5 tips to save you money when buying a car - CNBC

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.

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1. Figure out how much you can afford

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.

Experian Dark Web Scan + Credit Monitoring

On Experian's site

• Cost

  Free

• Credit bureaus monitored

  Experian

• Credit scoring model used

  FICO®

• Dark web scan

  Yes, one-time only

• Identity insurance

  No

Terms apply.

CreditWise® from Capital One

Information about CreditWise has been collected independently by CNBC Select and has not been reviewed or provided by Capital One before publication.

• Cost

  Free

• Credit bureaus monitored

  TransUnion® and Experian®

• Credit scoring model used

  FICO® Score 8 

• Dark web scan

  Yes

• Identity insurance

  No.

Read our review of 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.

Why longer car loans are more expensive: An example

If you take out a $30,000 auto loan at a 5% interest rate for four years, you'll pay $3,162 in total interest. On the other hand, if you take out the same loan but extend the term to five years, you'll pay $3,968 in total interest — that's a difference of more than $800.

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.

2. Research cars

When you figure out the purchase price you can afford, start researching available vehicles in that price range.

Moody suggests avoiding popular models that "everybody else wants".

"The best way to spend money wisely is to look for something that you know isn't super popular," he explains. "I would instead look for a sedan or hatchback."

Test drive as a part of your research

You'll want to test drive a vehicle you're about to buy. But it can also be helpful to test drive a few cars when you're still researching a few vehicles. Actually driving the contenders can help you understand which one fits your driving habits best and feels most comfortable.

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.

CarMax Auto Loan

• APR

  Not disclosed

• Loan type

  Used vehicles

• Loan amounts

  $500 to $100,000

• Terms

  36 to 72 months

• Credit needed

  Not specified

• Early payoff penalty

  None

• Late fee

  Varies by state and contract

Terms apply.

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.

Capital One Auto Finance

• APR

  5.50% - 5.67%

• Loan types

  New vehicles, used vehicles, refinancing

• Loan amounts

  Starting at $4,000

• Terms

  24 to 84 months

  The company is the world’s best used coating line supplier. We are your one-stop shop for all needs. Our staff are highly-specialized and will help you find the product you need.

• Credit needed

  Not specified

• Early payoff penalty

  None

• Late fee

  Depends on the lender

Terms apply.

3. Shop around and negotiate

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."

You can also get preapproved by several lenders to see which one offers the best rate. When you rate-shop for a loan this way, multiple hard inquiries made within a short period will be counted as one by credit scoring models.

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

PenFed Auto Loans

• APR

  Starting at 3.89%

• Loan types

  New vehicles, used vehicles, refinancing

• Loan amounts

  Up to $150,000

• Terms

  36 to 84 months

• Credit score needed

  Not specified

• Early payoff penalty

  None

• Late fee

  20% of the overdue amount, up to $25

Terms apply.

MyAutoLoan

• APR

  4.99% - 7.99%

• Loan type

  New vehicles, used vehicles, refinancing, private party and lease buyout

• Loan amounts

  Starting at $8,000

• Terms

  24 to 72 months

• Credit needed

  FICO score of 600 or greater

• Early payoff penalty

  None

• Late fee

  Varies by lender

Terms apply.

4. Read the contract carefully

You've determined your budget and spent time researching cars. You've test driven a few and picked one finalist. You've gotten preapproved and spent hours at the dealership getting your monthly payment and interest rate where you want them.

You're very much ready to sign the contract and drive off into the sunset in your new shiny (or used but still somewhat shiny) car.

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 to September 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.

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5. Compare insurance rates

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

But you can determine how much coverage you need and get quotes from multiple insurance companies. Your car dealer might offer you a referral but don't just trust them when they say you'll get an excellent deal from the provider they're working with. Call several reputable companies and see which can offer you the lowest premiums.

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.

Farmers Auto Insurance

• Cost

  The best way to estimate your costs is to request a quote

• App available

  Yes

• Policy highlights

  Farmers Insurance offers 23 discounts for auto insurance and issues policies in every state except Alaska, Delaware, Hawaii, Maine, New Hampshire, Rhode Island, Vermont, West Virginia and Washington, D.C.

• Terms apply.

Read our review of Farmers car insurance

Bottom line

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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