The Millennial Buyer’s Guide To Car Loans

Buying a car can be a daunting experience. Even if you know exactly which make and model you’re interested in (which many people don’t), you have to figure out how you’re going to fund the purchase; since many people — especially first-time buyers — don’t have a few thousand dollars sitting around, they’re forced to take out a car loan to cover the costs. Let’s take a look at what you can expect from and how you can prepare for this experience.

Establish A Budget

There are a lot of vehicles on the market; from heavy duty pick-up trucks to the compact sedans, you’ll have your choice of features, add-ons, and specifications. It’s very easy to get in over your head and listen to the persuasive words of your dealer; before you know it, you’re driving away with a car that you don’t need and can’t afford, which can end up utterly destroying your credit score and hurting your financial status down the road.

To avoid this outcome, it’s best to determine precisely what you can spend ahead of time. Take a good look at your finances and figure out what you can comfortably — and realistically — afford. It’s recommended that you not spend more than 12% to 15% of your monthly income on payments, so if you make $3,000 a month, you shouldn’t be spending more than $360 to $450 on your loan payment. Remember that there are extenuating costs beyond the sale price: you have to consider insurance, taxes, and any additional fees. The type of vehicle you buy matters as well; 10 diesel engine trucks are sold for every 100 trucks in the U.S., but diesel fuel costs substantially more than gasoline, and maintenance repairs are often more costly as well. If you’re going to be driving your car a lot (most Americans spend an average of 46 minutes on the road every day), you’ll want to take fuel economy into account.

Meet The Requirements

Once you’ve got your budget planned out and are committed to sticking to it, you need to gather some materials. Because most lenders don’t want to take unnecessary risks, you’ll need to prove that you’re financially responsible and capable of handling your loan. You’ll need:

  • A good credit score: Your credit report offers a detailed explanation of your financial history. A good credit score (above 700) shows that you pay your bills on time and are a worthwhile investment. Although you’ll need 700 or above to qualify for most loans, car or otherwise, higher is always better; the more you’ve proven yourself to be financially responsible, the lower your interest rates will be.
  • Proof of income: Without a steady source of income, you’re not going to be able to make your payments. By supplying your lender with pay stubs or bank statements, you can verify that you can afford the loan, although some lenders will want to call your employers directly. Credit cards, verification of additional loans in your name, and details of an existing mortgage can also be used to prove your competency.

Buying a car is not a process that should be rushed; when you take your time to truly compare loans and vehicle options, you’ll guarantee that you end up with the best deal.