Preparing to buy a car for the first time is likely one of the most stressful experiences out there. With so many factors to consider about the actual car, the loan can fall to the wayside.
Don’t let it. Securing a good deal on your first auto loan requires research — but the more you do now, the better off your finances will be later. A low interest rate is key to an affordable car no matter what you end up buying.
1. Be honest with your budget
The biggest concern when buying a car should be the cost. Knowing the full cost means you know how much you will pay each month and the overall amount of interest paid to your lender. But it also means you know the total cost of ownership — expected maintenance, insurance and fuel all factor in to how much you spend.
Experts recommend spending no more than 10% of your income on a car. Use an auto loan calculator to estimate monthly payment and total interest paid. Then check resources like Edmunds and Kelley Blue Book to see what you can expect to pay for the vehicles you are interested in buying.
2. Remember that longer terms mean a higher cost
The average car loan length has been going up. It’s not hard to find a loan that lasts six or seven years, but it’s going to be much more expensive over the life of the loan.
A longer loan term does mean a lower monthly payment — which could be helpful if you are on a tight budget — but it results in more interest paid overall. Even if you buy an inexpensive car, you can quickly become upside down on your car loan with a long term.
For your first auto loan, choose the shortest term you can reasonably afford each month. It may mean you have to cut back in other areas, but it is by far the safest choice to protect yourself from owing more on your car than it is worth.
3. Review your credit report and score
Your credit score is the most important factor lenders consider when determining your interest rate. To get a good deal, you will need good credit. You will also need a history of on-time payments.
A younger first-time car buyer may have a difficult time getting a good deal if you haven’t had the ability to build your credit score and history. This may mean you have to use in-house financing from a dealership — which means a higher interest rate.
But if you can wait on your car loan, try to improve your credit score and get a history of on-time payments. A low debt-to-income ratio also shows lenders you are able to handle your finances. Focus on painting a good financial picture for your lenders to score a good deal.
4. Shop more than one lender
Buying a car means a lot of time spent on research. And while homing in on the exact make, model and trim of your car is important, comparing lenders is just as critical if you want a good deal.
Every lender has different rates and ways of calculating who gets what terms. It is critical to shop around and apply with multiple lenders. This allows you to see what you qualify for, how much you can spend and what you can expect to pay each month.
5. Get preapproved
Shopping around has an added benefit: It likely ends in a preapproval offer that lasts up to 30 days. This gives you time to visit dealers and test drive cars without the pressure of needing to secure financing.
It also means you have the upper hand in negotiations. Dealer financing is typically expensive since dealers mark up their rates to make a profit. But when you head to the lot with preapproval, you may be able to squeeze a good deal on both your loan and in-house financing — if that is the route you want to go.
Some dealers also offer the choice between a rebate or low-interest financing. If you have already managed to secure unbeatable rates with another lender, your choice is clear: reward yourself with a rebate.
6. Decide between new, used or leased
Lenders offer different rates on auto loans for new and used vehicles. Leases have their own way of calculating monthly payment — called the factor rate — and you should do your research on leasing a car before you take this step.
If you plan on buying, know that new cars typically have lower rates across the board. However, new cars are also significantly more expensive and will lose value faster through depreciation. So, while you may pay more interest for a used car, you may still save money.
7. Check out manufacturer specials
There are first-time car buyer programs available at most manufacturers, and some even offer special deals for college students and recent grads. If you are planning on buying a new car, have the income and credit to back you up and want in-house financing, it makes sense to see if you can get a little money off.
Manufacturers also offer rebates, 0 percent APR deals and special leases on new models. Keep an eye out for these. You will be more limited in what you can buy and how you can pay for it. But if you already have a clear idea of what you want and excellent credit, manufacturer specials can save you money on your first auto loan.
8. Use a co-signer or co-borrower
If you don’t have stellar credit, a co-signer or co-borrower could help your chances of getting a good deal. The lender will consider both credit scores when deciding whether to finance your vehicle.
9. Have a big down payment
The less you borrow, the more likely you are to get a competitive interest rate. Once you know approximately how much you can spend, start saving for a down payment that’s at least 20% of the total cost of the vehicle.
It may be tempting to just get a more expensive car, but first-time car buyers — and really, every car buyer — should use a down payment as a way of reducing the amount you need to finance. This will ensure you get a low rate and keep your monthly payment down.
Next steps
The key to getting a good deal on your first auto loan is to stay patient and shop around. By comparing lenders, saving up a down payment and working on your credit score, you can walk away with a competitive rate.
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