Automobiles are a necessity of the present. However, buying a car is not as easy as it may seem. Cars are expensive commodities, and getting one is a big financial decision, especially for first-timers.
Not everyone can buy a car by paying its entire cost upfront, especially first-time buyers. So, how can one buy a vehicle? By opting for car loans.Buying a car will impact your life and finances for years to come. Thus, you need to find a policy that is suitable for your needs. But with no or limited credit, this can be a tough job.
To help all the first-time auto loan seekers, we bring you this beginner-friendly guide that will tell you how, with careful planning and the right tools, you can get the right car loan as per your needs at affordable prices despite having no or limited credit history.
Explore Your Credit Score
Consumers who have never had an auto loan, also known as first-time buyers, likely have no or limited credit history. Your credit history is represented by your credit score, which is what most lenders rely on to determine your trustworthiness or ability to repay a loan. The number is based on the reports on your credit history, such as payments (late and on time), debts, and past charge-offs.
The first step to any large financial decision is understanding your credit score and history. You can get your free credit history report from any of the major credit reporting bureaus, namely, Trans Union, Experian, and Equifax. Every American is entitled to a free credit history report once a year from each of these firms, and you can use platforms like Annual Credit Report to get yours now.
One of the best things about having little to no credit history is that many financial institutions or lenders prefer newcomers, which is quite opposite to what we see in cases of bad credit car loans.
Know Your Budget For Financing
Before you go out and start exploring your auto loan options, the crucial thing you need to do is set up a budget. You need to include registration fees, insurance costs, initial taxes, warranty, fuel, and maintenance expenses in addition to the vehicle’s cost.
Setting up a budget will give you a clear idea of what you can afford without straining your pocket. For example, say within your means, you can easily afford to buy a Toyota Camry but you didn’t care to set up a budget and went on to buy a premium luxury car with white interior, your finances will be ruined down the road, even sooner than you had anticipated.
Popular platform Nerdwallet recommends spending less than 10% of your monthly income on a car payment and less than 20% overall on vehicle expenses (gas, insurance, maintenance, etc.).
For example, if you make around $2000 a month, you should look for car insurance with a monthly payment under $200.
Plan For Vehicle Ownership
The monthly and upfront costs of your vehicle may be the most pressing factors, but they are not all that matter. Your loan term determines the actual amount of money you will be paying to own your vehicle. In simpler words, the longer the term of your car loan, the more money you will be paying in terms of interest.
Generally, auto loan terms range from 36 to 72 months. Out of which, the 60-month term is the most common, which comprises five years.
In addition, do not forget about the vehicle’s warranty, especially if you are considering buying a per-certified ride. The warranty covers most mechanical malfunctions on your ride. However, if you do not have it, you will be paying it out of your pocket. So, discuss the terms of the warranty, as if you do not get it, your loan monthly payments can see a spike.
New or Pre-owned
Another crucial question to ask yourself before you go auto loan shopping is whether you wish to buy a new car or a pre-owned or used one. While a brand new car seems like an enchanting idea, it will cost you more compared to a used one. The car loan for a pre-owned ride will be much cheaper than the one for a brand new one.
While people who purchase new cars can enjoy lower interest rates and special incentives, there is a reason why it is recommended to avoid new cars in most situations.
The problem with new vehicles is depreciation. Once a car gets its first owner, it will see a large drop in value, and depending on the amount put down or vehicle traded in, this can give you negative equity in your loan. However. For the right terms and price, a new car can be a good option, especially if you plan on keeping it for a very long time.
On the other hand, used and certified pre-owned vehicles may have some wear, no warranty, and often come with higher interest rates, but they will have a much better chance of retaining their value when being sold to a second or third owner than they would when going from new to pre-owned. Most financial advisors would recommend finding a used vehicle with low miles rather than a brand-new vehicle.
3 Steps To Boost Your Chances Of Loan Approval
Not everyone who applies for an auto loan gets it. There are plenty of factors at play that decide whether you will get approved or not. So, if you are having a hard time getting approved or think you have a weak profile to get approved, below are some tips that you can follow to boost your chances of car loan approval.
Use a Cosigner
If you are an absolute newbie with little to no credit in your hands, having a cosigner for your auto loan is a great way to go. A cosigner is the second person who signs for your vehicle purchase with you and is equally responsible for all the loan terms.
You and your cosigner will be equal legal owners of the vehicle. A cosigner with an excellent credit history can build up your loan profile and help you get better terms.
Down Payment or Trade-In
You can get a cheaper car loan if you decide to pay a considerable amount as a down payment or decide to trade in a vehicle you currently own. Doing this will bring down your loan principle, which further decreases your monthly payments and even the loan term.
As per experts, a down payment of at least 20% of the car’s value is what you should go for. But overall, pay as much as you can without straining your bank account. Just keep in mind that the more you pay upfront for your car, the lower your interest rates will be for the auto loan.
Start Building Credit
As someone with a clear credit slate, you can work on building it. Credit cards, credit builder loans, installment loans, mortgages, paying off your debts, making timely payments, and becoming an authorized user on the credit card of a friend or family member with good credit can help you build your credit.
Conclusion
As a first-time applicant, obtaining an auto loan with no credit might seem challenging, but with the right strategies and knowledge, you can achieve it. All you need to do is understand your credit score, work diligently to improve it, set up a budget, choose the right lender, and decide on a significant down payment.
Remember that your journey with an auto loan does not end with you getting your vehicle into your garage. It is an opportunity for you to build your credit history so that, in the future, you do not need to rely on others to help you out.
