Getting a Car Loan for First Time Buyers

As the economy crumbles and commerce slows to a grinding halt, it seems like it is harder for first time car buyers to get the financing they need to purchase the cars of their dreams. Fortunately, banks can and will give first time car loans to savvy purchasers who have an idea of what bankers and loan officers are looking for. Even without a long established credit history, there are some ways to prove that you are qualified to sign on the dotted line. Just follow these tips on how to get a car loan.

Know your monthly payment

While all lenders have a payment calculator to show what payment you should be able to afford based on your income level, don't leave it up to the bank to determine what payment you can afford. Create a monthly budget that lists all of your monthly expenses including rent payments, groceries, utilities, projected gas and maintenance expenses for your new ride as well as projected insurance costs (see below). Take your budget with you to the banker to show them where your payment fits into your budget so that they can easily see how your allotted funds will translate into purchasing power.

Get an insurance quote before you finance

Contact a local insurance agent, and set up an appointment with them to see what the costs of insuring a vehicle will be. Have them write quotes based on your driving record and previous insurance history for a sedan, truck, van or SUV depending on what types of vehicle you may end up purchasing. This exercise will not only help you to figure out how insurance fits into your monthly budget, but may help to guide you in your search for a new vehicle once you discover the potential rate differences between vehicle types.

Have a down payment

Lenders are wary of buyers who aren't willing to put a down payment on first time car loans. The short explanation for this is that car buyers may be making payments on the loan for the next 3, 4 or 5 years and lenders know that due to interest accumulation and vehicle depreciation the borrower may become "upside-down" in the loan, owing more than the car is worth if no down payment is made. Be prepared to put 20% of the vehicle cost down towards the purchase of your new or used car. Not only will this help you to reduce the amount of interest you pay over the life of your loan, it will also help to keep you from purchasing a car outside of your price range.

Create some history

If you have the luxury of a little time, open a checking account and put your name on some utilities and maintain all accounts for 6 months before you apply for your car loan. While payments to the electric company or your cell phone company don't rack up the credit score points as quickly as loans will, they do show that you can make your payments on-time every month. Opening and maintaining a checking account also shows that you are able to stay within your budget and that you understand the basics of personal finance.

Have a co-signer on call

If you are having difficulty getting the car loan on your own, see if a family member or family friend will co-sign the loan with you. A co-signer is a person who states that if you are unable to fulfill the agreements of the loan, they will take over the responsibility of making payments to the lender for you. Be especially careful when signing a loan with a co-signer though as every decision you make with regards to the loan will affect the co-signer's credit score in addition to your own, and if you decide to sell or refinance the loan in the future you will not be able to do so without the co-signer's permission.

Get financing directly from the bank

First time car buyers should never allow a car dealership to finance a car purchase. Car salespeople will always be more interested in making a sale then they will be in your financial future, and will often charge you more than a car is worth and/or hand you the first car loan that is available without worrying about the interest rate or payment terms. In order to make sure that you understand the responsibilities and repercussions of taking out a car loan, it is always in the buyer's best interest to work directly with a banker before shopping for a vehicle.

If at first you don't succeed, try again (in 6-12 months)

Another benefit of working with a bank before you go to buy your first car is that if your credit score is too low or if your debt to income ratio is too high, they will be able to tell you what is wrong and will have the resources to help you find ways to correct the issue. Be aware that once you receive a credit rejection, it is in your best interest to wait 6-12 months before filling out another application as excessive credit checks by lenders will cause your credit score to drop.

The best tip for first time car buyers is to use this experience to learn about how credit works. The same principals for financing your first car will apply to other lines of credit later in life such as personal loans, revolving lines of credit and the purchase a home. Keep notes, ask questions, don't sign anything you don't fully understand and you will become a car loan guru in no time.