First-Time Car Buyer

Helping your child with their first-time car buying experience can be overwhelming. You’re looking for a car your child likes, you are preparing to go to a dealership, and then knowing you are going to work with a salesperson through the sales process. However, financial education for youth programs can help you work through the challenges with your child and feel confident in their ability to purchase their first car. 

At Indiana Members Credit Union, we offer several programs to help your child get started with their financial literacy, like SmartStart. When it comes to buying a car, it will be beneficial for your kids to know how loans and credit scores work.

That being said, many new buyers have questions like “How much should a first car payment be?” or “Is 550 a good credit score to buy a car?” What about if you’re a first-time buyer with a car loan and no cosigner? We know, it’s a lot to put on their plate all at once. That’s why we put together this parent’s guide to buying a car for the first time—and you can walk through it with your child, step by step. 

What to Do Before Buying a Car

Buying a car is a big milestone for young adults. While it can be tempting to head straight to the car lot once your child decides to buy their first car, there are a few steps you can take to help prepare them before they step foot at a dealership. Go through the steps below one-on-one with your child to get them started on their car-buying journey!

Obtain a Pre-Approved Financing Option

Getting pre-approved for a car loan is the most important thing you can do to simplify the automobile-buying process. Dealerships often offer loans with higher interest rates than a pre-approved car loan, but they might approve you for more than you can afford (which isn’t actually a good thing). Consulting with a credit union before you go test drive or shop for cars will give you a better idea of what fits in your budget. The latest and greatest sports car can be enticing, but sometimes—especially for first-time buyers— they’re just not affordable.

Of course, there are other advantages to getting pre-approved for a first-time car buyer loan. For example, here at IMCU, we pride ourselves on working with our members of all ages to help them fully understand their loan, as well as the purchase order from the dealership to assist them in making the best financial decisions regarding their auto loan purchase. 

Shop Around for Cars that Fit Your Budget

Shopping for cars has never been easier than it is today. If you’re online, you can compare vehicles directly—and even watch videos that describe the differences in price, performance, etc. There are several sites that have vehicles listed for sale—including local dealerships—where you can shop for the best price without speaking to a salesperson. 

For example, Kelley Blue Book is a free online resource that tells you the prices you should be paying for a vehicle—usually well below sticker price. Not only can you narrow your search to cars that fit your budget, but you can also find which make(s) and model(s) best suit your needs. Most new drivers just need a car to get from Point A to Point B. But you might have other needs, like towing or good gas mileage. Doing your research will help you negotiate once you’re working with a salesperson. 

If you’re working with a tight budget it can also be beneficial looking at used cars. While you might be eager to buy a brand-new car, you can save a lot of money by investing in a used car—even if it only has a few thousand miles on it. If you’re worried about the condition of a used car, you can always find a certified pre-owned (CPO) car with a clean history that has passed several inspections. However, according to Consumer Reports, CPOs are typically 1.8 percent higher in cost than non-certified used cars.

At IMCU, you’ll also find our handy auto advisor service, which will help our members find the best vehicle and solution for their needs. 

Talk With an Insurance Agent

Insuring vehicles can be expensive, especially for newer models or young drivers. That means that even if you can afford the car payment, you should also consider how much insurance will cost before purchasing a car. Speaking with an insurance agent will help you gauge what premiums to expect for each vehicle. It can also help you avoid expensive dealership insurance offerings like gap insurance—which oftentimes is available to purchase through your credit union, like at IMCU. IMCU offers GAP insurance and can roll it into your loan without increasing your payment—a more affordable option overall.

Save a Down Payment

Cars are expensive investments and they start losing value the moment you drive them off of the lot. So what’s the point of a down payment? Ultimately, it’s because you don’t want to owe more on your car than it's worth once the price depreciates. And lenders don’t want that, either—which means they’re less likely to finance your car. If you don't pay back the loan, the lender may have to repossess the vehicle—and sell it—which may result in additional financial loss for them. However, a down payment can lower the overall risk associated with owing more on a loan than your car’s value. 

