There are two key things that are almost always a good idea to look for in your first vehicle: reliability and affordability. When it’s your first car, it’s probably a better idea to play on the safe, especially if you’re financing for the first time.
How Much Should I Spend on My First Car?
It’s probably a good idea to buy a used vehicle when it’s your first one. A new car’s transaction price averages around $39,000 these days, according to Kelley Blue Book. Used vehicles are easier for first-time car buyers to qualify for, too, since they’re just generally much more affordable.
Whether or not you want a new or used vehicle, your income is vital in deciding how much you should spend on your first car. Many financial experts recommended that you should buy a vehicle that doesn’t exceed 10% to 15% of your yearly income. If you make around $50,000 a year, aim for a car that’s around $7,500.
Of course, you could always save for a down payment and knock down the amount that you need to finance. If you want a vehicle that costs more than 15% of your income, say around $9,000, then you could save $1,500 for a down payment and only need to finance $7,500.
If you’re looking for a teenager’s first car, it’s often recommended that you spend in the ballpark of $5,000 to $10,000. With younger drivers, it’s important to give them a reliable, safe vehicle, but you also need to be a little more realistic – the car may experience some damage in those first few years.
Remember that you need to factor in the cost of maintenance, possible repairs, gas, tires, and auto insurance, too. If you’re financing, the vehicle needs full coverage. Most borrowers count on spending at least $100 a month on car insurance.
Price isn’t the only thing you should be considering, though …
The key to finding the right, reliable vehicle is finding one that’s been well-maintained, has a clean title, and it’s obvious at first glance that it was well taken care of. You can also look up vehicle history reports for cars you’re seriously considering, and possibly get a hold of maintenance records.
Take it for a test drive if you can, and look at everything and push every button you possibly can to make sure it all works. It’s a big purchase, so take your time before you sign that dotted line.
Budgeting for Your First Vehicle
Besides the price of the vehicle, down payment, and auto insurance, how much disposable income do you have each month?
Budgeting is important when you’re financing. If you purchase a car with a payment that’s hard to meet each month, it could lead to missed or late payments that lower your credit score. Too many missed payments, or sometimes even one missed payment, leads to defaulting on the auto loan, and probably losing the vehicle soon after.
To determine how much disposable income you have each month, you can use the same formula that lenders use to calculate if you can afford the car you’re looking at called the debt to income (DTI) ratio.
The DTI ratio is an easy formula that auto lenders use to see how much income you have left over after paying all other obligations. Simply add up all your monthly bills (besides groceries and utilities), and divide it by your gross monthly income. You get a decimal answer, then you convert it into a percentage to get your final DTI ratio.
When you calculate DTI, you add the supposed vehicle payment and insurance payment into the equation, along with your other monthly bills, like rent. Here’s a quick example assuming someone makes around $50,000 yearly, or $4,100 a month with monthly bills that total $1,000 (including an estimated car and insurance payment).
- Monthly bills = $1000
- Monthly income = $4,100 monthly before taxes
- 1,000 divided by 4,100 equals 0.243, which is converted to 24.3%
- DTI ratio: 24.3%
From this DTI ratio, it looks like the borrower would likely qualify for a subprime car loan as long as they meet the other requirements. As a general rule, auto lenders don’t finance borrowers with DTI ratios higher than 45% to 50% of their income with the vehicle payment and insurance factored in.
You can do this quick calculation at home with the car payment and vehicle’s selling price that you’re aiming for to see how much room you have in your monthly budget.
Thinking About Your First Auto Loan?
If you’ve never had a car, there’s also a good chance that you’ve never taken on credit or you have a thin credit history. Having no credit history can lead to a lower credit score, which can make it hard to get approved for your first auto loan.
However, even as a first-time borrower with no credit, it’s worth it to apply with your credit union first. While credit unions can have higher credit score requirements than bad credit lenders, if you have a good history with a credit union and your accounts are in good shape, it’s worth a try. Credit unions may be more lenient with a first-time car buyer than other traditional auto lenders, such as the captive lenders of automakers or large banks.
If you’ve already tried applying with your credit union or you’re pretty sure you don’t make the cut, consider subprime financing. Subprime lenders are signed up with special finance dealerships. These lenders assist borrowers with less than perfect credit, and often help first-time car buyers get the vehicles they need.
Auto Credit Express Tip: If you apply for financing with poor credit, you can bet that a lender is going to require a down payment. Most times, they call for at least $1,000 or 10% of the car’s selling price.
Let’s Get Car Shopping!
Many people believe that you should get a rust bucket for your first vehicle, like it’s a rite of passage that every driver needs to go through. But if you have a steady income, a down payment, and you’re ready to take on a car, why settle for a clunker? It’s worth your time to do research, save for a down payment, shop for affordable auto insurance, and look for something reliable that you can enjoy driving.
Jumping into your first vehicle can be stressful, and even more so if your credit isn’t great. We want to make it a little easier on you, here at Auto Credit Express.
We’ve created a nationwide network of dealers that are equipped to help borrowers in all walks of life, including first-time buyers. We’ll match you to a dealership in your local area that can assist unique credit situations once you complete our free car loan request form. It’s secure, carries no obligation, and we’ll get to work for you right away.