It is an exciting time and a right of passage to go out and get that very first brand new car. Most first-time buyers do all their research on the internet before ever actually stepping foot in a dealership – which is fine – but often times this leads to a frustrating experience. You see, what is supposed to happen and what actually happens are often very different, so don’t take everything you read online as the gospel.
The fun part of researching your purchase is deciding which cars to look at and drive. However, this is also the time to plan your budget. There is nothing worse than falling in love with a particular model only to find out you cannot afford it. Although not nearly as fun, work out your budget based on your net monthly pay. A good rule of thumb that has been around for many years is no more than 15% of your net pay should go to your car payment. Remember, there are other costs associated with your car purchase, like insurance, gas, maintenance, etc.
Now is a good time to “back into” the price you can pay for a car to get the desired payment. There are a number of car loan calculators online that will let you put in the desired payment and it will tell you how much you can spend for a car. Be careful doing this however, the pertinent details are interest rate and length of loan. Base everything you do on a loan no more than 60 months if you are getting a new vehicle, and no more than 48 months if you are getting a used or certified vehicle.
To work out that potential purchase price, let’s talk interest rates for a moment. Some automakers have special low interest rates for first-time new car buyers. They want you to buy their product, have a great experience, and keep you as a customer for life. More often, first time buyers pay a higher interest rate, especially those who don’t have minor credit that has been paid well, so take that into effect when doing your budget. To be safe, figure a 5% APR interest rate on new, and 7% APR on used, which are fairly average rates for those without established credit.
You want to be independent, and do this all on your own, but if you have a parent or relative that will co-sign your loan, I recommend this because you will almost always get a better interest rate and lower payment. You will get full credit for the loan and if you make the monthly payments on time, you’ll never have to do this again.
A few thoughts to carefully consider: Unless you’ve saved a large down payment, your first car should not be your dream car, rather a vehicle to get you to your dream car. You should love your first brand new car, plan to pay it off completely, or close to it, so you have good equity for the next car.
Also, how you make the monthly payments on your first car loan will affect you for many years to come. If you make the payments on or before your due date, your next car purchase will be very simple and you’ll be able to get the best interest rate offered. Consider enrolling in auto-pay so you know the payments will be made on time, just make sure you have enough money in your account to clear the car payment.
Leasing is often a good way to get your first car, just make sure you can stay within the allotted mileage limits, and when checking insurance rates, be sure the insurance company knows you are leasing, that can affect the insurance premiums.
In closing, buying your first car is a huge decision, do not rush it. Be practical and not impulsive. If you blow your first loan by not making your monthly payments on time, or worse getting your car repossessed, you will be banished to tote-the-note used car dealers for years to come.