BEST OF

5 Options for a First-time Car Buyer Loan

Being approved for an auto loan can be a challenge for first-time car buyers, but some lenders have more flexible credit requirements to help.

Jun 23, 2022

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A “first-time car buyer” refers to someone who may have owned a car but has yet to borrow money to purchase a vehicle. They often also lack enough credit history and time on the job to meet traditional lending requirements. All are reasons lenders decline many first-time car buyer loan applications.

But some lenders are more willing than others to extend auto loans to first-time buyers, and there are steps you can take to improve your chances of approval. Expect higher interest rates, but you can most likely refinance down the road with several months of on-time payments on your credit report.

Options for a First-time Car Buyer Loan

Carvana
Learn more

on Carvana's website

Carvana - Used car purchase loan

Carvana

Est. APR

3.90-27.90%

Loan amount

$1,000-$100,000

Min. credit score

Did not disclose
Learn more

on Carvana's website


Min. credit score

Did not disclose

Key facts

Best for applicants wanting to streamline car buying and financing, and who will qualify for Carvana’s lower tier rates.

Pros

  • Offers pre-qualification with a soft credit check.

  • Customer service available seven days a week.

  • Borrowers can change their payment due date via the Carvana app.

  • Application process 100% online including document upload.

  • Minimum loan amount is lower than other lenders.

Cons

  • Maximum APR possible is higher than many other lenders.

  • Only finances vehicles sold through Carvana.

  • Not available in all states.

Qualifications

  • Minimum annual gross income: $4,000.

  • Maximum debt-to-income ratio: Did not disclose.

  • Bankruptcy-related restrictions: No active bankruptcies.

  • Maximum mileage: Did not disclose.

  • Maximum loan to value ratio: Did not disclose.

Read Full Review
MyAutoloan
Learn more

on MyAutoloan's website

MyAutoloan - New car purchase loan

MyAutoloan

Est. APR

1.99-12.99%

Loan amount

$8,000-$100,000

Min. credit score

575
Learn more

on MyAutoloan's website


Min. credit score

575

Key facts

Best for applicants wanting to quickly receive loan offers from multiple lenders for the purchase of a new or used vehicle from a dealer or private party. Bad- and fair-credit borrowers may qualify.

Pros

  • Applicants can receive up to four lender matches with a soft credit check.

  • Most lenders can provide approval within 30 seconds of application submission.

  • Provides lowest daily rates on website, including new auto purchases.

  • Some marketplace lenders offer rate discount with automatic payment.

  • Allows co-signers.

Cons

  • May result in multiple contacts from different lenders.

  • Social Security number required to submit initial application.

  • myAutoloan.com offers limited customer service support.

  • Not available in a few states.

Qualifications

  • Minimum annual gross income: $26,100.

  • Maximum debt-to-income ratio: Not provided

  • Bankruptcy-related restrictions: Must be discharged or dismissed.

Read Full Review

Digital Federal Credit Union - New car purchase loan

DigitalFederalCreditUnion

Est. APR

1.99-11.24%

Loan amount

$2,500-$500,000

Min. credit score

Did not disclose

Min. credit score

Did not disclose

Key facts

Best for applicants wanting fast approval, rate discounts and other credit union benefits.

Pros

  • Application process can be 100% online.

  • Has a 24-hour access consumer loan call center.

  • Offers two opportunities for discounts on already low rates.

  • Provides same-day or instant loan approval.

  • Allows co-signers.

Cons

  • Submitting an online purchase loan application results in a hard credit inquiry.

  • Credit union membership required to get a loan.

  • Social Security number required with initial application.

Qualifications

  • Minimum annual gross income: None.

  • Maximum debt-to-income ratio: 60%.

  • Bankruptcy restrictions: No bankruptcies in the previous 12 months.

  • Maximum mileage: 250,000.

  • Maximum loan to value ratio: 135%.

Read Full Review

CarMax - Used car purchase loan

CarMax

Est. APR

2.95-26.00%

Loan amount

$500-$100,000

Min. credit score

Did not disclose

Min. credit score

Did not disclose

Key facts

Best for used-car shoppers wanting to purchase from a large inventory and finance a car online. Vehicles can be delivered or picked up at a CarMax location.

Pros

  • Offers a three-day window to replace CarMax financing with a better loan offer.

  • Application process can be 100% online including document upload.

  • Minimum loan amount is lower than other lenders.

  • CarMax Auto Finance borrowers can select payment due date and manage their loan through the MyCarMax online platform.

Cons

  • Maximum APR is higher than many other lenders.

  • Only finances vehicles sold through CarMax.

  • Does not offer pre-qualification with a soft credit check.

  • Does not allow co-signers, only co-borrowers.

Qualifications

  • Minimum annual gross income: Depends on CarMax finance source and application details.

  • Maximum debt-to-income ratio: Depends on CarMax finance source and application details.

  • Bankruptcy-related restrictions: No active bankruptcies.

  • Maximum mileage: CarMax finances any vehicle in its inventory. CarMax doesn’t have a maximum mileage restriction for cars they purchase or acquire by trade-in, but high-mileage vehicles may be sold at auction and not become part of CarMax inventory.

  • Maximum loan to value ratio: None.

Read Full Review

Vroom - Used car purchase loan

Vroom

Est. APR

N/A

Loan amount

$5,000-$100,000

Min. credit score

Did not disclose

Min. credit score

Did not disclose

Key facts

Best for applicants who want to purchase a Vroom vehicle and will qualify for the lowest rates offered by Vroom lending partners.

Pros

  • Offers pre-qualification with a soft credit check.

  • Works with financing partners to find the best offer.

  • Application process 100% online including document upload.

Cons

  • Does not disclose range of estimated APRs.

