First Time Car Loan: What Terms to Expect

Obtaining a first time car loan may be a difficult process for many people, but it can be accomplished. The primary challenge stems from life being examined through the use of computers and pre-determined qualifications with little face-to-face assessment.

First time 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 will accept people with no credit are gas companies and department stores. Once you've established a history-6 months minimum-then applying for a first time car loan becomes an easier process. Make sure, however, once you've established an installment credit agreement, to make payments on time. Paying off any monthly installment in full allows you to establish an acceptable debt to income ratio, something lenders will look at when applying for a loan. Also, make sure you keep spending to below 50% of your limit. Lenders look at this fact also. The activity you take using credit and then paying it down each month will result in your establishing a credit score. If your credit is below 550, no lender will touch you. Some lenders require first time car loan applicants to have at least a 650 credit score.

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

A great way to acquire a car is to shop for an affordable used vehicle. Many manufacturers' authorized dealers have used car lots offering inspected and warranted used vehicles that have usually been traded in for a newer model. 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. If you want to purchase an older car, then you either need to spend cash or buy one from a used car lot that offers in-house financing.

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.