Have you decided to buy yourself your first car in the coming months? In that case, you’ve got a lot of planning to do as first time car buyers. According to NerdWallet, you need to ask yourself a few questions related to affordable payment options, shop rates, and the model you want to buy.
But most importantly, you need an auto loan to purchase the vehicle. Like any other loan, you can get this preapproved if your credit score allows it. Investopedia reports that the automotive loan balance in America was USD 1.62 trillion during the first quarter of 2024.
IBISWorld states that the market size of the auto leasing, sales financing, and loan industry was valued at USD 199.8 billion in 2023. This showcases the industry’s popularity. There are multiple auto loan providers, making it challenging for you to find the right option.
In this blog post, we’ll discuss the things first-time car buyers should look for in an auto loan.
#1. Policy Terms
The first thing you should check is the car loan’s policy terms. These include the following:
- Repayment duration
- Penalties
- Borrowing details
It’ll outline the responsibilities you’ll have as a borrower during the time of repayment. It’s like an agreement that covers the lender’s rights. For example, they can repossess the car you’ve bought if you default on payments.
As a first-time car buyer, you must understand every detail about the policy terms to help manage financial commitments and avoid potential issues. Before you sign and choose an auto loan, remember to carefully review the conditions and gain clarity about the clauses.
#2. Interest Rates
The auto loan interest rates will vary depending on your credit score. This rate signifies the cost of borrowing money for the purchase. According to the U.S. News, the average loan rates for a new car include the following:
- 750 or higher = 7.24%
- 700 to 749 = 7.24%
- 600 to 699 = 8.19%
- 451 to 599 = 10.89%
- 450 or lower = 18%
Usually, interest rates are based on credit score, but loan terms and your economic condition can also affect the percentage. For example, a lower interest rate will mean a reduction in the overall loan amount, leading to affordable monthly payments.
Buyers should compare the interest rates and policy terms across various lenders before choosing a car loan.
#3. Preapproval
For first-time buyers, another crucial thing is getting an auto-loan preapproval. This involves an evaluation from the lender’s perspective to analyze your financial situation. Based on that, they’ll determine the maximum loan amount and interest rate you qualify for.
Doing so gives you the ability to skip dealership financing once the credit union or bank gives you favorable policy terms. Look for loans that come with preapproval features because of the following benefits:
- You get to set a realistic budget for your car.
- You can avoid dealership markups.
- You can narrow down your ‘auto loan’ search.
Preapproval of auto loans can also enhance your negotiation position. However, to get these benefits, you must know your credit standing and get the necessary paperwork in place.
#4. Down Payment
A down payment is basically the percentage of the vehicle’s purchase price you’ll have to pay. Industry leaders state that buyers who put down 20% or 25% of the down payment will receive favorable interest rates and policy terms from the lenders. In some cases, this can be zero, depending on your finances.
Hence, you should look for an auto loan provider that will offer a wide range of personalized down payment options. Low or zero down payments can be beneficial if you’ve got limited upfront funds as a first-time buyer.
On the other hand, larger down payments will reduce monthly payments and the amount you’re being financed. As a result, it’ll reduce the interest rates over the loan terms.
#5. Additional Costs
Did you know that some auto loans have hidden costs that aren’t disclosed during approval? These additional costs will be charged on top of the principal interest rates and loan amounts. They can be any of the following:
- State or federal taxes
- Additional fees for transactions or processing
- Loan origination fees
- Credit or gap insurance
- Prepayment penalty
- Charges for credit checks and appraisals
Sometimes, your lender will require you to pay insurance fees and warranties for a loan agreement. It’s important to understand these additional upfront costs to accurately assess your financial standing and choose a provider.
To end with, over 100 million auto finance accounts are active in America. That means there are various companies you can choose from.
However, you must keep an eye out for the interest rates, terms of policies, preapproval options, down payment, and additional costs. Understanding these instances will help first-time car buyers choose a lender that’s perfect for their needs. You also get to compare lenders and choose a policy with favorable terms.
Remember, you can be denied due to errors in your application, a limited credit score, etc. That’s why you must be extra vigilant while applying.
