First-Time Car Buyer Loan Guide

A car loan can get you on the road if you don’t have the cash to buy your first car. Buying your first set of wheels can be exciting, but it can also feel overwhelming. And if you walk into a dealership unprepared, it’s easy to spend more than you should.

The car buying process doesn’t have to be daunting. And that’s especially true if you use our guide to help you pick your car and find the right car loan for your budget.

Figure Out Your Budget

Before buying your first vehicle, you’ll need to nail down your budget. Look at your income and review your bills and other expenses to see what monthly car payment you can afford. Remember to include car owner expenses, like gas, car insurance and maintenance, in your estimates.

You should also consider what size down payment you can afford since you’ll pay that upfront.

Calculate your car payment

Whether you have a car in mind or not, you can use the Edmunds auto loan calculator to estimate your car payment and see what fits your budget. Plug in a mix of car sales prices, down payments, loan interest rates and loan terms until you arrive at a number that matches your target monthly car payment.

Pick your car

Once you’ve set your budget, you’ll need to decide whether to buy a new vehicle or a used vehicle. Nowadays, used cars can cost as much as new cars depending on which models you’re considering. Don’t be distracted by bells and whistles. You should choose a car based on what you can afford to pay to buy it and what you can afford to pay to maintain it.

Keep in mind, older cars may have lower sticker prices but higher maintenance and repair expenses. And new cars may have higher insurance rates.

First-Time Car Buyer Financing

If you have a steady income and can stick to a budget, financing your first car can be a savvy choice. But getting a car loan can feel overwhelming because the options are practically endless.

Let’s look at where you can get auto financing:

  • Dealership: Dealerships partner with lenders to help car buyers secure financing. They can look up multiple loan options on the spot and may even have special financing offers – making this a convenient option.
  • Lender: You can get an auto loan at a bank, a credit union or an online lender. Every lender will have their loan qualification requirements. Some lenders offer bad credit car loans if you’re just starting to build credit or have low credit scores.

If you’re not sure about getting a car loan from a bank or a dealer, remember dealers can look up multiple loan options on the spot. But buyer beware: They may offer you a loan that makes them a lot of money – which doesn’t guarantee that it’s the best loan for you.

First-time car buyer programs

First-time car buyer programs can help you secure financing if you have student loans or thin credit history.

Some dealerships and car manufacturers offer programs and special deals to help make buying your first car more accessible. Like loans, these programs and offers may have qualifications you’ll need to meet.

When you’re car shopping, ask your dealer about any special offers or programs for first-time car buyers.

Learn What Affects Auto Loan Approvals

Your credit history will affect your loan approval. Lenders will pull your credit reports and check your credit scores to see if you qualify for their loans. Higher credit scores and stable income usually get you lower interest rate offers.

You’ll need a good credit score of around 670 or higher to get favorable loan terms, but some lenders offer auto loans to first-time car buyers with credit scores in the 500s. It may be hard to get your first car loan if you have bad credit or no credit – but it’s not impossible.

Improve your odds of getting approved for your first car loan by:

  • Having steady income and employment: A stable source of income will give lenders confidence that you can repay your loan on schedule.
  • Increasing your down payment: When you increase your down payment, you decrease the amount of money you need to borrow.
  • Getting a co-signer: Recruiting someone with higher credit scores to co-sign your loan can help you qualify and get approved. If you default, your co-signer must repay the loan, but the monthly car payments are your responsibility.
  • Building your credit: To boost your chances of being offered favorable loan terms, you can rebuild or build your credit to prove to lenders that you’re a responsible borrower.

Get a Preapproval

Before buying a car, compare lenders to find the best loan terms and interest rates.

If you can, consider getting preapproved for a loan. The lender will tell you the loan amount and loan terms they may offer you if your loan application is approved.

Pro tip: If you’re juggling a few lenders for preapproval, submit all your preapproval applications within 14 days, so they count as one hard credit inquiry on your credit reports – decreasing the impact on your credit scores.

Besides your estimated budget, you should use your preapproval as a spending guide while car shopping. You can also use your preapproval as leverage to negotiate the best loan offer. When you’re ready to buy a car, show the dealer your preapproval letter and ask them if they can beat your preapproved interest rate.

If you’re unhappy with the loan amount and loan terms you get, you’ll need to start making some decisions. Do you need to build your credit, make a larger down payment or get a co-signer?

Tips for Buying From a Dealership

Dealers may take advantage of someone coming in to buy a car for the first time, especially if it’s obvious they don’t understand the car buying process.

Here are some tips to help you buy a car like a seasoned buyer:

Understand car pricing

The manufacturer’s suggested retail price (MSRP) you see all over car windshields and online is a (emphasis added) suggested selling price. What you pay to drive off the lot with your new car is the out-the-door price – the selling price plus taxes and fees. It’s usually much higher than the MSRP.

Negotiate the right price

To get the best deal, negotiate on the out-the-door price, not the monthly payment. Yes, you should make sure you can afford your monthly car payment (which is why having a budget is important). But when you negotiate on the monthly payment instead of the car price, you may pay more in the long run.

To hit your desired monthly car payment, your dealer might extend your loan repayment term, but not decrease the car price. When a loan’s term is extended, you pay more interest over the life of the loan.

Only sign a completed contract

You must know and discuss what’s included in your sales contract and loan agreement before you sign. Read things over and ask the dealer to explain anything you don’t understand.

Avoid the scam of yo-yo financing by signing completed contracts. When things are busy, some dealers may have you sign a contract with an estimated out-the-door price and unofficial loan terms. So you’ll drive away with your car, but your loan offer is unapproved.

A few days later, they’ll call you back to sign new paperwork with the final price and loan terms, and things might end up looking a lot different. At this point, you’re legally required to sign the papers or return the car.

From Riding Dirty to Buying Your First Ride

Buyers, guess what? Car dealers want to sell you a car. So you know what that means? It means you’re in charge of the deal. Use that awareness to your advantage when you’re negotiating.

And here’s another negotiation tip: ask a friend or relative who’s bought a car with a loan to come to the dealership with you as backup.

Beware of dealers who try to sell you on add-ons or upgrades during negotiations. Remember, dealers can keep your monthly payment the same by extending your repayment period while piling on add-ons that make your car price skyrocket. That’s all the more reason to negotiate the out-the-door price to lower the total amount you have to finance.

No more asking for rides. It’s time to go forth and buy your first ride!

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