How do I get my first car loan?
Deciding it’s time to finally finance a car can be a big step. Before you get overwhelmed with the big picture, we’re here to take you step-by-step through the process of getting your first car loan.
Take a step in the right direction
The steps you need to take and the order in which you take them largely depends on the type of auto loan you qualify for. So, before you start your first car loan, you need to know where you started. This means that you need to familiarize yourself with your credit situation, both your credit rating and your credit reports.
Step one: know your credit
The first step to getting started on any auto financing journey is knowing your credit score and knowing what’s on your credit reports. There are several ways you can do this, but the easiest way right now is to log into www.annualcreditreport.com, where you can receive a free copy of your credit reports from each of the three major credit bureaus once a week until April 2022.
Typically, you can get your credit score from your bank or credit union, the credit card company, or any number of online resources. Once you have your credit score on hand and know what’s on your credit reports, you should be able to fall into one of three categories: good credit, bad credit, or no credit. .
As a first-time car buyer, you are likely to be considered a borrower with no credit, which is used to describe borrowers with poor credit records.
The drop in your credit rating determines the type of car loan you qualify for and the type of lenders you could work with.
Step two: establish a budget
Almost as important as knowing what’s on your credit reports is knowing how much you need to be working on financially. Your budget includes more than the cost of paying off your car loan, so knowing how to compare your income to the bills you pay is important, just like a lender will.
Two different formulas are used to calculate the amount that auto lenders think you can reasonably handle. They determine your eligibility by looking at your debt-to-income (DTI) and payment-to-income (PTI) ratios. Your DTI shows them how much of your gross monthly income (before tax) is already being used to pay for other things such as student loans and / or mortgage payments. Your PTI shows how much of your income is used by your car loan and insurance. If your budget is already limited, you probably won’t be eligible for funding.
Most lenders cap the DTI at 45% to 50% of your income and the PTI at around 15-20%. The lower it is, the better in both cases.
Remember to take into account that once you have the car, you will also be responsible for insurance, maintenance, fuel, and upfront charges on the cost of your loan, such as a down payment.
Down payments aren’t always required if you have great credit, but for most other borrowers, you’re not likely to leave a franchise lot without making one. As a borrower with bad credit and using a subprime lender, there is usually a down payment requirement of at least $ 1,000 or 10% of the sale price of a vehicle.
Step three: research your lender options
When you know your credit and budget constraints, you can start looking for a lender who meets your needs. Not all lenders can work with all borrowers, so your choice may be limited by your credit score.
Generally, there are three types of lenders that may apply to your car buying situation, even if you are a first-time buyer:
Direct lenders – These are lenders who work for financial institutions, such as your bank or your credit union. Auto loans generated by direct lenders tend to be reserved for borrowers with better credit scores. Plus, if you qualify, you can use your pre-approved direct loan at any dealership or for a private purchase. These loans tend to have lower interest rates as they are usually given to people with higher credit scores (credit score is the most important factor in determining auto loan interest rates. ), and if you are a borrower with bad credit, you may be luckier if you are a long-time member of a credit union.
Indirect lenders – These lenders are behind the scenes, and you usually work through a dealership’s finance and insurance manager, who acts as an intermediary. These are the loans you get when you walk into a dealership, find a car you want and apply for financing right away, or get financing first and then choose a vehicle. . These lenders know you have to start somewhere, so they look at more than just credit scores for borrowers to qualify for auto loans. Usually requires you to provide proof of income, residency, and a working phone, along with personal references and a down payment.
Internal funding – Where indirect lenders may look past your credit score, internal funders may not use it at all. These lenders, also called buy here pay here (BHPH) or tote the note lots, are often an option of choice for first-time buyers, who feel they do not have enough credit for a traditional or even subprime loan. Not all BHPH lenders work the same, so make sure you know the details before signing a contract. Some inside financiers charge an interest rate higher than the average interest rate and may require a down payment of up to or around 20% of the vehicle’s selling price.
Fourth step: find funding
As a first-time car buyer, you are likely to have a lower cash flow score. This is not a bad thing for the right kind of lender – everyone has to start somewhere! However, not all lenders feel the same. You are more likely to qualify for a car loan if you stick with lenders who know how to work with borrowers who get their first car loan.
Your credit is a record of your financial life in the credit world, recording all the loans and debts you incur in your lifetime. Most credit information typically has a lifespan of seven years and “falls off” on your credit reports after that time. The information in your credit reports generates your credit score.
Your score may vary depending on the credit scoring model used by a lender. However, most lenders use the FICO credit scoring model. This model ranges from 300 to 850 and groups borrowers into levels based on score.
Since you have never financed a vehicle before, there is no auto loan information from your past for lenders to judge how you might handle vehicle financing, so you are likely to be considered to have a slim backrest. This can make some lenders hesitate to provide you with financing. However, there are other lenders, called subprime lenders, who specialize in working with borrowers with unique credit situations.
We want to help
TO Auto Express Credit, we have a nationwide network of special finance dealers who have the lending partners you need. Don’t put too much pressure on your first auto loan! We want to help you find the right kind of lender. Simply complete our quick and free auto loan application form and we’ll get to work finding a dealership in your area.