* Advice and car financing strategies for first time car buyers, teens, high school students and their parents
* AutoCheck Vehicle History Reports: how to save thousands in losses when you buy a used car
* How to use your AutoCheck Vehicle History Report to negotiate a lower used car price
* How to get your credit score online at Experian, Equifax or TrueCredit
* How to refinance to a lower interest rate using lenders like Capital One Auto Finance and Up2Drive
* Information on safe teen driving
Do not attempt to buy a car until you have read this entire chapter including the Teen Driver Safety below and the links we provide to our other helpful chapters.
First Time Car Buying
If you are a teenager in high school, or a college student with no established credit history, there are a number of barriers in the way to your entry into car ownership. When you are young and invincible, you have all these starry eyed dreams about the car you are going to get, then reality sets in, as concepts you never had to deal with before suddenly leap out of no where to crush your dream and knock you back down to earth. How are you going to pay for your new car? Have you gotten insurance quotes? Who will finance you? Now you have to pay $80 a month in gas, and there's oil changes, new batteries to buy, and other unexpected expenses. We advise all car buyers to purchase a car that you can afford to pay off in 48 months. You must also put down 20% on the car to keep from getting upside down, where you owe more on the car than it is worth. If you cannot put down 20% on the car, then do not buy that car. You must buy a car in which you can afford to put down 20%. There is no room for arrogance or indignant responses here, it's a mathematical fact of life. Every single person who breaks this rule runs into trouble when they trade in their car later. You never ever want to be in the position of owing more than your car is worth. If you determine that you can afford a new car, then make sure you enter new car dealers with The Folder of competitive new car price quotes, or you'll overpay by thousands. InvoiceDealers, Cars.com, Yahoo!Autos, Autos.com, Edmunds.com, MyRide.com and CarsDirect all help you save when buying new cars.
If you cannot squeeze that car loan into 48 months, do not buy that car, you are heading down a path of destruction.
You don't want to spend the next 6 years paying off a car. Go buy a cheaper car instead. Remember, your car loan is but one of many cost items contributing to your overall cost of vehicle ownership. Most people overlook all the other cost items and get into trouble real quick, not realizing insurance goes up on a new car. You should create a budget that accounts for all your annual costs to own that car, like loan payments, tires, insurance, maintenance, etc. Then from your budget, you should determine if you can handle that much of an annual drain on your finances. If you cannot afford a new car, we suggest buying a quality dependable used car like Honda Accord or Toyota Camry, which typically run years with out costly repair issues. That is what is most important with your first car, safety and dependability, especially once you head off to college and cannot afford a single thing to go wrong. If you are going to buy a used car, be sure you read our guide How To Buy a Used Car And Avoid Scams. It's the best used car buying advice, with our used car bill of sale form, reviews of online used car classifieds, how to buy a used car from dealers or private sellers, negotiating with tough sellers, scams to avoid and a list of questions for you to print out to ask the seller. DO not attempt to buy a used car until you read that chapter. If you buy a used car, you absolutely must go get an AutoCheck Vehicle History Report on the Vehicle Identification Number (VIN) AND have a mechanic inspect the car on a lift. If you do not do both of these vital steps, then do not buy that used car. You have been warned. Do not email me asking how you get out of your purchase if something goes wrong, because I cannot help you. You must nip the problem proactively in the bud, not reactively after it happens.
There is no 3 day buyer's remorse grace period for you to return the car after buying it
There is no "undo button" when you buy a car. You buy it, the deal is done. There is no 3 day grace period to return your car, although many people erroneously think there is one. You should not continue to shop for cars after you buy your car and expect the dealer to take the car back, just because you found it cheaper later on. It's unethical and not the way to do business. We get emails about this all the time, and just delete them.
Barriers to getting your fist car
Since you have never bought a car before, here are the barriers and concepts you must keep in mind when car shopping:
* Lack of credit history is the biggest barrier, it is very difficult to get a car loan
* Some car salespeople will rake you over the coals if you are a first time car buyer
* Lenders won't approve car loans on used cars older than 5 years
* Insurance rates for teens especially are very costly, often in the $5000 range
* Insurance rates for single males under the age of 25 are also very costly
* Now you have to deal with car repairs and other maintenance costs, new tires, etc.
* Safety perspective: Teen driving safety issues
Let's examine some of the above barriers to buying your first car in more detail:
Lack of credit history
We advise all car buyers not to apply for a car loan unless you have checked your own credit score and credit report first. After all, that is what the car dealers do, so you better know what's wrong before they do. A car salesperson should never know more about your credit than you do. What is this concept of credit history? Why won't they just lend me money for my car? This is the first barrier that crushes your dream to buy that new car. Many young adults have not yet established credit of their own yet, because Mom and Dad have been footing the bill until now, but maybe Mom and Dad cannot afford to buy that first car for you, so you try it on your own. Reality hits you real hard here, because this is where most people fail to understand the rules of the game in order to get approved for a car loan. People with bad credit pay higher auto loan interest rates. It can hurt your job prospects, insurance companies check your credit too. Get your credit report instantly online, it's a must for The Folder. DO NOT apply for new car loans until you get your credit report WITH credit score. Get your credit score online at Experian, Equifax or TrueCredit. Remember, you can run your own credit file all you want, but if dealers run it for new car loans, then your score drops a few points. If your Credit Score is <>
Rules of the auto financing the game you must play by
So here's the rules of auto financing the game. By approving you for a car loan, lenders want you to have an established pattern of credit showing you paid your bills on time, no black marks on your credit history, no forgetting to pay your bills, no paying your bills 30, 60, 90 days past due. Lenders want to see you have a minimum monthly income of $1600, so if you work part time at Blockbuster Video, forget about getting a car loan, you won't meet the minimum criteria. Don't even think about financing a car you'll get rejected, it's just one of those sad facts of life.
