If you won’t be paying cash, you’ll need a car loan. Since you’ll be expected to make monthly payments on an auto loan, first figure what payment amount fits your budget.
When getting a car loan, you’ll decide on a loan term — which is the length of time you have to repay the loan. Terms are typically 24, 36, 48, 60, 72 and even 84 months. Going with longer terms may sound good, because it lowers your monthly car payment. However, you can end up paying much more overall, because you’ll pay loan interest longer.
Also, budget in any expenses you’ll have on top of the monthly loan payment. In 2021, AAA estimated a typical new car buyer with a five-year loan will spend nearly $10,000 a year, including depreciation, loan interest, fuel, insurance, maintenance and fees.
NerdWallet recommends spending less than 10% of your take-home pay on your car payment and less than 15% to 20% on car expenses overall. Remember, you'll be making that payment long after the excitement of buying a car wears off.
A common worry for first-time car buyers is, “Will I qualify for a loan?” It’s true that you may have more difficulty getting a loan, if you haven’t had loans or credit cards in the past. But you won’t know for certain until you apply.
Lenders will pull your credit report to see whether you’ve previously paid credit accounts on time. Even if you have little or no history of credit, you should request a free copy of your credit report, to see what lenders are seeing. If you find errors that could affect loan approval, such as late payments on accounts you never had, file a dispute with the credit reporting company.
Lenders will also check your credit score. In general a good credit score is 690 and above on a 300-850 scale used by the main scoring companies, FICO and VantageScore. According to consumer credit reporting company Experian, about 19% of new car borrowers and 25% of used car borrowers have credit scores less than 600 on the VantageScore scale. If you’re new to credit, it’s possible that you won’t have a credit score at all.
To improve your chances of getting loan approval, there are steps you can take:
Provide proof of a steady job and income.
Save up and make a larger down payment on the car.
Ask someone with good credit to be a co-signer or co-borrower on your loan.
Regardless of your credit history and score, you can most likely find a lender to approve your loan, but it could be with a very high interest rate.
Before you start shopping for a car, get preapproved for an auto loan. When you’re preapproved, a lender estimates the amount you will qualify to borrow and at what interest rate. The lender provides preapproval documentation you can take to the dealership or use with some online car retailers, like CarMax.
Getting preapproved for a car loan will help you in two ways: First, knowing what amount you can borrow enables you to shop for cars within your price range and avoid overspending. Second, it gives you numbers for a dealership financing office to beat, if they want to finance the car you buy.
Try to get preapproved with several lenders to find the lowest interest rate you can qualify for, and make all applications within a two-week window. Preapproval results in what is called a hard credit inquiry on your credit report, and that can temporarily lower your credit score (if you have one). Loan applications made in a two-week timeframe are counted as a single inquiry, affecting credit scores less.
As a first-time car buyer, you’re unlikely to get the lowest interest rates, but you can still shop around to improve your rate. If you belong to a credit union, that should be your first stop. After that, consider your bank or online auto lenders. And don’t accept financing at the dealership as your only option.
Even if you end up with a high interest rate, focus on making on-time loan payments for six to 12 months. Then you can look into refinancing to a lower rate and payment.
Before you settle on a car, do some research. Browse online sites or visit dealerships outside of business hours and ask yourself questions about what you need and want in a vehicle:
Use: Will you travel long distances and need better gas mileage, or mainly stay close to home?
Size: Will you be more comfortable driving a small car or large SUV? Do you have limited parking space?
Space: Do you need to allow room for children, pets or hauling items?
Cost: Will a car, which tends to be much cheaper to buy and maintain, fit your budget better than a truck or SUV?
New versus used: Should you buy a new car with a warranty or a used car that could cost more to maintain?
Gas versus electric: Do you want an eco-friendly car with lower fuel costs? Can you pay more upfront for an electric car?
Once you have a list of models that catch your eye, do your due diligence. Typically that will mean you:
Check fuel economy ratings at fueleconomy.gov.
Review Insurance Institute for Highway Safety, or IIHS, ratings at iihs.org.
Compare the relative cost to insure each vehicle.
Check online listings to see what sellers are asking.
Find reliability ratings through Consumer Reports; if you don't subscribe, your local library does.
To investigate further, find online communities, like Reddit, for owners of the vehicles you like. Read online reviews. These sources can reveal whether current owners are happy with their car or have faced any issues.
When you have specific vehicles in mind, think about where you want to shop and possibly buy. You aren’t limited to a car dealership. Online car retailers like Vroom, CarMax and Carvana are an option to complete the entire process online with no-haggle pricing. Car-buying apps can also simplify the process by offering unique filters and tools. Or, you might get a better deal on a car sold by a private seller.
If you do plan to buy a car from a dealership, don’t wander into the showroom without knowing what to expect. Your inexperience can be a great opportunity for a dealer’s salesperson and finance manager to make money.
Before you set foot into a dealership, you should know the maximum monthly car payment you can afford, but don’t allow the dealer to only focus on the payment amount. Dealers have ways to manipulate numbers to provide the payment you need, and that may not always be in your best interest. For example, they could extend the loan term to reduce the payment, but you would end up paying more interest over the course of the loan.
Insist that the dealership focus on the car’s out-the-door price. Your out-the-door price includes the vehicle purchase price, as well as sales tax, documentation fees, delivery and prep charges, registration, loan interest and any add-on products or services, such as extended warranties.
Out-the-door price reflects the total amount you will pay or finance, broken down into monthly loan payments, and it can be thousands of dollars higher than the price on a car’s window sticker. If you firmly insist you will negotiate only on out-the-door price, you’re in a better position to know if a particular car truly fits your budget.
Your discussion about out-the-door price and financing will take place in the dealership’s finance office. It’s also where you should present preapproved loan offers, which give the finance manager a rate to beat and can help you get the lowest rate possible.
If you end up getting a car loan through the dealership, carefully review the vehicle contract, which will include financing information. Ask for an explanation of any fees or add-on services you weren’t aware of or didn’t agree to. Also, know that even if you’re told otherwise, you have the right to receive a copy of the contract with completed Truth in Lending Act disclosures to take with you. That gives you time to review loan terms without feeling pressure to sign quickly.
One final tip is to beware of yo-yo financing at dealerships. On weekends or during busy times, some dealers will allow you to take a car home without an approved loan, a practice called spot delivery. The finance office provides a sales contract with numbers based on an educated guess and not actual loan approval. When Monday morning rolls around, a dealer may ask you to sign new paperwork with different terms, which you’re legally obligated to do if you keep the car. At this point, you do have the option to turn down the loan and return the car.
To avoid yo-yo financing, take a preapproved loan to the dealership, and always decline any request to sign an incomplete or inaccurate sales contract.
If you’re concerned about being taken advantage of at a dealership, ask a more experienced car buyer to go with you. You can still make your own decisions, but having the support of someone who knows the ropes can help you make those decisions with more confidence.