Parents: Guiding your child through the process of getting a loan, speaking with an insurance agent, and saving a down payment will start them off on the right foot. Don’t be afraid to assist them when they need help navigating the difficult steps.

What Questions Should Young Adults Ask When Buying Their First Car?

There are many questions you can ask car dealers when purchasing your first vehicle, but here are the most common:

• Can I take the car for a test drive?
• What safety features are included with the vehicle?
• Are there any extras or add-ons in this model?
• What is the total price out the door—with fees and other charges?
• Are there any warranty deals available?
• Can you beat the pre-approved loan rate from my lender?
• How much does maintenance cost?

By asking questions like these, you’ll be able to determine if the vehicle they’re showing you is exactly what you want, if it fits your budget, and what future costs might look like.

What Not to Do as a First Time Car Buyer

There are a few major things to avoid while you’re preparing to buy your first car. Unfortunately, first-time buyers might feel pressured to ignore inspections, sign up for long-term loans, or purchase cars that are unaffordable or outside of their needs. 

Don’t Skip the Inspection

Mechanical issues with cars can get really expensive rather fast. Some repairs can cost hundreds—or even thousands—of dollars, with parts and labor included. Don’t be fooled by a shiny exterior and clean interior. Get the car inspected! If you get an inspection before you purchase the car and drive it off the lot, you’re more likely to avoid any immediate and expensive repairs. This is especially true for used vehicles, which benefit from a more thorough inspection from a professional third-party mechanic to ensure they’re functioning properly. 

Don’t Choose Longer-Term Loans

The lower monthly payment can seem tempting as a first-time buyer, but longer loan terms at higher interest rates can lead to thousands of dollars more in payments overall. For example, a 36-month loan might cost more in monthly payments, but longer loans, like 72 months, will ultimately cost you a larger total amount. Find a car that’s within your budget with a shorter loan—and remember that the higher your down payment, the lower your monthly payment will be.

Don’t Let Salespeople Pressure You

It’s easy to feel pressured by salespeople when you first start looking for cars. Or you might just be overwhelmed with the entire process—that’s okay! However, some might try to sell you a luxury package, a vehicle you can’t afford, or overcharge you in general—and with poor loan terms. That’s why it’s important to come prepared with a pre-approved loan and complete a lot of research. If you know what you want and have an idea of how much it should cost, you’ll be more equipped to push back on aggressive salespeople. Do not let them talk you into anything you’re uncomfortable with, especially with vehicles that don’t meet your needs. One great option is to connect with an IMCU Auto Advisor, through our auto buying service. These experts can help you navigate through the auto buying process, including working with the dealerships, keeping your process simple and stress-free. 

Don’t Skim Over the Contract

Just like with loan terms, a contract may lay out extra fees or conditions that weren’t negotiated. Make sure to read the entire contract thoroughly before signing, so you’re not agreeing to something you were unaware of or did not want. Whether that’s extended warranties or coating fees, you should always understand the contract. Don’t be afraid to ask questions or call a trusted advisor, like your IMCU Branch Manager—or family friend—for help. 

Don’t Settle for Less (or Give in to Too Much)

In general, if you show up to the dealership prepared, the salesperson should work with you to get the exact vehicle you want at a reasonable price. While they make commission off of sales, they ultimately would like to get you in a car that you feel comfortable with. 

Parents: You don’t have to do everything for your child—but you don’t want them to get a bad deal. Help talk them through the process of negotiating and reading through contracts or loan terms.

How Much Money Should You Have Before Buying a Car?

The general rule of thumb is having a 20% down payment—plus a little extra if they can. That means if a vehicle is $20,000, you should have $4,000 ready to put down immediately. When you make a larger initial payment toward your vehicle, then you take a higher percentage of ownership at the beginning. As a result, the risk of ending up with a loan that costs more than the vehicle is worth is lowered. Not only will this percentage help you pay off your car faster, but it will lower your monthly loan payments and interest rate, as well as protect against depreciation costs. Some dealers offer a first-time car buyer no down payment, but it’s best to avoid those if possible and put down 20%.

Is It Easier to Get a Car Loan with a Down Payment?

