7 Financing Tips Before You Buy Your First Car

    

7 Financing Tips Before You Buy Your First Car FSCB Blog

Everyone dreams of the day they get their first car. When you get your license, you can’t wait to ditch the family sedan and have your own wheels. The challenge, of course, is figuring out how to afford a car, either new or used. What are your financial options to achieve automotive freedom?

If you are in the market for your first car, then you are probably in the market for an auto loan, as well. Before you even start looking at cars, you should have your finances in order. You want to make sure you can borrow the money you need and that an auto loan won’t break the bank. To help you get started, here are seven tips for first-time car buyers:

1. Start with a budget.

Budgeting is one of those things that everyone has to deal with. We all have bills to pay, so measuring how much money you bring in each month against what you have to pay out is essential. There are many approaches to budgeting. One route is the 50/30/20 approach—allocating 50 percent of your income to things you need (“must-haves”), 30 percent to things you want (“nice-to-haves”), and 20 percent to savings. Car payments usually fall in the “need” category, but you still need to make sure your outflow isn’t more than your income. Determine how much money you take home each month. List your monthly spending, assigning costs to “need” or “want” categories, and be sure to set some cash aside for savings. If you add a car payment to your expenses, how much can you afford each month? With this number, you can calculate the size of the loan you can afford (and determine whether you should shop for a clunker or a new set of wheels).

2. Save up.

You can try to finance 100 percent of the auto loan, but most car buyers plan on having 20 percent of the cost of the car as a down payment, especially when buying a new car. The more money you can pay up front, the less you will have to borrow and the lower your monthly auto loan payments will be. When you are budgeting, consider putting the amount you would pay on a loan into a car down payment fund.

3. Shop for a loan.

When you start putting cash aside for your new car, it’s time to talk to the bank about a loan. You want to get some advice about loan pre-approval, what types of loan would work best for your budget, and what your options may be for a new or used car. Go to the bank rather than a car dealer or online lender. Bankers are there to help you and work with you to find a loan that fits your budget. A bank loan officer can discuss options and explain details that will affect your auto loan decision.

4. Check your credit score.

Before you actually apply for an auto loan, make sure your credit is in good shape. Your credit score will affect not only whether you can actually qualify for a loan, but how much you will pay; the better your credit score, the better the terms of the loan. There are a number of services that let you monitor your credit score, such as Credit Karma, MyFICO, and Privacy Guard. You also can get free annual credit reports from the three credit bureaus—TransUnion, Experian, and Equifax.

5. Check your loan terms.

Once you’re ready to apply, get down to the terms of the loan. Determine the interest rate on the loan (the lower the better) and the length of the loan. Remember that as long as you are making payments, the lender holds the title to the car. You don’t want to be making payments on your old car when it’s time to get a new car, so think before you commit to 36, 48, or 60 months of payments. Also, be sure to calculate the actual monthly payment, including interest and principal, to avoid unexpected costs later on.

6. What about a cosigner?

 If this is your first car, you are probably still establishing credit, which could make qualifying for an auto loan more difficult. One option is to find a cosigner. The cosigner is guaranteeing that you will pay the loan, so if you default, they will assume responsibility for the debt. Before you ask a relative or friend to cosign your auto loan, be sure they understand the risks, including how their credit may be affected.

7. Pay for the extras.

When negotiating to buy a car, you are going to have additional fees, such as sales tax, destination fees, car registration, and documentation fees. If you can, try to exclude fees from the loan and pay them yourself. You don’t want to pay loan interest on car registration and documentation fees.

If you have never purchased a car or signed for a car loan, remember that you don’t have to do it alone. Talk to your local banker. They can help you navigate the ins and outs of the process to help you finance your new car.

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