First-Time Car Buyer Loans: How To Finance Your First Car
Hanna Kielar6-minute read
PUBLISHED: March 23, 2023
Buying a car or other vehicle of your own can be an exciting but expensive purchase. Not everyone has the cash on hand to pay upfront, and that’s where auto loans can help potential car owners. If it’s your first time buying a car or applying for a loan, you’ll want to make sure you’re doing it right.
Take a look below at how getting a first-time car buyer loan works, and ways you can improve your chances of getting approved.
What Is A First-Time Auto Loan?
Simply put, a first-time car buyer loan is an auto loan for a first-time borrower. Auto loans can be available through banks, credit unions, car dealerships and private lenders. Some car buyers will use a personal loan as an auto loan, and there are pros and cons to this financing option.
First-Time Car Buyer Loan Requirements
A first-time car buyer is someone who hasn’t taken out a loan for a car purchase before, but not necessarily someone who has never owned a car. Some lenders may be hesitant to approve a loan for a first-time borrower because a first-timer may not have the credit history of more experienced borrowers.
Generally, a borrower should have the following in order to qualify for an auto loan.
- Good or excellent credit: In most cases, your credit score is your ticket to an auto loan. Having good credit for a loan usually means having a score of 670 or higher.
- Low debt-to-income (DTI) ratio: Your DTI measures how much you make versus what you owe in debts. In general, you’ll want a DTI lower than 50% to qualify for most auto loans – some lenders may require lower.
- Steady income: Having verifiable income from an employer assures a lender you can keep up with your monthly payments and repay the loan on time. Self-employed borrowers may need to show alternative proof of income to show they could make their payments.
Loans and lenders may vary when it comes to specific credit and income requirements.
How To Get A First-Time Car Buyer Loan
You may find yourself behind the wheel of your own car if you follow these 7 steps to getting a loan.
1. Set A Budget
Before applying for a loan, you should know how much car you can actually afford. A loan can cover the brunt of a car’s price, but you should expect to pay an upfront down payment of at least 20% for a new car, or as low as 10% for a used vehicle. You should also account for the costs of owning a car that come after the purchase, such as gas, insurance, maintenance and more.
Take a look at your finances and determine an appropriate budget for yourself.
2. Check Your Credit
As noted above, your credit score is an important factor when lenders evaluate your loan application. It can determine what interest rate you pay on the loan, and therefore affect the amount of your monthly car payment, so having a higher score can save you in interest in the long run.
Check your credit score at the beginning of your car-buying journey to get a better idea of your loan options.
3. Research Cars Within Your Budget
According to an October 2022 report from Kelley Blue Book (KBB), the average selling price for a new car is $44,584, and $27,564 for a used vehicle. Buying used is obviously going to cost less money, but many prefer to own a brand-new vehicle, or one of a certain make and model. Consider also what car features are important to you, including performance, gas mileage, cargo space and extra features like heated seats or Bluetooth connectivity.
Keep in mind, too, that newer cars may have more expensive insurance.
4. Consider Different Auto Financing Options
With a budget set, your credit checked and purchase options in mind, your next step should be to research your loan options. You’ll often have three main borrowing options for buying a car:
- Traditional auto loan: You can take out a traditional auto or car loan from a bank, credit union or private lender. You’ll make an upfront down payment for the loan and then begin making monthly payments after you’ve purchased the vehicle.
- Dealership financing: Many car dealerships offer in-house financing, sometimes with special offers for customers. Dealerships can look up different loan options for you right in-store and can even help with the paperwork.
- Personal loan: A personal loan can be used for various kinds of purchases, including a car or other vehicle. Because a personal loan is often an unsecured loan, the purchased car isn’t used as collateral – however, your interest rates may be higher for it.
Most auto loans are secured by the car or vehicle, so if you fail to make your payments, the lender can repossess your car.
5. Get Prequalified
When trying to get a loan, it’s a good idea to get prequalified ahead of time so that you have an estimate of your eligible loan amount and interest rates. If possible, get prequalified with multiple lenders and compare their offers before choosing one. Prequalifying for a loan typically requires a soft credit check, which won’t affect your credit score.
You can also bring your prequalification letter to a dealership and try to leverage a better loan offer from them.
6. Choose A Car And Negotiate A Purchase
Once you’re prequalified and know what kind of car you’re looking for, it’s time to shop. Whether you’re buying from a dealership or private seller, you may have some room to negotiate the sales price. Just be mindful of additional fees and ask questions before agreeing to anything, or you could end up owing more than you’d planned or were prequalified for.
7. Apply For The Loan
Once you and the seller have agreed on a price, you can go ahead and file a full application for your desired loan. Wait times can vary depending on your lender, but if you’re approved you should see the loan amount appear in your account.
For a personal loan from Rocket Loans℠, the distribution of funds can take 1 – 7 business days. In some cases, you can receive your funds the same day you’re approved.*
8. Enjoy Your New Ride
If approved for the loan, you can then finally buy your first car. There’ll be additional paperwork to fill out at the DMV related to title and registration – if you’re buying from a dealer, they may handle the paperwork for you. After that you should be able to hit the road as a car owner.
Ways To Improve Your Loan Application
Lenders may be hesitant to approve loans for first-time borrowers with lower credit scores. Try these strategies to improve your odds of getting a loan:
- Make a bigger down payment: If you’re financially able, making a bigger down payment upfront can lower the amount you need to borrow and reassure the lender they’ll get their money back.
- Have a cosigner: A cosigner is someone, typically with higher credit than you, who signs onto the loan with you in order to give your application a boost. The cosigner becomes responsible for the loan should the primary borrower fall behind on payments.
- Improve your credit score: There are numerous ways to improve your credit score and qualify for better loans. Taking out a secured credit card or becoming an authorized user are good ways to build up credit.
First-Time Auto Loan FAQs
Trying to get a loan can seem like a lot to keep track of, especially for a first-time car buyer. Here are some questions others have asked.
Are there first-time car buyer programs available?
Many banks and car dealerships offer loan programs that can assist first-time car buyers with lower down payments, monthly payments and interest rates. Ask your bank or local dealerships about programs they may offer.
What is a good credit score for a first-time car buyer?
It’s recommended to have a credit score of 670 or higher to qualify for a good auto loan. The minimum required credit score for a personal loan is typically 610 – 640.
What is a good monthly payment for a first car?
Your monthly payment amount will depend on your interest rates, loan amount, etc. If possible, experts recommend keeping your total car costs under 15% of your monthly take-home pay. That 15% should include additional car expenses as well.
How can I finance my first car with no credit?
Unless you can qualify for a first-time car buyer program, you can make up for having low or no credit by making a bigger down payment or having a cosigner. Otherwise, your best option is to take steps to build or fix your credit. If you can raise your credit score, you’ll find you can apply for more money with lower interest rates.
It can seem like the odds are against you as a first-time borrower, but following the steps listed above can bring you closer to owning your own mode of transportation. Having good credit can be your key to qualifying for a car loan, so make sure you check your score and take steps to improve it if necessary. Otherwise, consider application-boosting options or dealership programs.
Want to see your personal loan rates? Start your prequalification today at Rocket Loans.
*Same-day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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