First-Time Buyers Loan for a Car
If you want to buy a new car, but you have a limited credit history, you may want to consider a first-time car buyer program. First-time buyer programs are ideal for people who have never had an auto loan before. But how do you qualify for a first car loan, and is there any way you can make the approval process easier? Learn everything you need to know about first-time car buyer auto loans today.
Who Qualifies for First-Time Car Buyer Programs?
In general, the people who will qualify for a first-time auto buyer program are those who have poor credit, those who want to build credit, and those who can only afford smaller down payments. Typically, college students, people who have never owned a car, and people who are recovering their credit history are the most qualified for this type of auto loan.
The qualifications for first-time car buyer programs will vary depending on the lender. Some lenders have very strict income requirements, while other lenders are more lax. In many ways, first car loans are similar to bad credit auto loans. The main difference between the two is that recent college graduates, recent high school graduates, and other people who have never financed a vehicle are more likely to be approved for this type of loan.
Who Offers a First-Time Car Buyer Program?
Many lenders have auto loans for first-time car buyers, but these programs may not be directly advertised. You will likely need to call around to ask if lenders offer a first-time car buyer loan before you start seeking loan approval. The lenders most likely to offer these loan programs include banks and credit unions, online lenders and sellers, and captive lenders.
For first-time car buyers, a captive lender is usually a better option than a credit union or other lender. Essentially, a captive lender is a loan provider that acts as the financing arm of a vehicle manufacturer. Applying for an auto loan from this type of lender is another way of getting financing directly from dealerships and car manufacturers. The advantage of a captive lender is a low annual percentage rate. You may even qualify for a cash rebate, which can reduce the total cost of the vehicle.
How Can You Access a Captive Lender Auto Loan?
The best way to get a loan from a captive lender is to apply for financing through the dealership where you are buying your vehicle. The dealership works exclusively with the lender approved by the car manufacturer to simplify your auto financing.
Steps for Choosing a Car Loan
Choosing the best car loan for your first car purchase is a process that will require some homework. Before you start submitting applications to be pre-qualified for a loan, you will want to make sure all of your finances are in order, so you can make the car-buying process as streamlined as possible.
Check Your Credit Score
Before you take any other steps, you will need to check your credit score. Getting a free credit report will show you all the creditors and debt you have, as well as your current credit score. Your credit score matters because it is one of the main metrics assessed by your credit union, bank, or lender to assess if you have a record of paying back loans. Having a good credit score is the best way to show you are a low-risk borrower, and this may help you get approved for your loan more quickly.
Use a Purchase Loan Calculator
It's a good idea to use a loan purchase calculator so you can learn about how much you can afford to borrow. When you understand the maximum loan you can afford based on your gross monthly income, you will be able to assess loan terms more easily. As a rule of thumb, you don't want to devote more than 10% of your monthly budget to your auto loan and other vehicle expenses, like insurance, maintenance, and gas.
Factor In Liability Insurance
All drivers need to have car insurance, but when you are planning to finance or lease a vehicle, you may be required to have additional insurance. In particular, liability insurance may be a requirement of your auto loan until the loan is completely paid off. Liability insurance will pay for medical bills and property damage repairs if you are at fault for an accident. Your lender may also require you to have collision insurance.
It's important to note that first-time car buyers and first-time drivers typically have to pay higher insurance premiums, which is why you must factor in this additional cost when you are creating your monthly budget. The make and model of the car you buy can also influence the cost of your premium.
What Is a Good Monthly Payment for a First Car?
On average, the cost of a first car ranges between $10,000 and $25,000, which could mean that the monthly payment for your first new car is as little as $300 or as much as $600. However, the type of car you purchase can influence your monthly payment. The auto loan payments for a new car are usually much higher than the payments for a used car. Ultimately, if you buy a car at an affordable purchase price, you should be able to afford your monthly car payments.
What Are Common Mistakes First-Time Car Buyers Should Avoid?
First-time buyers are vulnerable to making certain mistakes. If you rush the car-buying process, you may wind up with a loan you can't afford or with terms that don't benefit your credit-building goals. The main mistakes to avoid as a first-time buyer include:
Not Choosing the Right Car at the Right Price
While it may be tempting to buy the car of your dreams, it's better to be more practical when you are choosing your first car. You need a car that can meet your lifestyle needs and your budget constraints. Much of the time, you can negotiate with the dealership so you can get the car you want at a price you can afford. In other words, don't be impulsive about selecting the vehicle you will be driving for the next few years.
Not Comparing Interest Rates
It's a major mistake to not compare interest rates on your various loan quotes. Auto loan rates are constantly in flux based on the economy, the lender, and your personal finances. You should do your best to find a loan with a low annual percentage rate, since high interest rates can result in higher loan payments.
