Financial Advice

Buying a Car for the First Time

Car ownership has been a rite of passage in America for generations. And while you’ll likely always have a soft spot for the first car you ever drove — whether it was handed down or purchased especially for you — the pride that comes from buying your own vehicle for the first time is a feeling that cannot be matched. Unfortunately the process leading up to that elation can be a bit rough.

The truth is that buying a vehicle is usually a stressful experience. From trying to find the best deal on financing to haggling over pricing at the dealership, car buying can be overwhelming for anyone, let alone first-timers. That’s why it’s important to arm yourself with knowledge about what to expect and how you can ensure you come out of the process on top.

For the purposes of this article we’ll be discussing what’s involved with buying a new or used car from a dealership. However some of it will apply to private auto sales as well. So with that, let’s take a look at what you should know when planning to buy your first vehicle.

First Time Car Buyer Financing

If you’re buying your first car there’s a good chance you haven’t built up a ton of credit. Luckily car loans are often much easier to obtain than other types of credit, although the rate you pay may be higher than normal (more on that later). There are also several different methods you can use to finance your new vehicle:

Bank, credit union, and online auto loans 

One of the first places many would-be car buyers start on the search for financing is their local bank or credit union. If you have good credit that could be a smart move, as some banks will offer discounted rates to their checking or savings account customers. Additionally there is also the chance that your history with the bank will factor into their approval decision instead of going strictly off of your FICO score. This is even more true for credit unions, which often also may offer better interest rates.

Beyond the big banks and local credit unions there are also many legitimate online lenders that offer auto financing. Upon approval these funds can either be transferred to your bank account or the lender may send you a blank check (good for up to your max approval amount) that you can then make out to the dealership you purchase from. As you’d expect all of these lenders have their own requirements for approval and their rates do vary so you may want to shop around. However, before applying, be sure to inquire whether getting a quote will result in a “hard pull” that could ding your credit score.

Dealership financing

Another method of financing your car loan is to apply through the dealership. For example a Toyota dealership would send your application to Toyota Financing for approval. This is typically more for new cars than used, although many dealerships sell both. It should also be noted that this differs from “buy here, pay here” financing, which we’ll address in a moment.

Perhaps the biggest perk that applying on-site offers is that it allows you to take advantage of those 0% financing deals that sometimes come around. Additionally, since dealers are looking to make sales, they may be more inclined to work with you and ensure that the monthly payments meet your requirements. Sadly, as a credit newbie, there is always the chance that you will not only be disqualified from any 0% financing offer but also be declined for any new car loan, so don’t get too excited until it’s a done deal.

Buy here, pay here

You’ve probably driven by several so-called “buy here, pay here” dealerships and not even known it. However what often times gives them away is their large signs and banners declaring that they sell to those with bad credit or no credit. There are several local BHPH dealerships in many parts of the country, as well as some national chains such as DriveTime

Buy here, pay here dealerships are usually a last resort for those who can’t get financing elsewhere. In fact, according to The Huffington Post, DriveTime’s average customer has a credit score between 461 and 554, which would likely disqualify them from most bank loans. Of course these dealers taking a chance on you comes at a price; the average DriveTime buyer pays 19% on their auto loan, although their lowest offered rate is 5.9%. Ultimately, if you can get financing elsewhere, you’re more likely to get a better deal than going to a BHPH dealer.

Which is best?

There are pros and cons to all of your options. For example having financing before going to the dealership can help give you more leverage while negotiating the price for your vehicle. On the other hand those worried about their credit scores might prefer to go straight to a dealer who may be more willing to work with you in order to make the sale. Finally, if all else fails, buy here, pay here lots may be a necessity if your credit really is an issue and having a vehicle is a must. But, no matter what you choose, there is yet another option to consider later.

You can refinance down the road

So you had to settle for a less than stellar interest rate? All hope is not lost!

As you make your on-time auto payments your credit scores are likely to improve. When that happens you may become eligible for loans that you were previously excluded from and that could give you a better interest rate than you’re currently paying. Because of this it may be worth revisiting your options.

Although auto refinancing loans aren’t quite as popular or widely available as regular auto loans, there are a few lenders that specialize in it. Recently peer to peer lender Lending Club joined that list, offering refinancing on auto loans that have outstanding balances between $5,000 and $50,000. Other institutions, including some traditional banks, also offer refinancing products, so exploring your options is always a good idea. But, once again, be sure that lenders aren’t hurting your credit score in order to give you a quote.

You may not have your title and you may need extra insurance

Something you might not realize about buying a car is that, depending on which state you live in, the title for the car won’t be in your possession for some time. Instead your title will become property of your lienholder — A.K.A. the company that loaned you the money. Only once you’ve paid your loan off in full will the title be released to you, allowing you do as you please with the vehicle. That also means that you will not be able to sell your vehicle until the lienholder releases your title.

In addition to those restrictions, some states and/or lenders may require you to purchase additional insurance for your vehicle. This is something you’ll want to look into ahead of time in order to avoid the sticker shock. If you do end up having to add additional coverage to appease your lienholder, you would be well served doing some research and getting quotes from different insurers just to ensure you’re getting the best rate. Unfortunately if you don’t have a good or even a long driving record your insurance options can be severely limited. Regardless of your driving record, Edmunds.com offer some good tips for finding lower cost insurance. 

Although companies like AAA offer lower rates they typically only issue policies for drivers with established good driving records. Miranda Marquit recently wrote about some of the best insurance companies for young adults who most likely won’t quality for good driving discounts. 

Don’t be afraid to walk away

You know how they say there are plenty of fish in the sea? Well there are also plenty of dealers in the nation. For that reason you should never let yourself get pressured into overpaying for a car or buying a vehicle you can’t afford.

To be sure car buying and negotiating can be an intimidating process. While walking the lot, test driving cars, and perhaps even eating free hot dogs can be fun, that excitement tends to end when the office door shuts and the matter of money comes to the forefront. The most important thing is to stick to your guns and, if you feel like you’re being bullied, mistreated, or swindled, simply walk away. Additionally don’t let your love of a certain car cloud your judgement — if you can’t afford it, let it go!

Admittedly car buying is not the most pleasant process. If you’re a first-time buyer with little to no credit history, it can be even worse. That being said, preparation can go a long way in smoothing everything out. The best thing to do is explore all of your financing options before going to a dealership, stand firm on your needs and your budget, understand what’s involved with buying a car, and keep in mind that you may be able to refinance for a better rate once you establish some more/better credit. Good luck!

This article by Jonathan Dyer first appeared on Dyer News and was distributed by the Personal Finance Syndication Network.

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