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Getting a car loan as a first time buyer can be difficult. After all, lenders use your past history of credit to decide your approval and interest rate. If you’ve never had a car loan before, they may view you as a high-risk applicant. However, it may be easier to get a loan as a first time buyer than it is for someone who has been irresponsible with car loans in the past.

Budgeting is Paramount

Budget, budget, budget. Why is it so important for first time car buyers? Simple, you do not want to buy a car that you cannot afford to repair and maintain, nor do you want to make yourself “payment poor.” Before buying, you need to look at all of your monthly income and expenses. The lenders are certainly going to! Two major criteria for a loan are debt-to-income (DTI) ratio and gross income. Your gross income must be more than $1,450 per month, and your DTI must be less than 40 percent of your gross income, including the payments on the loan you are going to apply for. Looking for financing without knowing your numbers could be frustrating if not futile.

Once you have looked over your budget, determine how much you can afford to commit to a monthly payment. That amount may look good on paper, but you should verify its practicality before you shop for a car. To do that, put that much money into a savings account each month, on the date that you want your car payment to be due. Next, decide on the type of car you want. With that in mind, call your car insurance company and get an estimate for the cost of coverage for that vehicle. If there is a jump in cost, put the difference in the same savings account. If that money goes untouched for six months, then you can truly afford the car you are looking at and you have built a nice down payment in the process. As a side note, never tell a car salesperson how much you can afford to pay each month. They will try to sell you more car than you need. Always look at the total price instead.

Managing Your Credit Score

While you are going through the budget process above, hop over to annualcreditreport.com and print off your free credit reports. You may find that there are errors or omissions that are dragging on your credit score. If your score is lagging, you can either get a credit card or pay down the balance on your existing credit cards. Why?

When you apply for an auto loan, the lender will pull your credit report, usually from FICO. FICO builds your credit score on five criteria, with payment history, length of credit history, and amounts owed accounting for eighty percent of your score. So, if you have no credit history, a card will be a beginning. If you have a high balance, lowering it will improve the amounts owed aspect of your score. Making all of your payments on time will boost your score in either situation.

Shopping Your Loan

Once you have your credit score as high as possible and you have worked your budget to meet your payment needs, it is time to get a loan. The only way that you can be sure to get a loan on the best possible terms is to shop your loan around. Try the traditional lenders like banks and credit unions first. If you are denied, do not despair. There are plenty of specialty lenders who may still offer you a loan. You may need to search online, but they are out there. One last tip, shop your loan around within a 30 day period. Since your credit score temporarily dips each time you apply for a new line of credit, grouping your applications will soften that blow and allow your score to rebound more quickly.

 

About the author: Jerry Coffey

 

Jerry Coffey is the financial expert here at AutoFoundry.com. A recovered "debtaholic," he now preaches frugal-living and sound money management here and at Repaid.org, where he is the chief contributor. He works for a major automaker.

 

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One Comment

  1. Just be an educated consumer and make sure you understand all the terms of your no credit auto loan and use it as a means to establish your credit.

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