Getting a Loan Quick Facts for First-Timers
- The more you put down on a car, the lower your car payment and interest costs over the life of a loan.
- Obtain your free credit report to know how your credit history is developing before you look for a loan.
- You’ll find plenty of places to obtain a loan, so look for your three best options as you shop around.
Congratulations if you plan to apply for a vehicle loan and it’s your first time doing so. A car purchase of a new or used vehicle is among the biggest you’ll make behind a house. As a first-time buyer, we want to set you up for success so you can land a competitive interest rate and a payment plan that matches your budget. Here are tips so you can tackle it like a pro.
- Decide What You Can Afford
- Check Your Credit Score and Obtain a Credit Report
- Know the Difference Between Pre-Qualifying and Pre-Approval for a Loan
- Shop for Loan Rates
- Research and Find a Car to Buy
- Take Out the Loan
Decide What You Can Afford
Before you start the process, you must dig into your budget. Be honest with yourself. Here’s what to consider:
- How much do you pay for your fixed expenses like housing, internet, streaming services, student loans, etc.?
- How much do you estimate you pay monthly for utilities, mobile phone service, etc.?
- Estimate what you spend on groceries, eating out, entertainment, etc.
- Weigh how much you can spend on a down payment for the vehicle. A typical rule of thumb is 20%. If you have a hand-me-down car you can use as a down payment, that’s also an option. Check our sister site for the Kelley Blue Book value for trading it in or selling it yourself.
- Research the market of new and used vehicles. Car prices have skyrocketed during the past several years, so you’ll need to understand what prices you can expect and how that fits into your budget.
- Determine what car insurance may cost you by calling several insurance providers. Use the VIN, or vehicle identification number, of a vehicle you like for sale to help determine what a policy might cost.
PRO TIP: It’s important not to wipe out your entire savings, but the more you put down on a car, the lower your car payment and interest costs. Also, many finance experts advise the 20/4/10 rule when buying a car. It means 20% down on a 4-year car loan and spending no more than 10% of your monthly income on gas (or electricity), vehicle maintenance, and car insurance.
Check Your Credit Score and Obtain a Credit Report
Before you look for a car, you’ll need to know your credit score from your credit report.
- A credit score predicts how well you can repay debts, including car loans.
- Experian, Equifax, and TransUnion are credit bureaus that track your financial history.
- Obtain your free credit report online from AnnualCreditReport.com. The site says you’re entitled to a free weekly credit report.
- Lenders prefer to lend money to car buyers with credit from good to excellent. They’ll begin to provide the best interest rates to those with credit scores above 670. The higher your score, the better your interest rate.
PRO TIP: Don’t take on new debt during the car-buying process.
Increasing Your Credit Score
There are easy ways to increase your credit score, like secured debit cards and apps like Experian Boost and others. Over time, those build your credit profile. The most important thing to know is not to overspend beyond your means and to stay diligent about paying bills on time.
RELATED: Car Finance 101: Everything You Need to Know
Know the Difference Between Pre-Qualifying and Pre-Approval for a Loan
Something essential to know before you shop around for a car loan is the difference between pre-qualifying and pre-approval. You’ll find plenty of places to obtain a loan from banks, credit unions, online lenders, aggregators that match you to a lender, and dealership and manufacturer financing.
- When you get pre-approved for a loan, the lender pulls your credit and dings your credit score. While this is also an estimate of what you might expect, the interest rate is typically close to the final one. Remember that car loan interest rates can change daily.
- When you pre-qualify, there is no hard credit pull. It also means there’s no interest rate assigned.
PRO TIP: Be prepared to show proof of income and steady work history as part of your loan paperwork.
RELATED: Car Financing Glossary: Finance Terminology Explained
Shop for Loan Rates
Getting the best car loan interest rate depends on your credit score, which helps lenders assess your creditworthiness. When shopping around, obtain quotes from three separate sources. You can shop online for quotes or head to your bank. It’s also a great idea to look at the rates from a credit union in your area. First-time buyers may not have built a long credit history yet, but shopping around will help you find the best one.
PRO TIP: If buying a car from a dealership, never discuss your loan plans with the salesperson until you settle on a vehicle. First, obtain the bottom line cost summary and negotiate the final price. At that point, you can discuss the loan and financing deals the car manufacturer or dealer may offer.
Research and Find a Car to Buy
Your next step is to research the new and used car options and find the vehicle you want to buy.
- Want to buy new? Use our tips to find a new car to buy.
- Weigh all your options when considering used cars, including certified pre-owned programs. Certified pre-owned vehicles must pass intensive inspections, and trained specialists use factory parts to replace or repair defective components before reselling the car.
- Don’t forget to obtain a vehicle history report from AutoCheck or Carfax if buying a used car.
- Check the Kelley Blue Book value of the car from our sister site.
- When considering used car options, use Autotrader’s Private Seller Exchange, a marketplace that connects private sellers to buyers.
- If vehicle leasing is your best option, research the certified pre-owned leasing programs for carmakers like Honda, which targets first-time buyers offering leases on older vehicles. “Higher new-vehicle prices make the ability to lease Honda-certified used vehicles an even more critical gateway to vehicle ownership for young and first-time buyers,” said Dan Rodriguez, senior manager of auto remarketing at American Honda. “We continue to expand our award-winning CPO offerings to make it simple and easy to consider and purchase a high-quality Honda CPO vehicle.”
PRO TIP: The used car market remains competitive with a lack of available inventory on many popular vehicles. Some newer used cars may look attractive. However, it’s wise to weigh how the cost of a new car compares. In some cases, they cost the same. Another consideration: Interest rates are higher for used cars versus new ones. Using our loan calculator, you can calculate your estimated monthly payments and plug in different interest rates to see how those work with your budget. A bonus is the calculator can also estimate the interest you will pay over the life of the loan.
RELATED: Used Car Buying Guide
Take Out the Loan
The final step is to request the loan and complete any applicable paperwork officially. Of note, the dealership handles loan paperwork when you purchase from them. You must complete the loan paperwork with the bank when you purchase from a private seller. Before you sign anything, ask if the interest rate is firm and not an estimate. We’ve heard stories at less reputable dealerships where someone purchases a car, and after the fact, the financing falls through, only to find that the establishment wants to charge a higher interest rate for the loan of the car you already purchased. Don’t accept this kind of deal. Read your paperwork carefully to ensure you don’t see any surprise costs.
Also, note that dealerships don’t take returns on cars. Typically, new and used vehicles are not returnable, except in states where lemon laws exist.
We appreciate you talking about how your car payment and interest expenses will go down the larger the down payment on a loan. I’ll be sure to share this with my sister to keep in mind as she has expressed interest in applying for an auto loan. I’ll also look into services that can assist her in finding someone to mentor her through the procedure.