There are more than 222 million licensed drivers in the US alone.
If you’re newly licensed, the next step in your driving journey is buying your first car. But before you get too excited about the make and model you want, you’ll have to figure out how to go about paying for it.
Financing your first car involves figuring out how much you can afford and what loan options are available to you. There’s also the matter of your credit score to consider as well as how much you can pay for insurance.
So before walking into the dealership, be prepared. Keep reading for the five most important steps to buying a car.
1. Determine Your Budget
It’s easy to get caught up in the excitement of all the vehicle possibilities. Realistically, you can only purchase what you can afford. Which means you have to determine what your budget is.
Base your budget on what you can afford to pay monthly. Ideally, you should have at least half of your paycheck left after making your monthly car payments. If you can’t manage that balance, you either have to cut costs in another area (i.e. bye bye Netflix), or find a car that better suits your budget.
2. Clean Up Your Credit
Your credit score impacts how much of a loan you qualify for. Lenders and dealerships use it to figure out if they’ll extend you credit, how much to extend, and under what terms.
If you can improve your credit score before applying for a loan or financing, you’re likely to get better terms. That includes a lower interest rate, which will save you hundreds of dollars in the long term, at the least.
Your credit score is calculated based on:
- Your payment history
- Utilization (how much credit you’re using as a percentage of how much total credit you have)
- The age of your credit accounts
- Total debt
- Number of inquiries into your credit
- New accounts
- Public records (i.e. bankruptcy)
While you can’t change things like the age of your accounts, you can work on things like total debt, payment history, and credit utilization.
To do so, first, obtain a copy of your credit report. Look for any potential mistakes on the report and see if you can have them corrected. If you can, start paying down your balances and be sure you don’t miss any future payments.
3. Avoid Dealer Financing
Inevitably, your car salesman is going to ask if you need financing to help pay for your vehicle. While financing through the dealership is sometimes a good deal, most of the time it isn’t. Instead, you should start looking for personal loans through credit unions and your banking institution.
People with poor or no credit should be especially wary of dealership financing. They may try to talk you into long-term financing options that lead to a lot of money paid toward interest and your future finances will suffer.
Some dealerships also slip extra fees and charges into your financing arrangement. This pads their pocket with extra profit for the dealership and you end up paying more than you would have had you gone the right route for your loan.
4. Using a Loan for Financing Your First Car
Now that you’ve established a budget, cleaned up your credit, and you know the importance of shopping around for your loan, you can start looking for that loan. You should consider looking around for your loan before you get your heart set on a vehicle. This way you’ll know exactly how much you qualify for and can afford before you make any exciting decisions.
The first place you’ll want to look is your personal bank. You can also check with a credit union if you’re eligible.
It’s best to secure a pre-approval before heading to the dealership. Be sure to ask about any deals for automatic payments. Some banks offer lower payment amounts if you set up automatic payments.
One thing to keep in mind when it comes to financing your first car is not to rely on your loan. While a loan can help you pay for a significant portion of the vehicle, it shouldn’t be covering all of it.
Save up as much money as you can for a down payment. The more you can put down, the less financing you’ll need and the less interest you’ll pay.
5. Don’t Forget About Insurance
An often overlooked step in buying your first car is insurance. Every state requires drivers to have liability insurance, at the very minimum.
Lenders often require you to have insurance as well. Plus, it’s a significant portion of your overall costs that you need to consider.
You should start looking into insurance costs after you’ve narrowed down your vehicle options. To make your research a little easier, make sure to have the following information on hand:
- Make, model, year of the vehicle(s)
- Vehicle identification number(s) (VINs)
- Your social security number
- Your address or the address where the vehicle will be housed
- Your driving records, if applicable
- Your insurance history, if applicable
- What kind of coverage you’re looking for
- You deductible needs
- Any additional/optional coverage you need
- Safety and security features of the vehicle(s)
- Purpose of vehicle purchase (i.e. pleasure, commuting, etc.)
Once you’ve gathered all the relevant information, call around to various insurance companies and get quotes. You can incorporate these costs into the budget you created in step one.
All About Cars
Financing your first car begins with creating a realistic budget based on your income and what you can afford to pay every month. After that, you can start shopping around for loans at your bank and credit union. And remember that the better your credit score is, the better the terms you’re going to get.
Keep reading our blog for more insights.