First-time car buyer – Think back to the first time you rode a bike — or drove a car. Most of us are probably much better today than we were on that first ride. Back then we didn’t have any prior experience on which to rely. But, as with most things in life, activities like these tend to get easier as you keep practicing and building confidence over time.
Well, buying a car for the first time is the same way. Without having gone through the process before, you might be a bit apprehensive about what to expect — especially when it comes to the financing part. That’s why we’ve put together these questions to help you think about the most important considerations before you officially start shopping for your vehicle.
How Much Car Can You Afford?
Although salespeople often have the charisma to make any price sound workable for your budget — for a slightly higher monthly payment, of course — only you have the power to dictate how much car you can really afford. Experts generally recommend capping your monthly loan payment at 15 percent of your take-home income or less. As U.S. News & World Report says, factoring in additional transportation costs like gas, maintenance and insurance should not push you over 22 percent of your net monthly income.
An auto finance calculator is a convenient way to view the most important numbers all in one place: monthly payment, loan length, interest rate and down payment. Some manufacturers and dealerships even have first-time car buyer programs to help answer questions you may have so you can understand the ins and outs of getting a loan.
What About a Down Payment?
Making a down payment on a vehicle serves a few important purposes. First, it signals to the lender from whom you’re soliciting a loan you are serious enough about acquiring and owning the car that you’re willing to put down a few thousand dollars up front. This increases your chances of getting approved for financing.
Putting enough money down — generally considered about 20 percent for new vehicles — also:
-
Reduces the amount you’ll have to borrow and pay interest upon.
-
Makes monthly payments more manageable.
-
Helps you avoid going “upside down” in your loan, or owing more than your vehicle is worth, if something were to happen to it.
And, don’t forget: If you have a trade-in vehicle to offer up, the value it is appraised at will also bring down the total cost of your vehicle in conjunction with your down payment.
Which Terms Can You Negotiate?
It’s not always easy to negotiate a car loan, especially your first time around. But knowing how to do so can potentially save you hard-earned cash.
Avoid the trap of agreeing to a car that exceeds your budget because the monthly payments look attractive if you stretch out the loan an extra year or two. Keep the loan length at or below 60 months; if you can’t handle the monthly payments with those terms, you can’t afford the car. In other words, aim to reduce the sale price not the monthly price.
You can even get pre approved for financing from another lender — like a local bank or online lending company — to use as a bargaining chip against the in-house financing department at the dealership. This’ll give you a clear idea of the APR for which you can qualify.
Above all, avoid making a snap decision because you feel like you “have to.” You have the power as the buyer. Walking in armed with knowledge about the car-buying process will help you make the choice that works best based upon your unique financial situation.
