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Auto Loan - Tips for First Time Car Buyers

Posted on February 6, 2015

Buying your first car may be a rite of passage into adulthood, but that doesn't mean you should jump blindly into a deal that will affect you and your finances for the next several years. It is important to take the time to research your purchasing options, consider your budget, and select the car that best meets your immediate needs. The consumer information division of the Federal Trade Commission (FTC) recommends deciding how you want to pay for your car before you ever visit a car lot. For most people, financing the purchase of a vehicle will involve taking out a loan. If you're a bit mystified by the application process, you're not alone—here's everything you need to know about applying for a car loan.

 

Direct Lending or Dealership Financing?

When you're ready to apply for a loan, you'll need to decide where to apply first. Your options are seeking financing from a bank or your credit union, known as direct lending, or going through the dealership. Choosing direct lending to finance your vehicle is much like pre-qualifying for a mortgage. You can visit a NAE branch or apply online, get approved for a specific amount, and then go shopping for a car with that budget in mind. If you have good credit, you can apply to several direct lenders until you receive the interest rate and loan repayment terms that you want.

 

A common scenario with dealership financing is for a person to show up at a car lot, express interest in a certain vehicle, and apply to finance it directly through the dealership. Many dealerships will arrange financing through a bank or your credit union. You are then responsible to make payments to that organization until the loan is paid in full. It's worth knowing that the financing available through the dealership may not have the lowest interest rate or best terms: always negotiate!

 

Know Your Credit Score

One of the biggest mistakes first-time car buyers make is not knowing their credit score before entering into price negotiations with a car dealership. Your credit score is a number from 300 to 850 that lenders use to determine how risky it is to loan money to you. A higher score means you have managed your finances responsibly, with few issues, and thus constitute a very low risk to potential lenders. Lenders also use this number to decide on the amount of interest to charge you.

 

Every consumer is entitled to one free copy of their credit report from all three of the major reporting agencies every year. Before you make any major purchase, be sure to obtain and review your file. You can get your FREE credit report by visiting AnnualCreditReport.com. Your credit score may be higher than you expect, which gives you more leverage when it comes to working out loan details. It is too easy to be taken advantage of when you don't know your own score.

 

Be Realistic About How Much You Can Afford

The FTC advises anyone buying a car for the first time to put together a monthly budget first. You should be able to afford the new payment without having to cut back anywhere else. Write down how much you spend for your rent or mortgage, food, fuel, clothing, entertainment, utilities and other major expenses every month. Then add up the total before you add in the new car payment and after you add it in. Be sure to include expenses for gas, auto insurance, and routine maintenance. Subtract each from your monthly income to see how much is left over before you commit to car payments every month for the next several years.

 

You may have your heart set on a brand new car, but this may not be realistic option for first-time buyers. The payments are often too high to get a loan and rapid depreciation means you may lose money on the car when you try to sell it. Stick with buying a used car and commit to making the payments on time every month. This puts you in a better position to buy a new car in the future if you so desire.

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