If you’re in the market for a new vehicle, buying used could save you money. The average used car price was $28,219 as of July 2022, compared to $48,182 for new cars, according to Kelley Blue Book.

But saving money shouldn’t be the only priority on your list when considering a used car rather than a new one. To make your purchase a worthwhile investment, you should know the steps to take when buying a used car and red flags to watch for.

6 key steps to buying a used car

There is no surefire way to guarantee that you will get a used car free of defects. However, you can take steps to minimize your risk and secure the best deal.

1. Make a budget and stick to it

Take a look at your budget and determine how much you can afford to spend each month on a car loan. Experts recommend spending no more than 25 percent of your net (or take-home) pay on all vehicle costs.

Use an auto loan calculator to estimate your maximum purchase price based on your desired monthly payment. If you’re planning to roll tax, title and registration costs into the loan, include them in the purchase price as well.

And don’t forget to factor in the cost of vehicle maintenance. You may need to adjust your budget to comfortably afford the monthly payment along with fuel costs, insurance, repairs and maintenance.

Key Takeaway

Car-related expenses should take up no more than 25 percent of your take-home pay. When budgeting for this expense, don’t forget to include the costs of insurance and maintenance.

2. Research cars that fit your needs

Now that you have an ideal purchase price, research safe and reliable models that fit your needs and budget. Create a list of your top five options and narrow it down based on reviews and safety ratings from the Insurance Institute for Highway Safety. Kelley Blue Book and Edmunds also offer reviews and ratings for used cars.

If you plan on buying a car from a franchise dealership, look at the certified pre-owned options. CPO vehicles offer several advantages. Only vehicles in the best shape and condition qualify for CPO programs. They are generally under 5 years old, with low mileage and a clean vehicle history.

In addition, CPO vehicles often have a warranty from the manufacturer. You can also buy a private extended warranty if you find a perfect ride that isn’t CPO.

Key Takeaway

Research and identify cars that fit your needs and your budget before starting shopping. Consider certified pre-owned cars as part of your search, as these vehicles typically have low mileage and a clean vehicle history.

3. Prequalify for financing

Before you visit the dealership or start shopping for a vehicle from a private owner, get prequalified for an auto loan through a traditional bank, credit union or online lender. Some lenders let you explore potential loan options on their website without affecting your credit score. And most allow you to apply for preapproval, so you have up to 30 days to shop with financing to back you up.

Getting in-house financing from the dealer or a lender in their network may be tempting. But the dealer could try to pair you with a lender that pays a heftier commission over another lender with a lower interest rate.

Walking into the dealership as a prequalified buyer shows the salesperson you are serious. It also gives you more leverage to negotiate both the vehicle’s sale price and financing terms.

Key Takeaway

Before you start car shopping, get prequalified for a loan if you intend to use financing for the purchase.

4. Shop around

Conduct a quick online search to find inventory available for the vehicle you’re looking to purchase. Be sure to check out what dealerships, private owners and even rental car companies have to offer.

If you aren’t sure where to search, visit sites like AutoTrader and Cars.com. Some private sellers also list on Craigslist and Facebook Marketplace, but proceed cautiously to avoid scams.

Test drive any vehicles that pique your interest and know what to look for when viewing a used car. Some of the top items to review include:

  • The car’s body condition: Look for dents, rust and panels that don’t align properly, which may indicate poor assembly or repair work.
  • Suspension: Make sure the car sits levelly.
  • Lights: Inspect all the lights to ensure they are working and are not cracked or foggy due to moisture.
  • Pedals: Look at the gas pedal, brake and clutch to make sure the rubber is not overly worn. If a car is advertised with low mileage, the rubber on these pedals should not be worn through.

Once you’ve explored your options, pare down your list to the top few — and be sure to jot down the VIN, or vehicle identification number, for each.

Key Takeaway

Do plenty of shopping around before settling on a vehicle. Your search can include dealers, private sellers and also rental car companies. And know what to look for when inspecting a used vehicle.

5. Fully research a car after test driving

Access the vehicle history reports for your top choices. You can visit Carfax or AutoCheck to pull this information using the VIN if the vehicle is from a private seller. Otherwise, the dealership should have the vehicle history readily available to review.

Consider contacting the car’s previous owner when buying a vehicle from a dealer. You can learn more about the car’s maintenance history and whether it has issues you should know about.

The previous owner’s information can be found on the car’s title. You can also ask for the car’s VIN and then use that number to track down the vehicle’s previous owner through such websites as Carfax, which provide vehicle ownership history reports.

Also, have the car inspected by a mechanic certified by Automotive Service Excellence. If there are issues, ask that the seller cover the repair costs or reduce the selling price. You should also check for safety issues and recalls, which can be done on the National Highway Traffic Safety Administration’s website using the VIN.

Key Takeaway

Pull the vehicle history report on a car you are considering buying so you can review its history. It’s also a good idea to have the car inspected by an independent mechanic.

6. Make the purchase

The final step is to seal the deal. Try to negotiate a fair purchase price that works for both parties. If you’re financing the car, focus on the purchase price and not the monthly payment to avoid getting trapped into an extended loan that will cost you more in interest over time.

You will also need to finalize the loan by contacting the lender directly to sign documents and by purchasing the required insurance in your state.

Key Takeaway

Seek a fair purchase price when negotiating. Focus on the overall price, not what the monthly payments would be.

What to watch out for when buying used

A used car could be right for your finances. Still, there are pitfalls to be mindful of when considering a used car purchase. Beware of:

  • Cars with salvage titles, which have been declared by the insurance company as a total loss.
  • Private sellers or dealers that aren’t open to you having a pre-purchase inspection done on the vehicle.
  • Private sellers who try to rush you into purchasing the vehicle.
  • Vehicle history reports with limited maintenance records.

If you encounter a salvage title or limited maintenance records, ask more questions and do more research before making a final decision. However, if a private seller or dealer will not let you conduct a pre-purchase inspection, or you’re feeling rushed into a purchase, it may be best to walk away altogether.

The bottom line

Purchasing a used car can save you money. But before making such a purchase, factor insurance and maintenance into your budget and then research your car options carefully.

Once you start shopping, make sure you know what to look for when inspecting a used vehicle and understand how to negotiate a fair selling price. Finally, never feel rushed or pressured into buying a car, especially if the seller will not let you take the vehicle for a pre-purchase inspection.