A First-Time Car Buyer’s Guide

If you won’t be paying cash, you’ll need a car loan. Since you’ll be expected to make monthly payments on an auto loan, first figure out what payment amount fits your budget.

When getting a car loan, you’ll need to decide on a loan term — which is the length of time you have to repay the loan. Terms usually range from 24 to 84 months. Opting for longer terms may reduce your monthly car payment, but it can result in paying more in total due to longer loan interest payments.

Additionally, factor in any expenses beyond the monthly loan payment. In 2024, AAA estimated that a typical new car buyer with a five-year loan would spend $12,297 per year, covering depreciation, loan interest, fuel, insurance, maintenance, and fees.

BW suggests allocating less than 10% of your take-home pay to your car payment and less than 15% to 20% on car expenses overall. Remember, you’ll be making that payment long after the initial excitement of buying a car fades.

One common concern for first-time car buyers is, “Will I qualify for a loan?” It is true that having no previous loans or credit cards can make it more challenging to get a loan. Lenders will review your credit report to assess your payment history on credit accounts. Even with limited credit history, you should obtain a free copy of your credit report to identify and dispute any errors that could impact loan approval.

Lenders will also evaluate your credit score, typically looking for a score of 690 or higher on the 300-850 scale used by major scoring companies. However, individuals with lower scores may still qualify for a loan. To improve your chances of loan approval, consider providing proof of steady income, saving for a larger down payment, or having a co-signer with good credit.

Regardless of your credit situation, you can likely find a lender willing to approve your loan, although it may come with a higher interest rate.

Before beginning your car search, obtain preapproval for an auto loan. This process involves a lender estimating the amount you can borrow and the associated interest rate. Preapproval provides you with a clear budget to shop for cars and gives you negotiating power at the dealership.

Having preapproval helps in two ways: It allows you to focus on cars within your budget and gives you leverage when negotiating financing options with the dealership.

To get the best interest rate, seek preapproval from multiple lenders and submit all applications within a two-week period. Multiple applications within a short timeframe are considered as a single inquiry on your credit report, minimizing the impact on your credit score.

As a first-time car buyer, you may not qualify for the lowest interest rates, but shopping around can help you secure a competitive rate. Consider credit unions, banks, and online lenders for financing options, and avoid accepting dealership financing as your only choice.

Before finalizing your car choice, conduct research to identify your needs and preferences. Consider factors like fuel efficiency, vehicle size, space requirements, cost, new vs. used options, and gas vs. electric models.

Once you have a list of preferred models, conduct thorough research by checking fuel economy ratings, safety ratings, insurance costs, online listings, and reliability ratings. Determine where you want to shop, whether at a dealership, online retailer, or through a private seller.

Consider using car-buying apps or online platforms for a hassle-free experience or explore options beyond traditional dealerships.

If you’re planning to purchase from a dealership, it’s essential to be prepared before visiting. Understand your maximum monthly payment and focus on the out-the-door price, which includes all costs associated with the purchase.

During negotiations, present preapproved loan offers to secure the best financing terms. Review the vehicle contract carefully and ensure you understand all fees and services included.

Beware of yo-yo financing practices, and consider bringing an experienced buyer with you for support and guidance during the purchasing process.