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Car loans for first-time buyers
How to get affordable financing for your first set of wheels.
You’re buying your first car, and you’ve got a lot of things on your mind — but you may not have figured out how you’ll pay for your first set of wheels. Finding a car loan can be tough if it’s your first time but options like bringing on a cosigner can help you qualify. Keep reading to find out what you need to know about car loans for first-time buyers including financing options and common pitfalls to avoid.
3 common loans for first-time car buyers
Depending on what kind of car you’re buying and your own personal financial situation, you may want to consider one of the following loans:
- A car loan. Car loans are offered by dealerships, banks and other lenders. Rates are competitive because your car is used as security for the loan. You can use these loans for both new and used vehicles.
- A secured personal loan. With a secured personal loan, you can use other assets besides a car as collateral and borrow more but still get the same competitive rates.
- Unsecured personal loan. Don’t want to risk losing your car? Consider an unsecured personal loan. Keep in mind that you’ll typically need good credit and might need to bring on a cosigner to qualify.
Compare these providers for a first car loan
What to do before applying
- Know your credit score range. Your lender might ask about your credit score when you apply for a loan. You can get an estimate based on a soft credit pull that won’t go on your credit report.
- Get your debt-to-income ratio (DTI). Lenders often look at your DTI to make sure you can afford to take on more debt. You can use our calculator to find out what your DTI is.
- Your monthly income. Your DTI doesn’t consider everything. To make sure you can budget new debt, know how much you typically bring in each month before you apply.
- Your monthly expenses. Go through your bank and credit card statements to find out how much you spend each month. Subtract this from your monthly income to get an idea of how much debt you can afford to take on.
Loans aren't necessarily one-size-fits-allYou may need to apply to multiple lenders and could face rejection if you have a limited credit history. When you’re ready to apply for a loan, consider requesting quotes from multiple lenders using a broker. Many auto lenders can offer you pre-approval that won’t count as an inquiry on your credit.
5 tips for first-time car buyers
- Check your credit report. You have free access to your credit report once a year. Read over it and make sure nothing has been misreported. If it has, it may be negatively affecting your credit. Correct any mistakes before you apply for a loan.
- Apply for pre-approval. Your credit won’t be impacted if you apply for car loan pre-approval. This can determine how much you can afford before you start searching for your first car.
- Have a large down payment. By having cash or a car to trade in, you reduce the amount you need to borrow. This makes you less of a risk to lenders and shows you’re able to build up your finances responsibly.
- Add a cosigner. A parent or a more established adult may be willing to be a cosigner to your loan. If you prove to be trustworthy and able to meet your debt obligations, having a cosigner can significantly improve your chances of approval.
- Build your credit score. This option takes the longest, but can have an impact on your interest rate. Consider a store card or credit card to start building your score to prove to lenders that you have what it takes to pay off a loan.
What do I need to apply?
Once you’ve found a lender and loan product you’re happy with, click the Go to site button on the table above. Most lenders require that you be at least 18 years old and either a citizen or a permanent resident of Canada.
Information that is generally requested by lenders are:
- Personal details, including your name and address; usually government-issued photo ID must be presented
- Financial details, including your income, employment and outstanding debt
- Vehicle details, including make and model
Pitfalls to avoid when getting your first car loan
- Comparing interest instead of APR. Your loan’s APR (Annual Percentage Rate) is a better representation of its total cost, since it includes rates, fees and costs associated wit getting the loan. A no-interest loan with high fees might come with an APR much higher than a high-interest loan with no fees. By looking at the APR, you’ll have a much clearer picture of how much a loan will actually cost you on a yearly basis.
- Applying solo with limited credit. If you don’t have a thick credit file, you probably won’t get good deals on your first car loan unless you bring on a cosigner.
- Going for a 72-month term. Long terms might lower your monthly costs but you’ll pay more in interest and risk having a loan that’s worth more than the value of your car.
- Not making a down payment. A 20% down payment on your car can save you a lot in interest and fees.
Your first car loan may not be the cheapest financial move, but it’s one that can make a difference in your life for years to come. The good news is this loan will build your credit, making future loans that easier to qualify for.
Frequently asked questions
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