Everybody remembers their first car.
Mine was a 1964 1/2 Ford Mustang, Guardsman Blue, with a 289 and a four-barrel carburetor Although it was over ten years old when I bought it, it had only 1800 miles on it– and the window sticker was still in the window. It even smelled new. I loved that car. Unfortunately, a drunk driver rear ended me while sitting in traffic one day and that was the end of my beloved Mustang.
Almost everyone remembers his or her first car fondly. But not everyone remembers their first buying experience so fondly — especially if they financed it. What most first- time buyers hear when they try to buy a car is “Sorry, you’ll need a cosigner and/or a lot of money down.” I’ve said this to so many First Time Buyers I’m almost blue in the face. Guardsman Blue.
Whether you’re 22 or 52, being a First Time Buyer isn’t easy. The fact is, we live in a credit-based society, and people who pay cash for everything their entire lives are not rewarded. In fact, if you haven’t financed anything in the past ten years, you may be stunned to learn you cannot finance a vehicle without a co-signer and a substantial amount of money down — no matter how old you are or how responsibly you’ve managed your money.
What makes buying your first car so difficult? Well, the people with the money — the lenders — have only one thing to go by when deciding whether to approve a loan: your credit history. But a first-time buyer doesn’t have any credit history. From a lender’s point of view, that makes loaning them a large amount of money a risky proposition. So what does a person with no credit history (and no suitcase full of cash) do if they need a car? Here’s my advice. First . . .
WHAT NOT TO DO
The most common mistake people with little or no credit history make is to pick out a low-priced car, something well under $10,000, thinking it should be easier to get a loan on a cheaper vehicle and their payments won’t be very big. There is a certain amount of logic to this. Lenders certainly don’t want people trying to finance large amounts of money their first time out. And yes, a lower price usually results in lower monthly payments, unless you’re a first time buyer.
The reason a cheap car isn’t always the answer: A car that costs less than $10,000 is usually an older car with higher mileage. And lenders don’t like to loan money on old cars with high mileage, particularly anything more than seven or eight years old with over 100,000 miles. So even if a lender is willing to loan you the money, they’ll limit the term — that is, how long they’ll give you to pay them back — and charge you a higher interest rate. The shorter term– 48 months versus 60, for example– and the higher rate combine in a one-two punch to give you a higher payment. On the other hand, if you buy a newer car, a lender may be willing to give you as long as 72 months to pay it back, and offer a much lower rate. Generally speaking, the older the car and the higher the mileage, the harder it is for the First Time Buyer to obtain financing. Look for something 3 to 5 years old with lower miles (but still not too expensive), and take advantage of the longer term and lower rate.
WHAT TO DO
Okay, now lets’s look at what you should do. First, plan ahead. Don’t wait until the day you need a car to start shopping for one. If you’re 16 or 17, start preparing for your first car a year or two ahead of time — not the day before your 18th birthday. Second. . .
GET A JOB
This may seem so obvious I don’t need to say it, but you’re going to need a source of income if you plan to finance a car. The first question any lender will ask themselves when considering your loan is “How are they going to pay for it?” I once had a young man tell me his girlfriend had agreed to make the payments for her. This is not an acceptable answer. Job time is also important. Ideally, you’ll need to be on the job at least one year. Third . . .
SAVE YOUR MONEY
Again, this sounds pretty obvious, but you’d be surprised how many First Time Buyers try to buy a car with no money down. (The majority, I’d say.) In eleven years of selling I’ve never seen it happen. You’ll need money down. There is no hard & fast rule on exactly how much you’ll need, but I would say $1000 is a good start — and may just make the difference between getting that first car or not getting it.
4. START BUILDING YOUR CREDIT NOW
Financing a car is a little like lifting weights. You wouldn’t walk into a gym, having never lifted anything heavier than a diet soda, and try to bench-press 400 lbs. Yet this is how many First Time Buyers go about buying a car. In order to lift a heavy weight, you’ll need to start out with small weights and gradually work your way up to the Olympic bar with the 45 lbs. plates. The best way is by building three lines of credit. For the first two, go out and get two credit cards, both with small credit limits, and use only a small portion of your available credit on each card, say 20-30%. If your limit is $500, keep the balance around $100-150. The key is to always pay on time. Even one late payment can hurt you.
5. GET A SMALL LOAN
For your third line of credit, go to the bank your mom and dad use, or a local credit union, and open a checking account. Once you have $1000 in your account, apply for a small loan using that money as collateral. Pay that loan off over the next six months. That will give you the third line of credit lenders like to see. It also helps you in another way.
6. BUILD RELATIONSHIPS
By getting to know the people at your bank or credit union, you may find that they’ll be willing to finance your first car when no one else will simply because they know you and seen how well you manage your accounts. Also, it doesn’t hurt to start schmoozing up that rich aunt or uncle you never see until the holidays. You may need them as a cosigner someday!
A WORD ABOUT COSIGNERS . . .
If you don’t have any money down, have insufficient job time, or insufficient income (less than $1800 a month), you’re going to need someone with good credit and good income to co-sign with you. However, you may find that it’s hard to find a willing co-signer. The reason is, if one person on a loan doesn’t make the payments, or is always late, it can hurt the co-signer’s credit. So my advice is try to do it on your own, if you can.
Of course, everything I’ve described above is the ideal way to go about it. If you can’t do all of the above, at least do some of it — at least get one credit card or a small loan — and you’ll find you’ve gone a long way toward building a sufficient credit history to finance your first car.
Also, you may have heard about First Time Buyer programs. Yes, some manufacturers and lenders do provide assistance for First Time Buyers from time to time, and I’ll touch on these in a later column. In the meantime . . .
7. BE REALISTIC
The last thought I’d like to leave you with is, you may not be able to buy a WRX STI or a Dodge Hellcat fresh out of high school. Yes, I know. Life is unfair. You may not even be able to get a two or three year old Mustang with leather seats and a sunroof. You may have to settle for a slightly scratched up, meek little four-banger with cloth seats and bad tires. Relax. Your image will survive. It’s your first car, not your last. If you pay it off on time, you’ll have sufficient power buying to get whatever you want the second time around.
When it comes to buying your first car, I can tell you that walking in blind is not the way to go. Your options will be severely limited and you will pay more money. So start preparing today. If you do, the whole experience will go a lot easier, and the good habits you develop now will benefit you for the rest of your life. I guarantee you.
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