Taking on an auto loan for the first time can be stressful. Without any experience navigating the car-buying process, you may not even know where to start! We’ve got some advice and tips before you head to a dealership or an auto lender.
Understanding Auto Loans
If you don’t get a car as a gift or pay cash, financing is likely how you have to get a vehicle. This means finding a lender that can approve you for a loan, so the lender can pay the seller/dealership for the car, and then you make payments to the lender until you’ve paid everything you owe.
Most auto loans use a simple interest formula, meaning that your loan balance and interest rate determine the cost of vehicle financing. The better your credit score, the lower the interest rate you’re likely to qualify for. If you have poor credit, you'll likely pay more in interest charges, and therefore, the car.
As a first-time borrower, your credit score may not be the greatest due to a lack of credit history, but there are still multiple lending options you can check out.
Different Auto Lenders
If you’re not sure where to start applying for an auto loan, know that there are different types of lenders, and some of them specialize in helping credit-challenged consumers. Though not all lenders can work with all borrowers, you typically have three lender types to choose from:
- Direct lenders – Includes banks, credit unions, and online lenders. You meet and/or speak with the lender directly, and they can typically hand you a check to pay the dealer or seller for a vehicle if you qualify.
- Indirect lenders – Third-party lenders that are signed up with franchised or independent dealerships. You don't speak directly with these lenders, and instead, work with the dealership’s finance manager. These lenders can include subprime lenders, as well as the captive lenders of auto manufacturers.
- In-house financing – In this case, the dealer is also the lender, so all car buying and financing is done in-house at the dealership.
If you have good credit, you generally have decent chances with any of the above lender options. Direct lenders from banks and credit unions tend to offer more competitive rates, and the captive lenders of automakers (like Ford Motor Credit) often offer savings for borrowers with great credit scores, sometimes offering 0% financing on new vehicles to borrowers that qualify.
If you have poor credit, you may need to seek out a credit union, subprime lender, or in-house financing. These lenders tend to be more lenient when it comes to credit score requirements, and in-house financers may even completely skip the credit check.
As a first-time borrower, a credit union may be a good place to apply for vehicle financing first. You could have a higher chance of approval if you’ve been a long-standing member with a good history, and credit unions are known for passing down savings to their customers.
If a credit union can’t help, then a subprime lender signed up with a special finance dealership may be a good next choice. Many subprime lenders have first-time car buyer programs, and they know that your credit score is only one piece of the puzzle. For subprime lenders, your ability, stability, and willingness to pay are the most vital parts of your eligibility for an auto loan.
What Will I Need to Apply for an Auto Loan?
You're likely to need many documents when you apply for your first car loan, no matter which auto lender you choose to apply with. Expect to need these basic items:
- Computer-generated check stubs with year-to-date income
- Valid driver’s license
- Proof of residency, usually proven with a recent utility bill in your name
As a first time borrower with poor credit, you need these additional items as well:
- A list of five to eight personal references with complete contact information
- Proof of a working phone (prepaid cell phones aren’t typically accepted)
- A down payment of at least $1,000 or 10% of the vehicle’s selling price
Car Shopping for Affordability
As a first-time borrower, you may not qualify for the greatest interest rates available, due to a lack of credit history. You may also struggle to qualify for large loan amounts, even if your income and work history are great. This is because your credit score is what auto lenders use to determine your creditworthiness – your ability to repay borrowed money on time.
It’s important to choose a car loan that you can comfortably afford so that you can start your credit history off on the right foot. Choosing an auto loan with car payments that don’t stretch your budget to the max means a higher chance of completing the loan successfully, and walking away from the car loan with an improved credit score. Once you’ve seen credit score improvements, and you’ve proven your ability to repay credit on time, pursuing something more expensive could be more within your reach.
Since you may not qualify for the lowest interest rates available or a very large loan amount for your first car loan, you may need to aim for an affordable used one. Bad credit and no credit borrowers are often advised to purchase used cars since they almost always have lower sticker prices – and a lower loan balance typically means a higher chance of approval. A lower sticker price also means saving money on interest charges.
Ready, Set, Auto Loan!
At Auto Credit Express, we aim to assist bad credit and no credit borrowers in their car-buying journey. We’ve created a nationwide network of special finance dealerships that know how to assist with credit challenges, so let us do the work of locating a dealer in your local area.
Complete our quick auto loan request form and we’ll look for a special finance dealership near you – at no cost and with no obligation.