Summary: We steer you through the five steps a first time car buyer should take to get the best deal on a new vehicle. Don't miss the last, little-known bonus tip that may be the most important of all.
Taking out an auto loan and getting the best deal is risky as a first time car buyer because you don’t know where to start or are not familiar with how it works.
As a first time buyer, your lending options may feel overwhelming as you could choose financing through an online lender, a bank, or the auto dealer where you're buying the car.
Once you’ve chosen a lender, they will run a credit check, then loan you the money to buy the car, and you agree to pay back the amount you borrowed through monthly payments, plus the interest rate quoted.
Here is the clincher: Interest rates will vary drastically from each lender option so you’ll have to shop around for the best deal, just like you plan on doing for your car.
I know this all sounds a bit scary. Don’t fear! Within this article, I’m going to show you how to find the best auto loan for first time car buyers.
You will be able to follow along with my easy 5 steps to a successful first time car buying experience.
Make sure you read the entire article because the fifth tip is an insider's bonus that most people don’t even know about!
First thing's first…are you an impulse buyer? Either way, you need to do some homework before you visit a car dealership.
Even if you drag your best buddy along to help keep you on track, car salespeople are taught to work on your emotions, and you could easily drive away with:
We are not going to let that happen!
So, let’s get started on the five steps every first time car buyer should follow to get a great deal on their next auto purchase.
#1 - Calculate How Much Can You Pay with This Little Trick
You’ll need to know how much per month you can comfortably afford to qualify for first time car buyer financing.
This isn't as simple as looking at your budget and saying, "Oh, I think we could probably spend $300 per month on a car payment."
The lender will use your debt-to-income ratio to determine the car payment you can afford.
To put it simply, this is all your monthly debt found on your credit report divided by your monthly income.
The resulting ratio is known as your debt-to-income ratio and is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
The max debt-to-income most car lenders want to see is 36%.
Here is how you figure out if you fall under that:
Multiply your gross income by 36% to determine the maximum monthly debt payments lenders want you to have.
For example, if your total monthly income is $4,000, multiply $4,000 by 0.36, or 36 percent, for a result of $1,440. Your total monthly debt obligations should not exceed $1,440 per month.
#2 - A First Time Car Buyer Should Prepare For A Down Payment
You’ll probably have to put down a down payment.
You might think, “How much is that going to cost me?”
There are a couple of good reasons why you want to make a down payment on your new car.
First, to obtain first time car buyer financing, the lenders are going to require a down payment.
Second, cars depreciate in value very quickly... like as soon as you drive them off the lot.
If you don't put a decent down payment, you're likely going to owe more than the car is worth for at least the first 3 or 4 years of ownership.
Cars depreciate in value very quickly... like as soon as you drive them off the lot!
If you get into a situation where you have to sell the car during this time, you will have to pay off this liability - which could be a very big problem.
Third, if you can provide a larger down payment, you will reduce the interest you'll have to pay over the life of the car loan.
Depending on how much you put down, this can save you hundreds, or even thousands of dollars over the length of the loan.
So what's the perfect down payment when buying a car?
Most experts agree you should put down at least 20% on a new car.
This will help ensure you won't owe more than the car is worth through the life of your loan.
On a used car, you should put down at least 10% up front.
Remember, these are the minimum amounts you should put down. The more you can afford, the better off you'll be.
Jot down what you can afford to put down. While getting all your ducks in a row, maybe you can possibly save for a higher down payment.
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#3 - Get Pre-Approved Financing
Most people can't fork over the full sales price of a vehicle, which means they much finance the car (borrow money from a lender).
You should figure out your own financing PRIOR to stepping foot on a car lot by getting pre-approved for a loan.
You may think, you’ve got to be kidding!
Don’t worry, this is a very common way to purchase a vehicle if you want to get the best deal.
Financing through the dealership is convenient but expensive.
In fact, according to U.S. News...
“Having the entire first time car-buying process neatly bundled into one transaction...makes purchasing easy. However, it’s a horrible way to buy a car if you want to get a good deal. It’s a common dealer trick to keep you focused solely on the monthly payment while they manipulate the trade-in value, vehicle price, and car loan terms. In most cases, they make a significant portion of their profit on the sale by marking up the cost of the car loans you are offered.”
Now, I’m pretty sure you don’t want to spend an hour of your lunch sitting in a bank only to be offered higher rates than you can get online.
You definitely don't want to use an auto dealership for first time car buyer financing.
