Tips for First Time Car Buyers
Do not attempt to buy a car until you have read this entire chapter and use 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 car ownership:
- How are you going to pay for your car?
- Who will finance you?
- Have you gotten insurance quotes?
- Did you budget over $100 a month in gas?
- How about regular maintenance like oil changes?
- Don't forget about unexpected expenses!
We advise all car buyers to purchase a car that you can afford to pay off in 48 months. You don't want to spend the next 6 years paying off a car. 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. You never want to be in the position of owing more than your car is worth. If you determine that you can afford a car, then make sure you enter the dealership prepared with "The Folder" of competitive car price quotes, or you'll overpay by thousands.
The most important things to consider with your first car is safety and dependability. 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.
There is No 3 Day Buyer's Remorse Period
There is no "undo button" when you buy a car. You buy it, the deal is done. 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.
Barriers to Getting Your First 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 your first car loan
- Some car salespeople will rake you over the coals if you are a first time car buyer
- Lenders won't approve loans on used cars older than 5 years
- Insurance rates for teens are very costly, often in the $5,000 range
- Insurance rates for single males under 25 are very costly
- You have to deal with car repairs and other maintenance costs, oil changes, etc...
Let's examine some of the above barriers to buying your first car in more detail:
Lack of Credit History
What is this concept of credit history? Why won't they just lend me money for my car? Many young adults have not yet established credit of their own yet, because mom and dad have been footing the bill until now. Keep in mind that many adults aren't knowledgeable about the subject of car financing. Before approving a loan, lenders want to see an established pattern of paying your bills on time.
What if You Have No Credit History at All? How Do You Establish Credit?
How can you win the chicken and the egg game if lenders only lend money to people with established credit? You must establish credit. Once you do, you must be responsible, pay on time and don't overspend. This might require you to wait another 6 months to a year to buy a car while you get your credit established. A good time to do this then would be 6 months before you begin the car shopping process. It's fairly easy to get a gas card from your favorite gas station, or a credit card from Target. As you do your normal shopping, 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. While you are in your 6 month credit building period, you can save even more money to put down on the car. 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.
Co-signed Loans Can Help You Establish Credit
If you still can't get approved for that car loan, try riding your parents' coattails. If the lenders reject your car loan application, you can do what is known as a co-sign loan where the loan is in your name and also your parents' name. The loan is really in the names of two parties at once, but it does benefit you by establishing credit in your name. If your parents were to just get a 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 this type of loan, your parents then become responsible for your monthly payments. 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.
There are Some Real Unscrupulous Car Dealers Out There
Some dealers will tell you that you are getting a co-signed loan but they trick the cosigner (Mom, Dad, etc.) into signing the wrong line of the loan papers and the loan ends up only in their name. 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 this all the time. The law requires both people to be present and sign at the same time. 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.
TIP: Never leave your income blank on the application, the dealer can write in an inflated number to get the application through.
Before you head out shopping, make sure to click here to read our complete article about car financing.
Insurance Rates, Especially for Teens, are Very Costly
You can expect to be blindsided by insurance costs if you are looking to buy a new car. Just try to get a quote on a Mustang, you'll see numbers like $5,000. In fact, rates are usually higher on 2 doors cars than on 4 door cars because of the sportier status of 2 door cars. Insurance rates also depend on where you live and how many miles you drive annually. You can shop around for insurance rates. You must include insurance in your annual cost budget. You cannot go without insurance, it is illegal. See if you can get in on your parent's policy because it will be cheaper. Click here to read our complete article about auto insurance.
If You Got Taken by the Dealer and Have High Payments
Wait about 6 months and you can refinance your car loan down to a lower rate and save money. Lenders like LightStream or others that specialize in refinance like CARCHEX can help. These sites will pay off your current car loan and now you have new lower payments. For more information, read our refinance chapter
Take the First Time Buyer Quiz
We have created a quiz for first time car buying so that you can make sure you learned the basics. This quiz is also a great resource for high school teachers and college professors teaching responsible personal finance to students. If you are an educator, you can email us for the answer key (from an official .edu email address).