Before approving you for a car loan, lenders and car dealers pull your credit report and look at all your past creditors and current open credit accounts and loans. They don't like to see lots of open accounts, so keep it to a bare minimum, you don't need every department store card, in fact you don't need any department store card, they are mostly 21% APR. I tell people just get one gas card, and one MasterCard, and pay them off every month, don't run a balance, or you will pay 15-21% interest on your credit card. That is what puts people horribly behind, because if you only pay the minimum credit card payment, it will take you 10-11 years to pay off the credit card. Lenders also don't want to see any of your credit card balances above 50%, or they will reject you. Keep your balances at $0 whenever possible. Smart shoppers use their ATM debit cards to pay for purchases. Lenders want proof that you have been living at the same address for 6 months, otherwise you'll get rejected. Statistics show people not in place for 6 months are nomads, otherwise why do they keep moving? These nomads are very likely to default on their loan. In the car financing landscape, there is online financing, and car dealer financing.
What do you do if you have no credit history at all? How do you establish credit?
What if you have no credit at all? How can you win the chicken and the egg game if lenders only lend money to people with established credit? This is the other big hurtle faced by most first time buyers. You must establish credit. Once you do, you must be responsible and pay on time, and don't overspend. This might require you to wait another 6 months to a year on the car loan while you go and get your credit established, and build somewhat of a history showing that you pay your monthly revolving credit card bills on time. A good time to do this then would be 6 months before you think you might buy a new car. It's fairly easy to get a gas card from your favorite gas station, or a credit card from Target stores. As you do your normal shopping at Target, use your credit card, but pay it off in full each month. Don't overspend, and never let any balance on any of your credit cards reach the level of 50% of your credit limit. That has a bad effect on your credit score. Then while you are in your 6 month building credit period, you are saving even more money to put down on the car, making your payments less. Patience pays off in the long run.
Until you get your first credit card, you probably have no credit score, or it's below 550, where no lender will touch you. This is why people get rejected. It is so unbelievably amazing how stupid many "adults" are, who think they can breeze their way through life and not pay their bills, thinking no one is watching. Big brother is indeed watching. Every bill you refuse to pay, doctors bills, credit card payments, loan installments, traffic tickets, bankruptcies, foreclosures, late apartment rent, arrest records, ALL gets reported on your credit report, and it definitely 100% keeps you from getting financing later in life, for 7 years. I hope you heed our warnings and that you'll learn from other people's mistakes, not your own, be much smarter from than these people. Lastly, lenders will not approve loans on any used car over 5 years old. So if you are buying an older used car, the only way to finance it is with cash. Don't fall for any crazy off the wall financing schemes here, just pay cash on older used cars.
If your Credit Score is <> 550, and you have no bad credit for 6 months, AutoCreditFinders Bad Credit Auto Loans can help you establish credit with lower online auto loan rates than dealers. If you had bad credit in the past, then a bad credit auto loan might be your only hope.