Yes! It is absolutely easier—and sometimes necessary—to get a loan for your new vehicle with a down payment. It might not always be possible, and many dealerships run “no money down” deals, but those terms are hard to secure, especially with expensive vehicles or low credit ratings. A down payment will always make it easier for you to get the vehicle you want at competitive prices and loan terms.

Parents: Helping your child save money is easy with Indiana Members Credit Union’s minor accounts. These accounts can help them learn the value of saving, while teaching them how to spend responsibly.

What Credit Score Do I Need to Buy My First Car?

In order to be approved for a traditional auto loan, you'll need a minimum credit score to buy a car of at least 600. But that’s on the low end of approved scores. In fact, most traditional car loan providers will only work with prime borrowers, meaning you need a credit score of 661 or higher to qualify.

According to research by Experian, to loan or lease a used car, the average credit score was 678, while the average score for a new car loan or lease was 738. However, there are different categories lenders use to determine eligibility for a loan:

• Super prime: 781 to 850
• Prime: 661 to 780
• Non-prime: 601 to 660
• Subprime: 501 to 600
• Deep subprime: 300 to 500

Most often, it’s ideal to be in the prime or super prime categories to receive good loan terms. You might still be able to secure a car loan even with a bad credit score, but you should be prepared to pay a significantly higher interest rate and monthly payment. 

Parents: Building up a young adult’s credit score is difficult, but Jumpstart credit cards help them learn how to use credit responsibly.

What Documents Do You Need To Buy a Car from a Dealership?

You won't be able to buy a new car from most dealerships without documents that confirm eligibility to purchase a vehicle. Not every dealership will ask for all of the following items, but being prepared is always a good idea. Here are some things to have on hand before heading out to the lot:

• Driver’s License
• Proof of Insurance (or Insurance Quote)
• Proof of Income
• Proof of Residence
• Form of Payment
• Credit Score and History

Before you head to the dealership, double-check that all of your paperwork is current—being prepared can save you time and might make the process less stressful. Make sure your car's insurance is up to date and your license is valid. These documents are needed so the dealership and your bank or credit union can verify who you are—this is a big purchase! Ultimately, you won't be able to purchase a car and drive it away the same day if you don’t have the right documentation or if your documents—like license and insurance—are expired. 

Parents: Help your child get all of their documents ready—whether they’re kept somewhere safe or still need to be acquired.

Do I Need a Co-Signer for My First Car?

Generally speaking, you do not need a co-signer for your first car unless you have a poor credit score—or no credit history at all—a high debt-to-income ratio, or a short work history. However, as a young, first-time car buyer, you might not meet all of these qualifications. Because of the increased risk you provide to the lender, any of these can make it challenging, if not impossible, to secure a good loan. But if you're having problems receiving a loan, or if the interest rates you're being offered are too expensive, a co-signer for your car loan could be a good solution. 

A cosigner is someone who assists you in taking out a vehicle loan and whose good credit history you can use to improve your own chances of being approved. In most cases, your cosigner must have a minimum 670 credit score and enough monthly income to pay off the loan if you can't. With a cosigner that has good credit, you might be able to secure the loan at a lower interest rate, as well as security that your loan will be paid off.

Parents: Be sure to talk with your child about how cosigning can impact you if their monthly payments aren’t made on time.

How Much Car Can I Afford Based on Salary?

When it comes to how much you spend on a vehicle, one way lenders look at the amount of car you can afford is using the Payment-to-Income ratio (PTI), which should be less than 18%. You can use a car payment calculator like the one at Indiana Members Credit Union to get a better understanding of how much you can spend and the length of time your loan will last based on your loan amount. 

Parents: Go over your child’s income and help them determine what amount they’re able to afford—the calculator will help!

Auto Loans Don’t Have to Be Complicated

At Indiana Members Credit Union, you can secure an auto without the hassle of haggling with a dealership. We offer competitive interest rates for first-time buyers and our pre-approval process will help you understand how much you can afford to pay for your new vehicle. Visit our website today for more information on why IMCU is your best choice for affordable auto loans.