Car loan for first time buyers11/12/2019
If you are a 1st Time Auto Buyer and want to get a new or reasonably new car, there are quite a few things you need to know.
Know the price of a car?
The First thing to know for first time car buyers, is to know the actual value of a car. Many television and newspaper ads would lead you to believe you can get a brand new car for $200 a month, but that's just advertising fluff. Sure, if you put down a $12,000 deposit on a new car, then you can indeed buy a new car for $200, but many first time auto loan customers have never actually sat down and done the math.
Let's say you have your eye on a new Honda Fit. Depending upon the model, optional equipment, and destination fee, you're looking at a price tag of around $20,000, which by the way is around $17,000 less than the average car on the highway.
Now, let's say you put down $1,000 as a down payment and got a first-time auto loan of 5.25 percent interest. While the TV ads are telling you that you can get a new car for $200, the actual math is to pay off a $19,000 loan in 48 months, your monthly payments would be $439 per month, and at the end of the loan, you would have paid $2100 just in interest. In order to bring that loan down to $200 a month, you would have needed to put down approximately half the loan, or around $10,000 at the start of the sale.
If you qualify for a lease, and that's a big if, you may be able to get near that $200 amount, but then you're essentially just renting the car, not buying it, and there are a lot of restrictions, such as the number of miles you can drive it.
Don't fall into the six or seven-year loan trap
Knowing how expensive the true cost of financing a car loan, particularly a car loan with no credit, first time car buyers are often at their most vulnerable when they believe they have settled on a new car, and then discover the $439 a month payment is way too much for them.
No problem, says the friendly sales manager, just stretch out the loan. For only $300 a month we can get you into this car if you finance it for 72 months instead of 48, (notice carefully how they almost always say months and not years, or $270 a month for 84 months.
That may sound like a good deal, only $70 more per month than advertised on TV, until you take into account depreciation, which may be another word they didn't teach you about in high school economics. Depreciation is the amount of value the car loses in value, based upon the years and mileage of ownership.
Even if you take extreme care of your car, and drive a very modest 15,000 per year, by the end of your loan you will have a 7-year-old car with over 100,000 miles on it, with a net worth of around $5,000 or less, if you are lucky. Meanwhile, you will have paid out nearly $23,000 total to buy the car.
Ten years ago, 90 percent of all car loans were 3 to four years. Now nearly 71 percent of auto loans, and in particular a first time auto loan, are in the range of 60 to 84 months. Remember, the longer the loan, the greater the likelihood you are to go underwater, which means that you will owe more to the auto financer than the car is worth.
First time Auto Loan and Special auto loan programs
In all fairness, car manufacturer's do help somewhat with special auto loan programs.
For example, the vast majority of manufacturers offer special auto loan programs for new college graduates, typically in the neighborhood of $400 to up to $1500. Most also offer similar rebates for veterans and active-duty military and reservists, There are also auto loan programs for first-time buyers, as well as for those with physical disabilities.
What's a good rate of interest for first-time buyers
The average rate of interest overall is around 4.2 percent, with those having excellent credit getting as low as 3.2 percent, and those fitting the subprime category getting around 12 percent interest.
Can You Get a new car loan without credit?
The answer is yes, with caveats. Most lenders will ask if you can get a cosigner to be responsible for the loan if you don't or they may take a chance on you if you can show you have a steady employment history and pay all your bills on time.
Without a co-signer, expect to pay a higher rate of interest, or to finance through the dealership itself. Another strategy, of course, is to buy a small item such as a bedroom set at a department store, even if they charge you 18 percent interest, and then pay that loan off as quickly as possible. At that point, you do have a modicum of credit history.
Where to finance?
You can apply for a car loan online, but its usually better to go straight to a bank or credit union, in person, so that some of your personality can shine through, and you can personally answer any questions about why you have no credit history.