Getting your first car can be an exciting experience. It is also a learning experience. The fact that you’re reading this article is a good sign; it says you want to learn from others’ experiences rather than your own mistakes. This will save you a lot of wear and tear on your emotional wellbeing.
It’s going to save you money too.
Here’s how to get your first car loan.
Determine Your Credit History
One of the most important things you can do first is to review your credit reports and determine your credit score. Even if you’ve never bought anything on credit, you might already have a credit score. Remember that student loan you took out way back when? Credit bureaus do, and it is reflected on your credit report. It’s also entirely possible these days that someone is using your identity without your knowledge.
You can get all three of your credit reports for free at AnnualCreditReport.com. Look them over for mistakes and accounts you don’t recognize. Dispute errors if you find them. You can get your credit score directly from Experian, Equifax, or TransUnion, the big three credit reporting bureaus. Your credit score will influence the interest rate charged on the loan you get, so it’s good to know yours before you shop for a loan.
Figure Out What You Can Spend
It’s also important to know what you can afford to pay before you look for a car. The best way to figure this out is by adding up all the bills you already pay each month, factoring in savings, food, entertainment, and walking around money. Subtract this sum from your total monthly take-home pay, and what’s left will give you an idea of the monthly payment you can afford. However, you must also keep in mind that you’ll have to pay for car insurance, fuel, and maintenance. Most experts say you should limit car spending to 20 percent of your monthly after-tax income.
Plan to Make a Down Payment
The exact amount will vary with the price of the car you get. Experts recommend going with at least 20 percent of the purchase price of the car. This will lower your interest rate, help ensure the car is always worth more than you owe, and reduce your monthly payments.
Find Out What You Can Afford
With your interest rate in hand, the amount you can afford to spend each month, and an estimated down payment, you can determine how much you can afford to pay for a car. Any good finance calculator will help you figure this out when you input the monthly payment your budget will allow, the interest rate you‘re pretty sure you can get, the amount of the down payment you’ll have, and the length of the loan you’d like. If you see you have to go beyond 60 months to make a monthly payment fit into your budget, you’re trying to buy a car you can’t afford — dial it back.
Shop Around for a Loan
It is to your advantage to have a pre-approved loan in hand before you visit a car dealer. Check with your credit union, your bank, and online lenders to see if they offer a first-time car buyer program. With all of the homework above done, you should find someone willing to work with you. Having a loan approved before you begin shopping for the car helps you stay within your price range and gives you the ability to put the dealership in competition with your lender to get you the most affordable loan.
These five steps will help you find the best possible deal when you get your first car loan. One more thing, this also positions you to negotiate the car’s price, as opposed to the monthly payment. You’ll already know what the payment will be on the amount you can afford. This will help you avoid getting stuck with what looks like a low monthly payment at a higher interest rate for a longer-term and save you money.
Featured Image by Joern Florian Kahn from Pixabay