8 tips for choosing the right first-time auto loan

Preparing to buy a car for the first time is stressful. With so many factors to consider about the car, the loan can fall by the wayside.

Don’t let it. Securing a good deal on your first auto loan requires research — but the more you do now, the better off your finances will be later. A low interest rate is the key to an affordable car, no matter what you buy.

1. Stick to your budget

The biggest concern when buying a car should be the cost. Assess your spending plan to determine how much car you can afford without stretching your budget too thin. Experts recommend spending no more than 20 percent of your income — including the monthly payment and other ownership costs like maintenance, insurance and fuel — on a car.

Use an auto loan calculator to estimate monthly payments and total interest paid. Then, check resources like Edmunds and Kelley Blue Book to see what you can expect to pay for the vehicles you are interested in buying.

2. Remember that longer terms mean a higher cost

You could get a loan term of up to seven or even eight years to make your monthly payments more affordable. But there’s a downside — it results in more interest paid over the life of the loan. Even if you buy an inexpensive car, you can quickly become upside down on your car loan, or owe more than it’s worth.

For your first auto loan, choose the shortest term you can reasonably afford each month. It may mean you must cut back in other areas, but it is the best way to protect yourself from overpaying on interest.

3. Review your credit report and score

Your credit score is the most important factor lenders consider when determining your interest rate. To get a good deal, you will need a history of on-time payments and a solid credit score.

If you haven’t had the chance to build your credit score and history, you’ll have a harder time finding a good deal. You may have to use in-house dealership financing — which means a higher interest rate.

But if you can wait on your car loan, try to improve your credit score and build a history of on-time payments. A low debt-to-income ratio also shows lenders you can handle your finances. Paint a good financial picture for your lenders to score a good deal.

4. Shop more than one lender

Comparing lenders is just as critical as comparing cars if you want a good deal. Lender types to choose from include:

• Credit unions: If you have little or no credit history, you may be eligible for a first-time car buyer program offered through a local credit union. You’ll need to become a credit union member to apply for loans, so inquire about ways to join before moving forward.
• Big banks: Consumers with an existing relationship with a traditional bank may qualify for an auto loan. As a first-time buyer, you may face higher rates.
• Online lenders: Online lenders generally offer less strict eligibility requirements than traditional banks. This is good news if you lack credit history or a high score, but you can expect a higher interest rate to offset the risk of default posed to the lender.
• Loan marketplaces: These online platforms feature an extensive network of lenders. Submitting an application shares it with the network so you can view potential loan offers with lenders who could be a good match.
• Captive lenders: You can also secure financing through a captive lender, or the finance company belonging to the auto manufacturer. They often feature auto loan programs for currently enrolled students and recent college graduates.

Every lender has different rates and ways of calculating who gets what terms. It is critical to shop around and apply with multiple lenders. This allows you to see what you qualify for, how much you can spend and what you can expect to pay each month.

5. Get preapproved

Shopping around has an added benefit: It likely ends in a preapproved offer that lasts 30 to 60 days. Preapproval gives you time to shop around for a ride, knowing you’ve locked in funding at a fixed rate.

Preapprovals require a hard credit inquiry but give you leverage when it’s time to negotiate the purchase price at the dealership. You may also be able to negotiate a better deal on in-house financing — if that’s the route you want to go — with a preapproval letter in hand.

6. Check out manufacturer specials

Manufacturers offer rebates, 0 percent APR deals and special leases on new models. Keep an eye out for these. You will be more limited in what you can buy and how you can pay for it. But if you already have a clear idea of what you want and excellent credit, manufacturer specials can save you money on your first auto loan.

Some dealers also offer the choice between a rebate or low-interest financing. If you have already managed to secure unbeatable rates with another lender, your choice is clear: Reward yourself with a rebate.

7. Consider using a co-signer or co-borrower

If you don’t have stellar credit, a co-signer or co-borrower could help your chances of getting a good deal. The lender will consider both credit scores when deciding whether to finance your vehicle.

A co-signer doesn’t have rights to the vehicle but will become responsible for the loan if you cannot make timely payments.

However, a co-borrower shares ownership of the vehicle and equal responsibility for the loan with you. Regardless of which you select, the individual should have good or excellent credit and a steady source of verifiable income that meets the lender’s minimum threshold for approval.

8. Have a big down payment

Once you know how much you can spend, start saving for a down payment that’s at least 20 percent of the vehicle’s total cost. A larger down payment improves your chances of a good interest rate, reduces your monthly payment and shrinks the interest you’ll pay over the loan’s course.

If you can’t afford this amount, aim for a down payment of at least 10 percent or whatever you can afford. Consider using Bankrate’s auto down payment calculator to find a figure that works for you.

It may be tempting to get a more expensive car, but first-time car buyers — and every car buyer — should use a down payment to reduce the amount they need to finance.

Are there auto loans for first-time buyers?

Some manufacturers, such as Honda, offer first-time car buyer programs and discounts through select dealerships. Some even offer special deals for college students and recent grads who fall into this category. If you are planning on buying a new car, have the income and credit to back you up and want in-house financing, it makes sense to see if you can get a little money off.

Ask the lender about eligibility guidelines and how to move forward with applying for a loan. You’ll generally need to be at least 18 years of age and have a steady source of income. In some instances, a down payment is also required. Some lenders will also limit the automobiles you can choose from if seeking financing through a first-time car buyer program.

Next steps

The key to getting a good deal on your first auto loan is to stay patient and shop around. You can walk away with a competitive rate by comparing lenders, saving up a down payment and working on your credit score.