If you’re like most Americans, eventually you’ll need to take out your first auto loan, especially if you’re looking to buy a new car. After all, the price of a modest new car can now range from the high `teens to almost $30,000 or more, and most people don’t want to, or can’t, spend that amount of cash at one time. Therefore, it’s important to know that not all auto loans are the same; in fact, the fees, terms, and interest rates on new car finance can vary significantly from dealership to dealership, or lender to lender, and will be affected by various factors, some of which are under your control. These factors can have a major effect on how much you will wind up paying every month for potentially 4 to 6 years or more on your first auto loan.
Note, there are several different reasons why someone might be applying for their first auto loans. First time car buyers can include: teenagers, buying their first car; college students living away from home for the first time; immigrants that have moved here from other countries; and finally, people that have always paid cash for vehicles in the past or have never owned one. For this article, we will be mainly addressing teenagers and college students.
ONLINE CAR LOANS: FIRST TIME AUTO LOAN APPLICATION
Even if you are applying for online car loans, knowing how an automobile dealership or lender sees you as a borrower will help you to be prepared when submitting your first auto loan application, so that you will be approved for the amount needed to buy the car that you want at the best interest rate possible for your current financial situation.
The first thing to consider is that the automobile that you want currently belongs to someone else, the dealership, and the dealership has paid for it. Manufacturers do not give cars to dealerships speculatively; the dealerships must purchase them. So, when a lender or dealership assesses a potential new borrower, they do so regarding “risk.” In other words, what is the risk that you will not pay your first auto loan back or that you’ll have difficulty doing so? The dealership or lender will determine what the risk of making an auto loan by asking certain questions of the borrower, including:
- What is your monthly income? Of course, the higher that your income is, the better that the lender or dealership will feel about approving your first auto loan. Your income will also affect the size of the loan that you are approved for, and consequently the price range that your new car will be in. So, when completing your auto loan application, make sure to count all income, even if it is a monthly allowance from home!
- What is your monthly housing cost (rent)? A scarcely known fact is that automobile dealerships and lenders pay close attention to this number. The reason is simple; they want to be certain that you have enough cash flow to make your monthly auto loan payments. They do this by comparing the amount of money that you spend on rent or your housing cost vs. what your monthly income is. For example, if you spend $350 on rent and your income is $1,400 per month, then your monthly housing cost is 25%. 25% is a great number when applying for your first auto loan. Any number over 40% and you might have problems getting approved.
- Do you have any money set aside for a down payment? Making even a smaller down payment can make a big difference when applying for your first auto loan. Once again, it comes down to offsetting the automobile dealership or lender’s risk in approving your first auto loan. Making a down can help to show the dealership and/or lender that you plan to be a good borrower and will make your first auto loan payments on time. Consider also that higher down payment will give you some leverage to negotiate for a lower interest rate on your auto loan. The combination of having a better interest rate and paying off some of the vehicle’s principal cost in advance will result in a lower monthly auto loan payment.
- Do you have any negative marks on your credit report? As this is your first auto loan, you are probably just beginning your credit life, and so should not have any bad marks in your credit history, However, if you have had a credit card, loan, utility bill, or any other bill that you have not paid that is currently outstanding, then there is a very good chance that you have a negative mark or two on your credit report. The only way to find out exactly what your credit history has to say is to get a copy of your credit report from the three main credit reporting bureaus (Equifax, TransUnion, and Experian). There is no need to go to one of those “free credit report” type websites, by law you are allowed one free copy of your credit report from each credit bureau, every year.
Again, if you are leaving home for the first time, still living at home, or are fairly certain that there should be no negative entries on your credit report, then you can skip checking your credit report. However, if you are not fairly certain, get a copy of your report from each bureau, as not all bureaus have the same information about you. If you then find negative marks/mistakes in your credit report, there are steps that you can take to get them removed. Getting these items removed can work in your favor by bringing up your overall credit score, thereby making better auto loan terms and interest rates available to you.
To find out how to have negative marks/mistakes removed from your credit history, see our recent article entitled “How to get Bad Credit Car Loans Guaranteed Approval if you have Low Income.”
Is there anyone available, a parent, relative, or another friend that could cosign on your auto loan? When applying for auto loans, first-time car buyers can alleviate any fear of risk that a dealer or lender has by having someone with a good credit history cosign the auto loan application. Having a cosigner on your first-time auto loan application will make most of the issues that first-time car buyers face moot. This is because a cosigner guarantees the auto loan and that if you fail to make your car loan payments, the cosigner will be liable to make them for you. Note, cosigners are not required to get an auto loan but can be helpful.
Taking these factors into consideration, you can get a better idea of how automobile dealerships and lenders look at you when you apply for your first auto loan, and also what you can do to affect or change that image to positively affect the outcome of your auto loan application.