First Time Buyer Car Loan Necessities
It is a scary process to run out, get a loan and buy a car if you are a first-time buyer. If you have subprime credit or are a first-time car buyer with no credit, you may not qualify for financing through a traditional bank. Most people at some point in their lives purchase a vehicle with bad credit or no credit and take the loan the dealer offers at the car lot without shopping for the car loan themselves.
Refinance that first car loan
The dealer may request that they use a co-signer to secure the loan. At that point, they think it is the easiest, quickest way to get a car that day and take it home. They completely trust the sales person with deciding their loan terms and payments. Dealers will sometimes use straw purchases tactics to scam you if you have no credit.
They pay the high payments without question, thinking that this is all they will qualify for, and that is exactly what the car salesperson is telling them. Then after the sparkle of the new car has dulled down they find out that they are paying a higher finance rate than they qualify for at other lending institutions. Some people will struggle to make the payments for the next few years until the car is paid off.
For first-time car financing, you should have no trouble getting a first-time car loan, even if you have less than stellar credit. While this is true, you must know you will pay a little higher monthly payments if you do not have a high credit score.
Of course, in the future, if you make payments on time and maintain a decent credit profile, you can always refinance your loan and drop those high payments while your credit rating improves. You do not have to wait until the loan term is completed to get better monthly rates.
Your Credit Score
Before getting started, you should know where you stand in regards to your credit score. Now, if you are a first-time car buyer with no credit, you can raise your score by paying off debt and resolving issues. You can also take the best loan you can find and use it to build credit.
On the other hand, if you have severe financial problems, you should consider holding off on applying for your first car loan until you can fix your underlying issues.
Your FICO automotive credit score
Auto lenders and car dealers look at what is known as a FICO automotive credit score. This credit score is not the same as your standard credit score because it looks at any credit history you may have with past auto loans.
Being a first-time borrower and not having any credit history, the credit bureau will look to any records of paying other types of debt you may have paid on regularly like rent or electric bills.
Your score will be established from this information if it is available to them. This is good news if you are paying your bills on time, this new process would give you a higher credit score than in the past.
When you are applying for your first auto loan, you should have your financial information on hand.
By not leaving any of the application fields blank, you can get the most accurate loan rate. To prepare for this, you should get out your pay stubs, vehicle information, job history and contact information and any other financial information that the lender will need. That way, when you fill out the paperwork or speak to a finance agent, you can have confidence that you will get a great rate.
Also, you will not have to deal with any lengthy delays when the lender asks for more information. This is where applying on-line can be helpful. You can fill out the application with no pressure from salespeople.
Take your time to find all the correct information, so your application is the most complete and accurate that it can be. You will also go to the dealer with the money in hand so it will be easier to negotiate with the dealer for a final price.
How Much Should A First Time Car Buyer Spend?
For your first car purchase, you should get pre-approved for a loan that fits your personal spending budget.
Car buyers can get distracted when you see all the available cars for sale. It is easy to fall in love with a new $50,000 car that is outside of your spending range. The sales person is all too eager to tell you he can stretch out the payments for you, and this is how many get caught in a bad credit trap with their first car purchase.
Dealers will also take advantage of first-time car buyers by selling you extras you do not need or adding additional fees you should not have to pay. If you are buying your first car and want a simple car with an affordable loan, do your research. You should consider a compact or other simplistic car offering reliability and safety at a reasonable price.
With this, you will also have enough money to make your payments without a struggle.
Remember, there is nothing wrong with a beautiful new car, but you must understand that it comes at a significant cost, and you should consider keeping your first purchase simple and not over-the-top. When you are a first-time car buyer, the loan, and the credit you build will be as important as the car you choose to drive.
Length of your first auto loan
For your first auto loan, you should think about the long-term when pondering your vehicle purchase. For example, when you want to buy a car and keep it for a decade, you can probably get a loan for six years without much aggravation or worry.
On the other hand, if you want to buy another car in a few years, you should keep your loan short. Otherwise, it is easy to fall into the trap of trading in vehicles and getting a larger payment just to replace the car.
Trading in a car you still owe money on comes at an enormous long-term cost and will likely hurt your financial future.
The monthly payment should not be the most important thing to consider. A good car deal starts with the overall price. However, the reality is, you should get a monthly payment that you can truly afford.
Now, most people do not know what this means. To understand this further, you should look at your budget and come up with a plan to make your monthly payments more affordable.
Budgeting your first car loan payment
- You should plan to put down 20% of the sticker price for a down payment.
- Your car payments should not exceed 15 % of your gross monthly pay or 20% of your take home money.
- Your car loan term should be kept to 48 months or less.
One example would be if you had a gross monthly income of $5,000, your monthly payment should be $750.00 or less. Now apply that to a 48-month loan term at 6% interest, and you will be able to finance a car loan for about $32,000. If you use a 20% down payment ($6,500), you will have a budget for a car that cost about $38,500.
If you do not have a budget, you should start with a simple budget first. At the same time, when coming up with a monthly payment, you think you can afford, remember to think about intangibles of your financial life such as missing work or running into other short-term problems.
We highly suggest using an auto loan payment calculator to help you preview what your payments could be with different sized down payments and different loan terms. Then you will have a good estimate of what you can afford.
Look at the Cost Of Ownership
It is easy for your first car loan decision to be based on monthly payments. While this is the biggest cost of car ownership, it is far from being the only thing to remember. You must understand that car ownership is costly. For starters, other than a monthly payment, you will have insurance, fuel, and taxes.
On top of that, you may have to pay for periodic mechanical repairs and maintenance. You should have an understanding if you can truly afford the monthly payments plus the other expenses.
If not, you may want to tone down your purchase. Our resource page has helpful tips for doing some of the maintenance yourself like changing wiper blades or plugging a leaking tire.
How Can I Get Cheaper Auto Insurance?
People buying a car for the first time or who have signed on for a high risk auto loan often try to think of other ways to reduce their spending. Often, one way that comes to mind is to reduce their insurance payments.
This may mean not getting full coverage auto insurance. One way to compensate for this problem is to select the right type of car. One way insurance companies decide how much to charge a person for auto insurance is the kind of car they have.
Your first car should be a wise choice. The car you choose will help you establish credit and provide transportation to school or a job. It should work to improve your future lifestyle. It should not be a fashion statement that will cause financial disaster and make you work just to make the car or insurance payments.