Co-sign loans can help you establish credit
You still can't get approved for that car loan? Try riding off your parents' coattails. If the lenders reject your car loan application, many car dealers can do what is known as a co-sign loan, where the loan is in your name, AND ALSO your parents' name, if they sign as the co-signer. This means the loan is really in the names of two parties at once, but it does benefit you by establishing credit in your name, as it is also in your name. If your parents were to just apply for a car loan in their name to buy you a car, you would not get the benefit of establishing credit in your name. This is very serious business so pay attention here. If you default on the car loan payments on this type of car loan, your parents then become responsible for your monthly payments, and if neither of you pay up, both of your credit histories take a hit, and they repossess the car. This can prevent your parents from re-financing their house for up to 7 years from now. That will also pretty much keep you from getting another car loan, or any type of financing on furniture, or apartment rentals for 7 years, no matter how much money you are earning 4 years from now. When you get out of college and are earning $90,000 a year, it does not matter to the lenders because you have shown a past of not paying your bills. This affects many adults who angrily email me asking why the bank turned them down when they earn a six figure salary. We call this situation Cash Rich, and Credit Poor. Your past will come back to haunt you in your adult life. Never co-sign a loan with a friend, room mate, boyfriend, or girlfriend, it almost always ends in disaster. Many people who co-sign end up defaulting, leaving the co-signer in jeopardy. You can see how delicate and risky this co-signer car financing strategy is, but it is completely safe if you pay on time, and the next car loan you apply for will be under your own name since you were a good customer who paid on time. One warning about co-sign loans, is there are some real unscrupulous car dealers out there, who lie to you and say you are getting a co-sign loan. Then they trick the cosigner (Mom, Dad, Grandma) into signing the wrong line of the loan papers and the loan ends up in their name alone, instead of both of your names together. This is known as a Straw Purchase. They pull this scam because they know you would never get approved, and they just want to sell the car. We hear about this all the time. The law requires both people to be present and sign at the same time, and you need to make sure the correct names go on the correct lines of the application, identifying you as the borrower, and your parents as the co-signer. Never leave your income blank on the application, the dealer will lie and write in an inflated number to get the application through. Let's review:
What lenders look for to approve you for a car loan
* Documented Monthly income of $1600 or more
* Living in the same address for at least 6 months
* Employed by the same company for 6 months
* Preferably a year of established credit with no black marks
* Credit score of 680 or higher to get lowest prevailing interest rates
* If your credit score is 600 to 680 you'll pay higher rates like 10%-15% APR
* If your credit score is below 600, it's very difficult to get approval, and below 550 it is nearly impossible
Let's look at how paying a high interest rate does an enormous amount of damage to your wallet over time. A person like me with a great credit score might get a car loan at 4%. But if you have a bad credit history, or no credit history at all, you can pay up to 6 times the amount of interest over the life of your loan that I might pay. This is why people who are broke will stay broke all their lives and never break the downward spiral, because they spend virtually all their income on interest charges and late fees. Sometimes the financing interest rate (APR) of a car loan can be so high that the payments will actually keep you from getting a car you wanted, all due to the higher APR. Look at this table below to see how bad the damage gets on a $15,000 car loan for 48 months:
Looking at the table above, you can see how urgent it is for you to establish healthy credit, and maintain your healthy credit score, or you will spend your whole life wasting your meager earnings on interest, when it should be building your nest egg. This is why most people, even those ready to retire are broke. A lifetime of careless spending habits, paying only the minimum monthly payment, and paying full price for everything has left them with no nest egg.
How to lower your current car loan payments
If you got suckered into a high APR car loan, just wait about 6 months and you can refinance your car loan down to a lower rate and save money. This is how big corporations work. They are constantly restructuring their debt to get their interest rates lower and save money. This is how we should run our own finances too. Why should you keep paying a high interest rate when there is a lender waiting to refinance your car loan down to a much lower interest rate? Fast and easy lenders like Capital One Auto Finance or Up2Drive are offering popular auto refinancing loans. They pay off your current car loan, and now you pay them back at your new lower APR rate. Your car loan can be completely refinanced within 2 days after you apply. Do your friends a huge favor. If you know anyone who is paying a high APR car loan, have them read this article, you'll save them thousands, and you'll be their hero.
Insurance rates for teens especially are very costly, often in the $5000 range
You can expect to be heavily blindsided by insurance costs if you are high school teenager looking to buy a new car. Just try to get a quote on a Mustang, and if they don't laugh you out of their office, you'll see numbers like $5000. In fact, car insurance rates are usually higher on 2 doors cars than on 4 door cars, usually because of the sportier status of 2 door cars. They know you are likely to race. This is why you see a lot of younger kids buying these little 4 door cars for the lower insurance rates, then rigging them up to the hilt to make them go faster. Insurance rates also depend on what part of town you live in, your local population and how many miles you drive annually. You can shop around your auto insurance rates at sites like Comparison Market, GEICO and Progressive Auto Insurance. Your insurance rates may drop a bit if you have an alarm on the car, or if you keep it in your garage. You must include car insurance in your annual cost budget to see if you can afford to keep driving the car you bought. You cannot go without car insurance, it is illegal, and disrespectful to others on the road, who are relying on you having insurance should you cause a wreck. See if you can get in on your parent's auto insurance, of if there is an umbrella policy protecting the house and all cars. Either way, make sure you get full coverage including with high coverage amounts.
You should get Underinsured or Uninsured Motorist Coverage
One of my personal favorites. I think EVERYONE should have this coverage, because it protects us from all the loser morons out there who refuse to insure their cars. Here in
Vehicle Maintenance costs
Welcome to the party pal! There's more costs to car ownership than just your monthly payment. Many people overlook this other large expense of car ownership, and instead focus on just the monthly payments of their car loan. But you also have other expensive obligations to your vehicle, which you now become slave to. Assume your insurance is $2400 annually, your monthly obligation adds $200 on top of your car loan. You better be ready for that. You can expect your monthly gas bill to be about $60. You should assume your tires will need replacing once a year at $160 per tire or $640 annually, and maybe more for a wheel alignment. Then there's the twice a year oil changes, and you must allow for one medium sized repair every year. Add all those up, calculate your average monthly expense, and add it to your car loan and see if you can afford it. I bet you won't be able to afford it. If you cannot work all those costs into your budget, then you need to buy a cheaper car to allow for your maintenance costs. This nails a lot of people who don't leave room in their budget for ALL ownership costs. Don't bite off more than you can chew, don't try to maximize your monthly payment without leaving room for maintenance items, car insurance, and unexpected repairs.
