call ahead of time and do as much negotiating as you can do on the phone.

I tried to do that as much as possible. It's like, "Okay, this is the firm price; this is what we're going to do." Get them to say "yes." And even on price, you can look up things like the MSRP (the manufacturer’s suggested retail price), and you can also look up the invoice price, which is essentially what the dealer paid—the cost to the dealer to get the car.

Now, if your car is in demand, if there's a shortage, a waitlist—you’re not going to be able to get close to the invoice price. It probably will be closer to the manufacturer’s suggested retail price, maybe even a little bit more if it's a really high demand car. But if it's not a super high demand car and there's a lot of inventory at the dealership, you could potentially discount a pretty good bit.

You could even get invoice, or in many cases, you can even sometimes get a below-invoice price on the car. Negotiate ahead of time, be really thoughtful on price. Don't necessarily—unless it's an option that you really want—fall for that. And you've got to sign the paperwork.

Usually, you're going to have to get insurance within a few days of bringing the car home, or sometimes you have to have the insurance immediately when you get it. So, that's my car buying advice.