Not Assessing Auto Loan Providers
It's important to compare potential auto loan providers. The terms of your first-time car buyer program will be set by the credit union, bank, online lender, or other lender you choose. You must understand the details and requirements of the first car loan program offered by your lender so that you can choose the best provider for your lifestyle and budget needs. By comparing multiple lenders, you will be more likely to find competitive rates.
Which Lender Is Best for Your Auto Loan?
The financial arm of your vehicle's manufacturer is often the best choice for an auto loan lender. A captive lender is more likely to offer you a better interest rate with more flexible terms, such as terms that last from 12 months all the way to 84 months.
With a loan from the dealership, drivers also have more room to adjust the amount of the monthly auto loan payment and may even be able to access perks that are folded into the loan payment, such as extended protection plans. Plus, the process of applying for a car loan through the dealership is much more streamlined.
Not Adjusting Loan Terms
You should also do your best to negotiate your loan terms, since the baseline terms may not be appropriate for your income level or your future plans. If you want lower monthly payments, you may want to opt for a longer loan term. On the other hand, if you want a lower interest rate, a shorter loan term may be better for you.
No matter who your lender is, if you are pre-qualified for a loan, you have the opportunity to negotiate your loan terms for the best deal before your loan application is approved. During the negotiation process, you may want to ask about rate discounts or other perks that can reduce your monthly payments.
Can You Improve Your Chances of Getting an Auto Loan?
The loan approval process can take a few days or a few weeks, depending on who your lender is. Dealership financing will usually approve your loan application more quickly than other lenders, like credit unions and banks. But is there anything you can do to improve your chances of approval?
Have a Good Credit Score
If you have a good credit score, lenders will be more likely to give you car loan approval. Even car dealerships care about your credit score, so it's beneficial to clean up your score before you submit any auto loan applications.
You can improve your credit score by making on-time payments, reducing the number of creditors you owe, or removing mistakes on your credit report. A history of late payments on other loans can make you look like a risky borrower.
What If You Have Poor Credit History or No Credit History?
The best credit score to have as a car buyer is around 660. If you have an excellent credit score above 781, you will be more likely to be approved for your application.
However, first-time auto buyer programs are specifically designed for borrowers who may have limited credit histories or no credit histories at all. These special programs will waive a lack of credit history and focus more on your income to assess whether or not you can pay back your auto loan.
Get a Co-Signer
A co-signer or co-borrower may be necessary for some first-time auto buyer programs. A co-borrower is someone who agrees to be responsible for the loan debt if you default on payments. Having a co-signer can make lenders more comfortable, since the co-signer essentially agrees to make on-time payments if you fail to do so.
Save for a Larger Down Payment
You can also improve your chances of qualifying for a first-time buyer loan if you save up for a larger down payment. As a rule, you should save at least 20% of the total price of your car to put toward a down payment, even if you are buying a used car. The benefits of having a large down payment are reduced interest rates and lower loan amounts.
Leverage Your Trade-In Value
Using the value of an old vehicle to offset the price of your new car is another way you can reduce your maximum loan amount. Some first-time car buyers may be driving a family car or a car that was purchased with cash. Since first-time auto buyer programs are for buyers who have never financed a car, you may be able to leverage the trade-in valuation of your old car as part of your down payment.
What Interest Rate Will You Get as a First-Time Car Buyer?
The interest rate for a first-time car buyer is typically a bit higher than the interest rates for other borrowers. However, you can still expect competitive rates from lenders. For borrowers with a prime credit score between 661 and 780, the interest rate on a new car is roughly 6.40%, while the rate on a used car can be as high as 8.75%.
Can You Reduce Your Interest Rate?
Even if you find a lender with competitive rates, you may still want to get a lower interest rate. If you don't have an established credit history, then reducing your interest rate will be determined by the terms of your loan. You may even want to consider refinancing your loan in the future to secure competitive rates when the market changes.
Can Dealership Financing Create a Payment Plan That Works for You?
Loan amounts are usually the most influential factor when your payment plan is created. However, the dealership financing department can help you find a loan you qualify for and set you up with dealership promotions to lower the sticker price on your vehicle. When you are financing through a captive lender program, you can also access more flexible terms, so your monthly payments are more affordable.
Should Consider Protection and Extended Service Plans?
A protection plan or an extended service plan like an extended warranty can save you money at the service center when it's time to service various parts of your car. Sometimes, protection plans and extended service plans can also work at the dealership body shop if you need to repair a ding or a scratch.
When you apply for a first-time car buyer program at your dealership, you can easily finance a vehicle even if you don't have any established credit. A first-time car buyer loan from a captive lender can be used to purchase a new or used vehicle, and will usually have benefits such as a below-market APR. To see if you qualify for a dealership first-time buyer loan, contact Landmark Dodge Chrysler Jeep RAM at 816-836-0100.