(NerdWallet) – Buying your first car is already a daunting experience; amid historic supply shortages, it’s easy to feel overwhelmed.
In March this year, the average price of a used car was $27,246, according to Cox Automotive – an auto market and data company – up 28% from a year ago. With these price increases, the monthly payments have also swelled. Average payments for used cars reached $488 in the last quarter of 2021, according to Experian. In addition, the average loan term for used vehicles was just over 67 months, or more than five years.
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For many, cars are a necessity. If you have little or no credit, no cosigner, or just a limited budget, it can be easy to accept a loan that stretches your budget or ties you to a car for six or even seven years.
Not being ready before pulling into a parking lot can open the door to a purchase you’ll regret later. Set your limits before stopping at a dealership; with the right preparation, you can prevent your purchase from becoming a burden.
” MORE: NerdWallet’s First Car Buying Guide
Get a loan
Your first step is to calculate the loan repayments you can afford and the total loan amount that is within your budget.
Try to keep your monthly loan payment below 10% of your take-home pay, and if you’re buying a used car, keep your loan term below 36 months. If you are looking for a new vehicle, keep the term under 60 months. Limiting the term of your loan will save you money on interest and reduce the risk of your loan becoming upside down – owing more than the value of the car.
Numbers in hand, start looking for a lender who will give you a loan. Getting pre-approved for a loan before visiting dealer lots can put you in a better negotiating position, prevent you from going over budget and lower your interest.
With little or no credit history — especially since you’ve never had a car loan before — your best chance of being approved for a loan at the lowest possible interest rate is to apply with a co-signer. But if that’s not a possibility for you, there are always financing alternatives available:
- One of the first places to look are banks and credit unions, especially institutions with which you have an established relationship.
- Look in your area for lenders with first-time buyer programs, which place conditions on how much you can borrow and which vehicles you can buy, but waive some of the credit requirements.
- You can also look for loans from online lenders who offer bad credit car loans, as they will often have low or no minimum credit scores. These loans can carry interest rates of over 25%, so a year after taking out one, you can try refinancing at lower rates.
Choose the right car
Finding a cheap car was easy – or at least easier than today. If you have a budget of $10,000, your options are limited, but that doesn’t mean there are no options.
With a limited budget, most choices will be older used cars, which increases the annual cost of maintaining your car. A 2021 Consumer Reports study found that 2016 model year vehicles cost $205 to maintain in the previous 12 months, while 2011 model year vehicles cost $430.
In addition to maintenance costs, there are also fuel, insurance, registration and taxes that add to the cost of owning a vehicle. When looking for a car, look at the cost of ownership as it differs from car to car.
The total cost of owning your vehicle, including paying off your loan, should not exceed 20% of your take home pay. While some costs can’t be reduced significantly, you can minimize others, such as future maintenance, repairs, and fuel, with the right car.
“The most important thing to look for is a car with a good service history,” Car and Driver editor Joey Capparella said in an email. “If the previous owner took good care of the car and can provide maintenance receipts, that outweighs other attributes such as mileage or brand. Single-owner cars are desirable for this same reason.
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Maintenance and ownership history can sometimes be found through a service such as Carfax. Use this information, along with the total mileage and age of the car, to narrow your search. When looking at vehicles under $10,000, the car with fewer miles will often be the better choice, if all else is equal.
Once you’ve chosen a car, give it a thorough test drive, Capparella added, and pay attention to “seating position, window visibility and engine noise.”
If something in the car isn’t right for you, another vehicle is probably a better bet, and don’t be afraid to be picky. You might not buy the car of your dreams, but you could live with your choice – and make payments on it – for years to come.