Buying a car for the first time is exciting. Soon, you’ll be driving your own vehicle with the freedom to go anywhere you like. But maybe you’re not sure about the best steps to take as a first-time car buyer.
Should you secure financing before you look for a car? How do you choose the right term? And what about the interest rate? Read on to find out answers to these questions and everything else you need to know about buying your first car with an auto loan.
Why Your Credit History Matters
Your credit score is important because it helps lenders decide if you’re a safe bet for a loan, or if you might struggle to meet your monthly payments. Two of the key factors that go into your credit score are your payment history and available credit.
Here’s how your credit impacts your experience as a first-time car buyer:
- People with higher credit scores are more likely to have their auto loan approved.
- People with higher scores are likely to be offered better interest rates, so the total cost to borrow will be lower.
- People with poor credit may not qualify for a loan, while people with fair or good credit may qualify but get higher rates.
APR vs. Interest Rate
When you’re shopping around for the best auto loan, you might see two different numbers: the APR and interest rate. So, what’s the difference?
- The interest rate is how much your lender is charging you to borrow the money. It’s shown as a percentage of your total loan amount.
- The annual percentage rate (APR) includes the interest rate but some lenders roll fees into the APR, so then the APR will be higher than the interest rate.
- When comparing loans, be sure to look at the APR and not just the interest rate.
Auto Loan Fees
When you’re looking for the best auto loan, be sure to check what fees you’ll have to pay upfront, monthly, and annually. Try to find an auto loan that waives certain fees.
Watch out for lenders that have a long list of extra charges. As mentioned, some lenders may even try to hide fees in the APR. Possible auto loan fees include:
- Application fee or origination fee to process your loan
- Prepayment penalty if you pay your loan off sooner than planned
- Late payment fees if you miss a payment
Advantages of Getting Pre-Approved
Getting your auto loan pre-approved means you can show up at the dealership knowing that you’re ready to go. Here’s how pre-approval can help first-time car buyers:
- You can shop around multiple lenders and find out exactly what rates you’ll get for your credit score and what fees you’ll have to pay.
- You’ll know exactly how much car you can afford for both the purchase price and your monthly payment, so you don’t end up borrowing more than you can manage.
- The dealer will take you seriously as a buyer and you won’t have to worry about whether you can afford the sticker price, or waste time haggling over add-ons.
Note: If you get your auto loan pre-approved by a few different lenders within one or two weeks, your credit score will only dip once. Your credit will recover once you’ve made a few timely payments on your auto loan.
The final number you need to consider is your loan term, or how long you have to pay your loan back. The term might range from 48 to 96 months. Choosing the right term is key to making sure you can afford your dream car!
Here’s how your loan term can affect your rates and monthly payment:
- Shorter loan terms mean a higher monthly payment with a lower APR, so you pay your loan off faster and your total cost to borrow is lower.
- Longer loan terms mean a lower monthly payment with a higher APR, so it might be easier to manage your monthly budget but your total cost to borrow will be higher.
- You can use an auto loan calculator to see how different loan amounts and terms will impact your monthly payment.
Next Steps for First-Time Car Buyers: Comparing Auto Loans
The most important step for first-time car buyers is to work out a monthly budget so you know what car payment you can afford. Then, once you’ve been pre-approved for a few different auto loans, you should take the time to carefully compare the offers.
Look at the interest rates and APR for each offer, and then look at the fees. Finally, make sure there’s a term that will give you the right monthly payment. Click below for a helpful checklist so you can compare auto loans with confidence!