Preparing to buy your first car is stressful and requires research to secure a significant deal on your first car loan. The longer you spend on the front-end, the later your finances will be. No matter what you buy, the low interest rates on car loans are key to an affordable car.
1. Stick to your budget
When you buy your first car, consider two numbers: monthly payments and overall costs to determine how much it will cost. Experts recommend spending less than 20% of your car’s income, including monthly payments and other costs of ownership, including maintenance, insurance and fuel.
However, finding the right size payment is a balanced act. Paying small amounts on an expensive car will result in much more interest in the long run, but larger payments can put a strain on your budget each month. I use an auto loan calculator to estimate monthly payments and total interest paid. Next, check out resources such as Edmunds and Kelley Blue Book to see what you can expect to pay for vehicles that are interested in purchasing.
Even if you buy a cheap car, you can quickly turn your car loan upside down or borrow more than it’s worth. For your first car loan, choose the shortest term you can reasonably afford each month. It may mean you have to cut back on other regions, but it is the best way to protect yourself from overpayment of profits.
2. Save big down payments
Once you know how much it will cost, start saving for a down payment of at least 20% of the total cost of the vehicle. A larger down payment will improve your chances of a good interest rate, reduce your monthly payments, and reduce the interest you pay on your loan course.
If you can’t afford this amount, aim for a down payment of at least 10% or something you can afford. Consider using Bankrate’s car down payment calculator to find the number that suits you.
While getting a more expensive car might be appealing, first-time car buyers, and all car buyers, will need to use their down payment to reduce the amount they need to raise funds.
3. Check your credit report and score
Your credit score is the most important factor that lenders consider when determining your interest rate. A significant transaction requires a history of on-time payments and a solid credit score. Lenders can also consider other aspects of your current debt, income, and income before approving your first car loan.
The borrower with the highest credit score will be approved at the lowest interest rate, while those with a lower score or with a lower credit history will receive much higher interest rates. Over the lifespan of a loan, the difference can cost you thousands of dollars.
For example, in the fourth quarter of 2024, the average car loan interest rate for new cars for credited borrowers was 6.40%, while the average fee for poor credit borrowers was 13.08%. For a $45,000 car loan over a 60-month period, this is how much you can save on a higher credit score.
| Monthly payment | Total interest paid | |
|---|---|---|
| Good credits (661-780) | $878 | $7,702 |
| Fair Credits (501-600) | $1,026 | $16,544 |
If you didn’t have the opportunity to build your credit score and history, you’ll have a hard time finding a fair amount of deals. You may need to use in-house dealer funding. This means higher interest rates, so improve your credit score and build a history of on-time payments. The low debt-to-revenue ratio also indicates lenders who can handle the finances. Draw a good financial picture for your lender to get a significant score.
Consider using co-signers or co-loads
If you don’t have great credits or have no established credit history, Cosigner or co-borrower may help you with your chance to make a fair deal. The lender will consider both credit scores when deciding whether to fund the vehicle.
Cosigner does not have the right to the vehicle, but if you are unable to make a timely payment, you will be liable for the loan. The co-borrower shares ownership of the vehicle and is equally responsible for the loan with you. Even if you choose, individuals should have a stable source of good or good credit, and verifiable income that meet the lender’s minimum approval threshold.
4. Shop multiple lenders
Comparing lenders is just as important as comparing cars when you need to do a substantial deal. Auto loans are common, so there are many options.
- bank: Large banks tend to have strict requirements for auto loan applications, but if you have an existing relationship, you may be able to qualify. As a first-time buyer, you may face higher fees.
- Credit Union: If you have little or no credit history, you are eligible for the first time auto buyer program offered through your local credit union. Most credit unions require you to become a member of the application.
- Online lenders: Online lenders typically have fewer eligibility requirements than traditional banks. This is good news if you don’t have much credit history or high scores, but higher interest rates may be expected to offset the default risk imposed on lenders.
- Loan Market: These online platforms feature an extensive network of lenders. When you submit your application, you can share it with your network, allowing you to consider a potential loan offer as a lender. You will then need to complete another application using a lender.
- Lenders for prisoners: You can also secure funds through prisoner lenders or through a financing company belonging to an automaker. They often feature auto loan programs for currently enrolled students and recent university graduates.
- Dealer Funding: If you are unable to secure a car loan from your lender before you shop, the dealer has a financing option. However, you may need to resort to expensive purchases here. You will need to pay for options that could put a strain on your budget.
Every lender has different rates and methods to calculate who gets what terms. It is important to shop and apply with multiple lenders.
5. Apply for pre-approval
Shopping offers additional benefits. You may be able to obtain a pre-approved offer that lasts between 30 and 60 days. Preapproval gives you time to shop for a ride, knowing that you’ve locked up your funds at a fixed interest rate.
Preapprovals requires a strict credit check, but they provide leverage when it’s time to negotiate a purchase price at the dealer. Also, if that’s the route you want to go, you may be able to negotiate a better deal on in-house fundraising.
6. Check out the manufacturer special
The manufacturer offers rebates, 0% APR transactions and special leases on the new model. Please be aware of these. You will be more limiting what you can buy and how you can pay for it. But if you already have a clear idea about what you want and great credit, the manufacturer’s special can save you money with your first car loan.
Some dealers also offer the option of car rebates or low interest rate funding. If you already have an invincible fee with another lender, your choice is clear: reward yourself with a rebate.
7. Find out what your first car buyer program is
Some manufacturers, such as Honda, offer some car buyer programs and discounts through selected dealers. Some offer special deals for university students and recent graduates falling into this category. If you’re planning on buying a new car, have income and credit, and are looking for in-house funding, it makes sense to see if you can make a little money.
Ask your lenders about eligibility guidelines and how to move forward with your loan application. Usually you need to be at least 18 years old and have a stable income stream. In some cases, a down payment is also required. Some lenders will also limit the vehicles they can choose if they are seeking funding through their first-time car buyers program.
Conclusion
The key to getting a fair deal on your first car loan is to keep patients and shop. Compare lenders, save down payments, and work on your credit scores to walk away at a competitive rate.
