First Car Financing Tips

Buying a car for the first time can be intimidating. One of the most intimidating aspects is the financing. Read on to learn how to prepare for buying and financing your first car.

1. Know your credit options. As a first-time car buyer, you may have little to no credit history. So you'll likely have to pay a higher interest rate than established buyers. This is because without a history, you represent a greater risk to the lender. You can get better interest rates if you build up a little bit of credit before shopping for a car. You may consider opening a credit card and making some  purchases on it that you pay off quickly.

2. Don’t take out a long-term loan. A longer-term loan will give you lower monthly payments, but it will cost you hundreds or thousands of dollars more in interest. The longer your loan length is, the more likely you are to end up with negative equity (owing more on your car than what it’s worth). Try to keep your loan term as short as you can comfortably go. Of course, one way to avoid high monthly payments is to buy a less expensive car.

3. Know your budget. To figure out what you can afford, work backward from your desired monthly payment, and see the total car price. And, if you're purchasing a used car in order to save some cash, be sure to budget for more than the asking price. Used cars may have maintenance needs, and little to no warranty left. Preparation is key to successful car ownership.

4. Save up for a down payment. A safe goal is 20% of your purchase price. If you’ve figured out that you can afford a monthly payment on a $10,000 car, try to save up $2,000 to put down on it. There are many benefits to putting more money down at purchase. You'll pay less in interest on the loan; you'll have lower monthly payments overall; and you'll qualify for financing more easily because the lender is assuming less risk. You'll offset depreciation on the vehicle, which is even more important with used cars. Be aware that any vehicle purchase will cost more than the purchase price. All vehicles require the payment of tax, title, license, and special fees. You can save money by paying these fees at the time of purchase, instead of rolling them into your monthly payments and paying interest on them.

5. Do you have a trusted friend or relative who can so-sign for you? If so, you may consider asking them for this favor. You'll have an easier time getting financing if you can find someone with good credit to co-sign your loan. This is a risk for your friend or relative though. By co-signing, they are agreeing to make your payments if you can’t or don’t. Be responsible and do not ask anyone to risk their own credit unless you can be sure to take care of the loan yourself.

Follow these tips for financing your first car purchase, and you'll be on your way to some shiny new wheels!

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