Most people dream of the day they get their first car. When you get your license, you can’t wait to ditch the family sedan and have your own wheels. The challenge, of course, is figuring out how to afford a car, either new or used. What are your financial options to achieve automotive freedom?
Those in the market for their first car are probably in the market for an auto loan as well. Before you start looking at cars, you should ensure you have your finances in order. You want to be sure you’re able to borrow the money you need and that an auto loan won’t break the bank.
Car Shopping: New or Used?
Progressive reports that the average new car loses 20 percent of its value just over the first year of ownership. The value of most cars continues to decrease an additional 15 percent per year until it’s four or five years old.
If you’re looking to save and aren’t tied to the idea of leasing or buying a brand-new car, you might consider a used car instead. It’s possible to save thousands of dollars by purchasing a used or certified pre-owned version of the car you have your eye on. Plus, many used cars show little sign of prior use or ownership other than having a few miles on them already.
What about a cosigner?
If this is your first car, you are probably still establishing credit, which could make qualifying for an auto loan more difficult. One option is to find an eligible cosigner. The cosigner’s purpose is to guarantee that you will pay the loan, and if you default, they will assume responsibility for the debt. Before you ask a relative or friend to cosign your auto loan, be sure they understand the risks, including how it may affect their credit.
Tips for First-Time Car Buyers
Aside from buying a home, a car is likely one of the biggest purchases you’ll make over the course of your life. If you’re a first-time car buyer, below are our top financial tips to consider as you look for the car that’s right for you.
1. Stick to your budget.
Budgeting is one of those things that everyone has to deal with. We all have bills to pay, so comparing how much money you bring in each month against what you have to pay out is essential. Car payments usually fall in the “need” category, but you still have to make sure your outflow isn’t more than your income. If you add a car payment to your expenses, how much can you afford each month? With this number, you can calculate the size of the loan you can afford (and determine whether you should shop for a clunker or a new set of wheels).
That being said, how much money are you hoping to spend on your first car, and how much can you put down right out of the gate? The more money you can pay up front, the less you’ll have to borrow and the lower your monthly auto loan payments will be.
According to Autotrader, first-time buyers are encouraged to put down a minimum of 10 percent of the total vehicle price at the time of purchase. If you’re able to put down 20 percent, even better—that’s the recommended down payment.
2. Match your selection to your budget and lifestyle.
Effective money management means fully understanding your finances and knowing how to properly allocate for various wants and needs. How does a car payment fit into these figures?
Once you determine the down payment you can afford and the amount you plan to borrow, it’s time to research your options to find a car you like. What type of vehicle can accommodate your needs? Lifestyle considerations should include:
- The length of your commute (gas mileage)
- The size of your family (number of seats)
- Your plans to grow your family (safety rating)
- Frequency of travel (storage space)
3. Shop dealerships and private sellers.
Whether you choose to buy from a dealership or a private seller is a personal decision—and there’s no wrong answer. Investigate both options to determine what you’re comfortable with.
When you buy a car from a dealership, you likely get a warranty—in some cases, even on used cars. However, the peace of mind and additional legal protection you might receive with a dealership can mean a higher price tag than you would get from a private seller.
On the other hand, there is often less pressure when you buy from a private seller, and you might have an easier time negotiating a deal. Keep in mind that private sellers don’t have to comply with the same laws that dealers do. You won’t get a warranty, and it might be tricky to determine whether to trust the car’s reported condition. The bottom line? Do thorough research so you know exactly what you’re looking for and who to purchase from.
4. Monitor your credit score.
Before you actually apply for an auto loan, make sure your credit is in good shape. Your credit score will affect not only whether you can actually qualify for a loan but also how much you will pay. Typically, the better your credit score, the better the terms of the loan.
There are a number of services that let you monitor your credit score, such as Credit Karma, myFICO, and PrivacyGuard. You also can get free annual credit reports from the three credit bureaus: TransUnion, Experian, and Equifax.
5. Take out an auto or personal loan to support the purchase.
Most buyers don’t have enough savings to pay for a car in full. Even those who do might prefer to take out an auto loan so they can hold onto more of their cash, paying off the remaining balance over time. Securing an auto loan also enables you to gradually build your credit score as you make your monthly payments.
As soon as you start putting cash aside for your new car, it’s time to talk to the bank about a loan. A bank loan officer can discuss and explain details that will affect your auto loan decision, such as preapproval, loan types, and available options.
6. Check and verify the loan terms.
Once you’re ready to apply, get down to the terms of the loan. Determine the interest rate on the loan (the lower the better) and the length of the loan. Remember that as long as you are making payments, the lender holds the title to the car. Also, be sure to calculate the actual monthly payment, including interest and principal, to avoid unexpected costs later on.
7. Negotiate, negotiate, negotiate.
When you’re buying a car, there’s almost always some wiggle room built into the price. Whether you’re buying from a dealership or a private seller, new or used, don’t pass up the opportunity to negotiate the cost. (Politely, of course.)
Find Tips for Financing a Car, Taking Out a Mortgage, Opening a Credit Card, and More
If it’s your first time financing a car or signing for a loan, remember that you don’t have to face these challenges alone. Talk to your local financial advisor; they can help you navigate important financial processes, including how to finance your new purchase.
Need some additional guidance when building your budget? FSCB can help you take control of your finances and better manage your money with our interactive budgeting worksheet.
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