Shopping for your first car is exciting, but it can also feel intimidating. It’s a major commitment, but one that will give you the freedom to go where you want, when you want. Before you head to the car lot, set yourself up for success by following these steps:
1. Start with a Budget
Take a look at your budget to figure out what monthly loan payment you can reasonably afford. Next, calculate insurance, as well as periodic costs like annual car registration and routine maintenance. You’ll also need to save for emergencies (like a blown tire), so a savings account you contribute to each month is ideal. Even with insurance and warranties, you may have deductibles or repairs that aren’t covered.
If you haven’t started a budget yet, check out our handy budgeting tools. What are your current income and expenses? Also, what do you expect them to look like in the near future? You’ll likely be paying your loan for a few years, so if you’re planning to go to college, move out on your own, or start a family, you’ll need to keep room in your budget to adapt to any expected (or unexpected) lifestyle changes. However, don’t plan your purchase based on expected income increases later on. There are a lot of ways that could go wrong, and one financial emergency on a too tight budget can take years to recover from.
2. Use a Loan Calculator
Once you have a price range in mind, play around with an auto loan calculator to see what different purchase prices and potential loans would look like once you factor in sales tax, other fees, and a down payment. This will help you narrow down a reasonable price range early in the process. Knowing your price range can help you stand firm if you encounter high pressure sales tactics. Once you’ve decided what you want, you can use the calculator to build a more accurate estimate ahead of your purchase. You can also apply for your loan ahead of time to get pre-approved so you’ll know exactly what to expect.
3. Wants vs. Needs
Now that you have a price point in mind, make a list of your wants and needs to guide your search. You might be fine with anything that gets you from point A to point B, or you might need something that fits certain criteria. When it comes to the things that are nice to have but not essential, how much are you willing to pay for them?
4. Do Your Research
Many dealerships post their inventory online, which gives you a chance to do research. With your price point and needs list, you can figure out what vehicles might be a good fit for you before you head over for a test drive. Shop around, and use tools like Kelly Blue Book. Look into the costs associated with maintenance for the cars you’re considering, such as oil changes and new tires. You’ll also want to search for reviews from other owners and take note of any common complaints.
5. Build Your Down Payment
Once you have a car in mind, use the auto loan calculator again to estimate a payment, and make “practice payments” to your “car savings” account for several months. If you can do this comfortably, you’ll feel confident the loan fits your budget. Also, the money you saved with “practice payments” can boost your down payment and build your emergency fund. It also gives you a chance to see if your budget is realistic before committing to this major purchase. If the payment is too difficult, look into an option with a lower price point, or build up a bigger down payment so you need a smaller loan.
6. Work on Your Credit Score
So you know your credit score influences your ability to get loans and the rate you pay for them, but how does that work when you don’t have any credit? The good news is that everyone has to start somewhere. Credit bureaus start tracking your credit history when you turn 18, which is when you start establishing your score.
An easy way to get started is to apply for a credit card. Even with no prior history, you can often get approved for a card with a low limit, typically around $500, although it may come with a higher interest rate. Treat your credit card like a debit card for some normal purchases, like gas or groceries, and pay it off each month. As you make payments and prove your credit worthiness, your score will rise.
After establishing a history for about 12 months, consider asking your lender for a higher limit and lower rate. Then keep your balance low. Ideally, you want to utilize less than half of your credit limit. Using 30% or less is even better, and 30% of $500 is just $150. If you need to use your card to cover an emergency, you could easily max out a card with a lower credit limit and lower your score.
Parents may be willing to co-sign for a credit card, as well as your auto loan, which means their credit history is taken into account for the rate and limit approval — but keep in mind that any late payments will show up on both yours and your parent’s credit report, so you must be diligent.
Another option is a secured credit card. You put down a deposit that acts as your limit, so you can’t spend more than you can afford since you’re essentially using your own money as collateral. If you close the account, your deposit will be returned to you.
You might also consider a credit builder loan. For example, SESLOC offers a Share Savings Secured Loan, which is low-cost and secured by your own funds in your account. Basically, you “borrow” your own money and pay it back with interest to establish payment history and build your credit score, all while earning dividends.
7. Go Shopping
Finally, it’s time to go shopping. You can save time and know exactly what you’ll qualify for by applying ahead of time to get pre-approved for your loan. Otherwise, the dealer’s finance department will work with you when you’re ready to buy.
When doing a test drive, listen for unusual sounds and get a feel for how it handles at different speeds. Does it feel smooth as it shifts through gears to get up to speed? What about when you hit the brakes? Inspect the interior and exterior for any damages. A used car that comes with maintenance records might give you extra peace of mind, since you’ll know if the previous owner cared for it properly or if they experienced unusual issues.
Once you’ve made your decision, it’s time to make a deal. And as a new car owner, you’ll want to check out these tips for saving money and preserving the value of your ride.
