First Time Car Buyer Guide
As a first-time car buyer, you might expect an overwhelming experience ahead of you. Between getting a loan, picking the right car, and negotiating price, there’s a lot to juggle. Consider this guide before you hit the gas on grabbing the wheel of your first ride.
Should You Be a First Time Car Buyer?
For starters: do you actually NEED a car right now? How have you been getting around up to this point? Will that strategy continue to work? Will another? Having as much time as possible to prepare for purchasing your first vehicle is a positive. Especially if you’re just getting started with credit and are going to need to get a car loan. So, if you’re not prepared right this minute, putting the purchase off for a little while might make sense.
What should you do with that time? Saving up a down payment will certainly help. And if you don’t have much of a credit history, beginning to build one first will make it easier to get a car loan. Also, the longer you’ve been on your job at the time of applying for credit, the better. (More on all of that a little later).
Riding Within Your Means: Determine Your Budget
Once you’re ready to purchase, a good place to start is figuring out how much car you can afford. Unfortunately, this is probably the biggest landmine that first-time buyers encounter. It’s easy to be wide-eyed about something as fun as a new car. They’re typically the second-largest purchases we make (after buying a home). And they certainly represent more than just transportation for many consumers. They can symbolize freedom, fun, image, status, etc. But be cautious – if this is you’re a first-time car buyer, getting started on the right foot is critical. And that means calming all that excitement and purchasing modest, reliable transportation.
A good place to start is spending no more than 50% of your gross annual income (at least as a first-time buyer). And, if you’re going to get a car loan, putting yourself into a payment of no more than 10% of your gross monthly income. So, if you make $30,000 a year, you should look to spend no more than $15,000, and if financing, getting into a payment of no more than $250 per month. But, while those are good benchmarks, your personal finances are unique and specific to you. You may need to spend less or put yourself into a smaller payment. But those are good guidelines for maximums when shopping for your first car.
Picking The Right Wheels for a First Time Car Buyer
The next thing to think about, which is closely related to affordability, is the reliability of the vehicle you choose. Far too many first-time car buyers have their hearts set on a dream vehicle, and when confronted with trying to fit it into their budget, start shopping for older, higher mileage options. This is a serious mistake. It’s important that you set yourself up for success, and that means choosing a car that will require as little maintenance and repair as possible.
For most first-time car buyers, a used car will probably make the most sense. However, purchasing new doesn’t have to be ruled out, provided you are able to find one that fits within the affordability guidelines mentioned above. One downside to new cars is the old adage of it “losing 20% of its value the minute you drive it off the lot.” There’s certainly truth to this concept. But the upside is the reliability. New cars aren’t likely to need pricey repairs anytime soon. And they come with various manufacturer warranties that cover a lot of items if issues arise.
However, used cars are generally the more affordable option. In order to make sure you get quality, reliable transportation, a good guideline might be to cap your age at 6 model years or newer, with 60,000 miles or fewer. So, in the year 2024, purchasing a model year 2019 or newer with fewer than 60,000 miles is a good idea.
Also, do your homework. Search the internet for reviews, specifically focusing on the reliability of the vehicle. There’s a ton of very helpful information out there.
Credit Score & Down Payment
Next, unless you have enough money saved to purchase the car outright, you’re going to need to get a car loan. This can be tricky for first-time car buyers.
For starters, establishing a credit history prior to applying for a loan is essential. Few lenders will make a car loan to a borrower with no credit. And the ones who will may charge very high interest rates, upwards of 25%.
Opening a secured credit card is a good first effort in building credit. These work just like traditional credit cards, except the limit is typically lower, and you place an amount of money equal to that limit on deposit with the lender. The lender holds that money as collateral, meaning if you don’t pay the credit card as agreed, they can use the money pledged as collateral to pay off the card and close it.
Another good idea is to save a down payment. The larger, the better. There’s really no magic number here, but at least 10% of the purchase price. The more you save, say 20%, the more likely you are to be approved. Especially if your credit history is new and not terribly well established.
Ultimately, the lender is trying to manage their risk in making you the loan. If you don’t have a long history of borrowing and repaying as agreed, you’re going to be considered a higher-risk borrower. The more you can do to reduce that risk, the more likely you’ll be able to get a car loan. Making a substantial down payment and purchasing a newer, lower-mileage vehicle are ways to help reduce the risk a lender is taking.
Getting Credit Prepared
But sometimes, even if you’ve opened a secured credit card and made a few months of payments, saved a considerable down payment, and selected modest, reliable transportation, it may be a struggle to get approved. In this case, you may be asked for a qualified co-signer. Someone with a more established credit history who is willing to sign on the loan and guarantee they will pay if you don’t. If this isn’t an option for you, and you get declined by a few lenders, you may have no choice but to wait a little longer to make your purchase. Keep saving to increase your down payment, continue to build your credit history by paying on your secured credit card, and maybe open a couple of other cards (paying them down promptly and responsibly), and you will find that, in time, you will be able to get a car loan.
Once you do secure financing, make sure you continue to set yourself up for future success. This car won’t last forever, and one day you’ll be looking to buy another. Make sure you pay all of your debts on time, including your new car loan. This will help to establish that lengthy, positive credit history.
If you ever find that you’re unable to make your payment by the due date, contact your lender and try to work something out. Going past due and not communicating can result in a repossession, which is going to do you no favors when you go to purchase your next car.
Now You’re First Time Car Buyer Ready!
Purchasing your first car will inevitably be very exciting and can be a lot of fun. With a little planning and care, it can not only provide you with needed transportation but can also serve as a launching pad for a lifetime of good experiences with credit and borrowing.
Posted In: auto loans, Lending
