Broker Check
First Time Car Buyer Guide

First Time Car Buyer Guide

May 17, 2021

The first steps to buying your first car is to determine what car you can afford and you need that car to do for you. A rule of thumb is to not spend more than 20% of your monthly take-home income on transportation. Once you divide your monthly after-tax income by five, you will need to figure out how much you will spend each month on gas, insurance, maintenance, tolls, and parking. Once you have subtracted your ancillary transportation expenses from 20% of your monthly income, you have your maximum monthly car payment. Here’s an example for somebody that makes $50,000 a year:

Monthly Income: $4167
20%: $833
Insurance: ($150)
Gas: ($100)
Maintenance: ($100)
Max Payment: $483


Build your credit score.

As a first-time buyer, this may be challenging. You still have financing options to fit your needs. Checking your credit gives you a sense of what auto loan interest rates you might qualify for and is especially important for younger adults. A lot of first-time car buyers have what we call weak credit. It’s not bad credit, it’s just that they have a thin credit file and can start building with small limit credit cards or store backed cards.  


Save up for a down payment.

The more money you put down at the time of purchase, the less your monthly payments will be. Aim to put down at least 20% of the car’s sale price, but any amount helps.


Research rates.

The average first time car buyer tends to pay a higher APR(interest rate) due to lack of credit history. Your down payment, age of the car, and the term length may also affect the rate. Credit unions are my favorite place to get a car loan and should be researched and be pre approved before you step on the car lot. Dealer financing, especially manufacturer subsidized, can also be a good deal as long you are not trading for other incentives like cash back.


Consider a cosigner.

You can ask a family member or close friend with a good credit history to cosign for financing, which could get you better rates and terms. A cosigner shares responsibility for the financed amount and payments, so keep in mind that missed payments will reflect on your credit score as well as theirs.


Credit Scores

The better your score, the lower your auto loan interest rate will be. If your score is average or above, borrowing money may be the easier route since you can pay for the car over time without paying too much extra in interest. A 20% down payment is recommended

If your credit score is on the low end and would result in sky-high interest rates, consider buying with cash. The starting price for a safe and functional used car is about $2,500.