  • Only finances vehicles sold through Vroom.

Qualifications

  • Minimum annual gross income: None.

  • Maximum debt-to-income ratio: Did not disclose.

  • Bankruptcy-related restrictions: None.

  • Maximum mileage: Did not disclose.

  • Maximum loan to value ratio: Did not disclose.

Read Full Review

Who is eligible for a first-time car buyer loan?

Eligibility for a first-time car buyer loan isn't necessarily based on age. While first-time car buyers are often considered young adults ages 18-24, they can also be older. For example, a first-time car buyer could be a grad student who delayed purchasing a car until graduation or someone new to the U.S. who hasn't established credit here.

From a lender's perspective, first-time car buyers are generally defined as someone with a limited or no credit history and no previous auto loan, regardless of age.

Where to apply for a first-time car buyer loan

Finding a first-time car buyer loan can require research since lenders willing to offer such financing don't always advertise it. However, here are some places to consider.

Credit unions. Many credit unions, such as Digital Federal Credit Union, offer credit-builder programs that include first-time car buyer loans. A quick online search of "credit union first-time car buyer program" will bring back many credit union results. These programs vary, but for the most part, they're designed to help new-to-credit borrowers get an auto loan and successfully repay it. Credit unions require membership to get a loan, but many make joining easy.

Captive lenders. A captive lender is the financing arm of an automaker. They often finance cars for first-time car buyers with the hope of securing brand loyalty for future car purchases. Some have special programs — with financing, incentives or both — that are limited to future or recent college graduates.

This financing is usually available through car dealerships and some banks; however, some car makers have temporarily suspended their programs due to the current shortage of vehicles.

Marketplace lenders. A marketplace lender or aggregator works with a network of lenders, so they can match first-time car buyers to a lender more likely to approve their auto loan. An example is myAutoloan.com, which doesn't make loans but matches borrowers to lenders. Using an aggregator often results in being contacted by multiple lenders and third parties wanting to sell you other services.

Online car retailers. Sites that sell cars, like Carvana, CarMax and Vroom, also have access to a network of lenders, which enables them to find lenders more likely to work with a first-time car buyer.

But be aware that when working with an online car retailer or a marketplace lender, you may be matched with a bad-credit lender. Bad-credit lenders have more flexible credit requirements to approve borrowers with limited credit histories. However, the trade-off for getting approval is usually a very high interest rate.

Improve your chances of first-time car buyer loan approval

You can take steps to improve your chances of obtaining loan approval for your first car. And even though your main focus may be simply getting approved, don't just settle for a high interest rate. With a little effort, you may be able to improve the rate you receive.

Review your credit report. Your credit report shows your payment history for loans or credit cards, and lenders use this information when determining loan approval. You can request a free copy of your credit report to see what information lenders are pulling about you.

If you're entirely new to credit, you may not have information in your credit report at all. But it's a good idea to check for errors, such as late payments reported on an account you never had. Inaccuracies could prevent you from getting loan approval, so you should file a dispute with the credit reporting company if you find errors.

Know your credit score. The credit score is one of the most significant factors in determining whether a borrower qualifies for a loan and at what interest rate. When you know where your credit score falls on the most common credit-scoring scales (FICO or VantageScore), you have an idea of what interest rate to expect. You can view your free credit score through NerdWallet.

For someone new to credit, it's possible to have no credit score. If you don't have a credit score, you will most likely receive rates similar to someone with a 660 credit score or lower on the VantageScore scale, as shown in the following table. It's also possible to have a good credit score, perhaps from paying a credit card on time and still be declined because of other factors — such as the inability to show steady employment.

Credit score

Average APR, new car

Average APR, used car

Superprime: 781-850.

2.40%.

3.71%.

Prime: 661-780.

3.56%.

5.58%.

Nonprime: 601-660.

6.70%.

10.48%.

Subprime: 501-600.

10.87%.

17.29%.

Deep subprime: 300-500.

14.76%.

20.99%.

Source: Experian Information Solutions.

Compare lenders. Don't accept the first loan approval and rate offered without shopping around to see what else you might qualify for. Try to get preapproved auto loans with more than one lender, and compare each lender's Annual Percentage Rate or APR. The APR includes any lender fees and provides a more accurate comparison.

Each loan preapproval will result in a hard credit inquiry on your credit report, temporarily lowering your credit score (if you have one). So try to make all applications within a two-week window to minimize the effect on your credit score.

Look for special rate-reduction features. Some lenders, especially credit unions, will reduce your rate if you direct deposit your pay into a checking account and set up automatic loan payments from that account. Others will reduce a rate later in the loan term, such as after completing 12 months of on-time loan payments.

Use a co-signer or co-borrower. A co-signer is someone who agrees to take responsibility for paying off your loan if you don't. A co-signer has no ownership of your car, but their credit score can take a hit if you miss loan payments. On the flip side, a co-borrower has equal vehicle ownership and responsibility for paying off a loan.

Adding a co-signer or co-borrower with good credit to your loan can help you get approval and a lower rate.

Reduce the amount you borrow. The less you borrow, the less money a lender will lose if you don't repay a loan. When you're considered a lower risk, lenders may be more inclined to approve your loan — often at a lower interest rate.

Buying a less expensive car is one way to reduce how much you have to finance, and another is to make a down payment. Some lenders require first-time car buyers to make a down payment on a car.

Make on-time payments and refinance later

You can likely find a lender to approve your first car loan, even if it's with a higher interest rate. However, if you end up with a high interest rate, you may be able to refinance your car loan after making six to 12 months of on-time loan payments. Refinancing is an opportunity to start a new loan with a lower interest rate and reduce your monthly payment.

Last updated on June 23, 2022