Obtaining a Car Loan: A Guide for First Time Car Buyers

With the current turmoil in the U.S. auto industry, many car dealers are offering considerable price reductions on new and used vehicles. As a result, this is probably one of the best times to buy a car in recent memory. If you are a first time car buyer looking for a car loan, here is what how you should approach obtaining a car loan.

First, determine your price range. In the last few years, many lenders approved loans for exorbitant amounts, and many first time car buyers wound up purchasing a car they could not afford because the credit was available. Nowadays, lenders are carefully scrutinizing every potential debtor's assets and liabilities.

Do not ask for more than you can afford: if you get rejected, you've slowed down the process and perhaps lost out on a favorable interest rate. If you are approved (based perhaps on the expectation of an increase in future income or lax lending standards), you may not be able to make the payments. Make a realistic assessment of what you can afford, and get pre-approved for a loan of that size.

Make sure you have copies of your paystubs, tax returns, and any brokerage or savings account statements ready to show the loan representative to speed up the process. For first time car buyers whose income fluctuates, it is a good idea to show the loan representative several years' worth of recent tax returns. Lenders will want to estimate how much you can reasonably afford to pay on any loan they make to you. This is especially true if you are a first time car buyer, and you have no history with car loans with which the lender can gauge your credit-worthiness.

Check and clean up your credit score before you meet with a loan representative. There may be errors on your report that affect your ability to get a loan. (You can check your report annually for free at all three credit bureaus at www.annualcreditreport.com). To minimize the interest charged on your loan, make sure there are no blemishes on your record, and make sure your recent payment history is faultless. For the first time car buyer, this is extremely important, as many lenders have been hesitant to extend credit to even borrowers with long credit-histories and sterling credit scores.

When looking at what you can afford, also keep in mind the attendant costs of each make and model. Research which types are likely to require a lot of maintenance. This can eat away at the money budgeted for your purchase. Your lender will not necessarily consider this whether for a first time car loan or a ninth car loan. You have to.

Whether a first time car buyer or not, put as much money down as you can afford. This will lower your interest payments over the life of your loan. Dealers may try to entice first time car buyers with 0% interest rates or "No Money Down" offers. These only increase the length of the loan and the amount of money you are charged for borrowing it. Taking these deals is a common mistake among first time car buyers.

Car dealers are looking to make a deal and their financiers may be able to offer you credit on lucrative terms. But be aware that they are compensated by the size of the sale, so they may try to pressure you into buying extras you don't need. Banks may be the better choice for you as a first time car buyer because they are more likely to look at your proposed loan within the context of your lifestyle, based on your pre-existing relationship.

Shop around. Do not allow anyone to pressure you into taking a particular loan because of a special promotion that will soon expire - that is often just a sales tactic. Take notes on the terms of loans at your bank, your dealer, your credit union, and anywhere else that may lend you money. Do not just rely on these representatives for their advice on how to get a car loan either; do your own research and ask friends and family members.