First Time Buyer Car Loans: Typical Terms, Tips for Better Rates

March 18, 2013

First time buyer car loans can have high interest rates due to lack of credit history. There are a few tricks you can use to keep rates in check.

First Time Car Buyer

If you're in the market to buy your first car, there are a lot of questions that come up, but probably one of the most important is the question of finding first time buyer car loans with the best rates possible. There are many options out there, and the choices may leave you needing some guidance to navigate them all. While there's no single answer that will work for everyone, there are some tips that will make the process easier, and in the end will leave you satisfied that you got the best rate possible on your loan.

Know Your Own Credit Rating
This is an important step, because knowing what your personal credit report looks like will help you pick a lender that specializes in loans to people with similar credit ratings. If you have great credit, it will be much easier for you to find loans with lower interest rates and more agreeable terms and conditions. If you're credit isn't so great, you may find that you'll only have luck with companies that base their business on auto loans to people with lower credit ratings.

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Get Credit First
First time buyer auto loan applicants need to establish some type of credit history to apply for a traditional finance agreement. Finance companies only lend money to people with credit, so establishing a credit history is the initial requirement for a first time car loan.

Establish credit with a company that makes monthly reports to the top credit information agencies. Some places that accept people with no credit are gas companies and department stores. Once you've established a history (6 months minimum), applying for a first time buyer car loan becomes an easier process.

Make sure to make payments on time. Paying off monthly installments in full allows you to establish an acceptable debt to income ratio, something lenders look at when you apply for a loan. Also, make sure you keep spending to below 50 percent of your limit. Lenders look at this as well. The activity you take using credit, and then paying it down each month, will establish your credit score. If your credit is below 550, no lender will touch you. Some lenders require first time buyer auto loan applicants to have at least a 650 credit score.

Do Some Research
Different providers offer different interest rates at different times, so it is important to find a lender that has the best rate at the time you are looking to buy your first car. Luckily, there are a number of sites on the Internet that connect you with loan providers, and offer detailed search options to specify exactly what you're looking for. Two of the biggest and most highly rated of these services are MyAutoLoan.com and Autocreditfinders.com.

Pre- Approval
It is best to get pre-approved before you start shopping for a car. There is nothing worse than finding the car of your dreams, only to learn that there is no way you can afford it. When you have gone through the pre-approval process, you know exactly how much car you can afford and adjust your shopping accordingly. Getting pre-approved does not lock you into one lender. It may end up that the dealer you buy the car from may be able to give you a better loan rate.

Car Type
Shop for an affordable used vehicle. Many manufacturers' authorized dealers have used car lots offering inspected and warranted used vehicles. Dealers prep these vehicles, making them both cosmetically appealing and operationally sound, as well as providing limited warranties. Obtaining a good used vehicle helps reduce the overall auto cost, and can help a first time buyer qualify for a loan. However, lenders will usually not finance vehicles more than 5 years old or with over 50,000 miles on them. If you want to purchase an older car, you need to spend cash or buy one from a used car lot that offers in-house financing.

First time car buyers may find it difficult to afford a new car, but it never hurts to look. Often, manufacturers offer some special deals and rates on auto loans. Check with the finance manager to see if you qualify for a loan from the dealer or manufacturer. Be realistic about how much you can afford, do a monthly budget and determine how much of a car payment you can make. Do not forget to include the cost of insurance when figuring out how much you can afford.

Apply
Another benefit of the sites listed above is that their application process is free and has fast turnaround. Often, they will have a quote for you in a matter of seconds. Be sure to pay attention to the interest rate in the quote, though, because that is the rate they are offering you specifically, and it is often different than the teaser-rate that they post on their homepage. Also, be aware that you should obtain as many quotes as possible (as long as the applications are free or inexpensive), because the only way to know you are getting the best rate for a first time car loan is to cast a wide net and see what's out there.

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Documentation
Be prepared to provide proof of income as well as a complete financial picture. Lenders want to know about any other loan or debt obligations that you have. Any credit or banking history you can provide will be helpful. You will also need to provide proof of residency and insurance.

Down Payment
Although lenders are only providing money for the actual financed amount needed, first time buyer car loans usually require at least a 20 percent down payment. This is what is called a secured loan. The car purchased acts as collateral for the loan, and you will have an immediate 20 percent equity investment that you won't want to jeopardize by defaulting on the loan. That's the lender's belief, so the larger the down payment you provide, the less risk the lender takes.

Get a Co-Signer
Many first time buyers cannot meet the minimal requirements for an auto loan, and need to use someone else to guarantee payment. This is called a "co-signer." Usually this is a relative with good established credit. The loan, however, will be in your name, and payment activity will be reported in your name to the credit bureaus.

Shopping for your first car can be both exciting and intimidating. Getting a car loan is harder to do these days, but being knowledgeable about the process and understanding what lenders are looking for can make the process easier. These tips should help you drive your dream car off the dealer's lot.

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