We have made this easier for you to find the best rate for an auto loan from the comforts of your home or cell phone.
All of our online lenders will often give you a better rate than a dealership or a bank.
This will take you to our recommended online lenders; you fill out the application, and get offers from multiple lenders.
This is the way I would proceed as getting options from all types of lenders is a lot of work and just darn confusing.
As we’ve already done the research, our on-line lenders often offer you the best rate.
Just push the orange button and try it out.
You’ll have a pre-approved loan before you ever step on a car lot.
BEWARE! You don't want to get a loan using the car dealer's financing.
They will most often charge you much more interest than you can get elsewhere, sometimes triple the amount!
You may have talked them into giving you a better price on the car but they’ll get it back in interest.
I’ve seen my son’s dealer interest rates from just a few months ago and they are ridiculously high!
#4 - Know Your Credit Score
To get the best rates for your first time auto loan you need to know your credit score.
Many of published rates you see on the internet are based on an excellent credit score.
A 715 FICO® Score is good, but by raising your score into the Very Good range, you could qualify for lower interest rates and better borrowing terms.
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Let’s find out what your credit score is.
A great way to get started is to get your credit report from MyFico.
This is the one we recommend.
They not only provide your credit scores but you also get a variety of services: 3-Bureau credit monitoring, Score alerts, Identity theft monitoring, alerts and dark web surveillance and Fraud resolution and up to $1 million ID theft insurance.
You’ll want to purchase from all 3 of the credit reporting bureaus to get your credit scores.
Check your credit score to find out the specific factors that impact your score the most.
This credit score will determine what kind of interest rate you’ll get along with your debt ratio.
You don’t know from which reporting agency the lender will pull your credit score, so you’ll need to know all 3.
Knowing your credit scores can help you understand why you might get a different APR from one lender to another.
So you might ask, “What the heck is an APR?”
APR stands for “Annual Percentage Rate.”
For car loans, APR is the rate you pay that accounts for your interest charges plus all other fees you have to pay to get your loan.
This means that you can compare the actual cost for any loan offer by looking at their APR rates.
The lowest APR rate is the best loan offer!
Find Your First Lender Financed Vehicle
Now the fun begins! Get online and find the kind of car(s) that make the most sense.
Be sure to note the make and model, year, cost, and dealership.
Keep in mind that dealerships and automakers are constantly running special promotions that may save you money.
Many sites offer calculators online to figure out your monthly payments.
You’ll already know the cost of the car and the year and your credit score.
You pick the number of years you plan to pay it off.
If the payment is too much or too little, you can adjust the figures to make it work for you.
If you read this entire article, you should know what you can afford.
Bonus Tip: Buy Your Car In The 4th Quarter
The 4th quarter is the time of the year to buy!
The months of October, November, and December are the best time of year to buy a car.
Car dealerships have sales quotas, which typically break down into yearly, quarterly, and monthly sales goals, according to TrueCar, which forces them to come down on their prices at the end of the year to meet quotas.
Best day of the year to buy?
New Year's Eve! TrueCar estimates you'll get an 8.3% savings off the price of your car compared to any other day of the year.
Alternatively, the next best time to buy would be at the end of January as it's a new year and a new sales quota.
Head To The Car Dealership
Put on your comfy shoes and business casual clothes so they’ll take you seriously.
Clear your day and get a babysitter if necessary.
Bring a notebook for taking notes and a phone to take pictures.
Pack a meal and maybe even a book for all those negotiating hours. Don’t forget to bring your pre-approved loan info.
Head out to the car lots and begin car “looking”.
Oh, how fun! At least they give you water and a snack these days.
Remember, you don’t have to buy the 1st day you look.
Different dealerships offer different rates and deals
Take your time and find the perfect car at the best cost for you. See you down the road!
Annual Percentage Rates (APR), loan term and monthly payments are estimated based on analysis of information provided by you, data provided by lenders, and publicly available information. All loan information is presented without warranty, and the estimated APR and other terms are not binding in any way. Lenders provide loans with a range of APRs depending on borrowers' credit and other factors. Keep in mind that only borrowers with excellent credit will qualify for the lowest rate available. Your actual APR will depend on factors like credit score, requested loan amount, loan term, and credit history. All loans are subject to credit review and approval. Discrimination based on gender is absolutely forbidden. Whether the loan is for her or for him, you should receive the same terms.
By Susan J. Ham