9 tips to get a good deal on your first auto loan

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 the 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. Weigh how much you will pay each month and the overall interest paid to your lender. But you should also consider the total cost of ownership — expected maintenance, insurance and fuel all factor into 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 payments 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 is rising. It’s not hard to find a loan that lasts six or seven years, but they come with a big downside.

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, or owe more than it’s worth.

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.

If you haven’t had the chance to build your credit score and history, you’ll have a harder time finding a good deal. You may 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 build a history of on-time payments. A low debt-to-income ratio also shows lenders you can handle your finances. Paint a good financial picture for your lenders to score a good deal.

4. Shop more than one lender

Ccomparing lenders is just as critical as comparing cars if you want a good deal. Lender types to choose among include:

• Credit unions: If you have very little or no credit history, you may be eligible for a first-time car buyer program offered through a local credit union. You’ll need to become a credit union member to apply for loans, so inquire about ways to join before moving forward.
• Big banks: Consumers with an existing relationship with a traditional bank may qualify for an auto loan. As a first-time buyer, you may face higher rates.
• Online lenders: Online lenders generally offer less stringent eligibility requirements than traditional banks. This is good news if you lack credit history or a high score, but you can expect a higher interest rate to offset the risk of default posed to the lender.
• Marketplace lenders: These online platforms feature an extensive network of lenders. Submitting an application shares it with the network so you can view potential loan offers with lenders who could be a good match.
• Captive lenders: You can also secure financing through a captive lender, or the finance company belonging to the auto manufacturer. They often feature auto loan programs for currently enrolled students and recent college graduates.

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. When you request preapproval, the lender generates a soft inquiry that won’t impact your credit score. You’ll have time to visit dealers and test drive cars without the pressure of needing to secure financing.

Getting preapproved gives you 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 a preapproval letter, you may be able to negotiate a good deal on 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. Lessors have their own way of calculating the 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

Most manufacturers offer first-time car buyer programs. 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.

A co-signer doesn’t have rights to the vehicle but will become responsible for the loan if you cannot make timely payments.

However, a co-borrower shares ownership of the vehicle and equal responsibility for the loan with you. Regardless of which you select, the individual should have good or excellent credit and a steady source of verifiable income that meets the lender’s minimum threshold for approval.

9. Have a big down payment

Once you know how much you can spend, start saving for a down payment that’s at least 20% of the vehicle’s total cost.

If you can’t afford this amount, aim for a down payment of at least 10% — or whatever you can afford. Consider using Bankrate’s auto down payment calculator to find a figure that works for you.

It may be tempting to get a more expensive car, but first-time car buyers — and every car buyer — should use a down payment to reduce the amount they need to finance. A larger down payment improves your chances of a good interest rate, reduces your monthly payment and shrinks the interest you’ll pay over the loan’s course.

Next steps

The key to getting a good deal on your first auto loan is to stay patient and shop around. You can walk away with a competitive rate by comparing lenders, saving up a down payment, and working on your credit score.

Learn more

• How much a co-signer helps secure a car loan
• How to decide whether to buy new or used
• Current auto rates