Top tips for financing your first car

Being a first-time car buyer, especially if you’re applying for financing, can feel overwhelming. But with a little knowledge and the right team to help, the process can be simple. Here are our top tips for a smooth and stress-free buying experience.

• Know your limits: Some experts recommend using the 20/4/10 rule (20% down, 4-year term, 10% of income) to set a realistic budget that covers insurance, maintenance and the monthly payment, though for used car purchases it's common to see a 10% down payment.
• Check your credit: Your credit score directly impacts your financing terms. Know where you stand before you shop and if necessary, take action to increase your score or consider a cosigner to improve your chances at a lower interest rate.
• Prepare a down payment: Making a down payment at purchase time can help reduce your monthly payments, save you money on interest and, depending on the size of the payment, prevent you from owing more than the car is worth.

Before you head to the dealership or browse vehicles online, you need to know how much you’re planning to spend — including and planning for all associated costs that come with owning a vehicle. One of the biggest mistakes first-time buyers can make is focusing only on the car's sticker price.

A helpful guideline to help you get started is the 20/4/10 rule. Experts who favor this method recommend:

• Making a 20% down payment (or 10% down for used vehicles)
• Financing the car for no more than 4 years.
• Ensuring your total monthly vehicle expense (payment and insurance) is under 10% of your gross monthly income.

While this can be great advice, the most important part is understanding the total cost of ownership. Beyond the monthly payment, you'll need to account for expenses such as:

• Insurance: As you’re narrowing in on a specific vehicle, it’s smart to get quotes from insurance companies so you know what to expect.
• Maintenance and repairs: Oil changes, tire rotations and repairs can quickly add up. You can call around to get an idea of how much you’ll pay for regular maintenance, but it’s also a good idea to set aside some funds to cover the unexpected.
• Fuel: Estimate your weekly or monthly gas expenses based on where and how often you expect to drive.
• Registration, taxes and fees: These typically vary by state, so you’ll need to do a little research to know what applies where you live.
• Play with the numbers: An online car payment calculator can help you see how different down payments, interest rates and terms will affect your monthly payment.

Negative equity, also called being "underwater" or "upside down," happens when you owe more on your car than the car is currently worth. This can be a common pitfall for first-time buyers who may choose longer financing terms (72 or 84 months) to get a lower monthly payment.

Cars lose value quickly, sometimes faster than you can pay off the financing balance. If you are underwater and your car is totaled in an accident or you need to trade it in, you will still be responsible for paying the difference between the car's value and what you owe. Thankfully, there are a few steps you can take to help you avoid this:

• Keep your financing term on the shorter side.
• Make a substantial down payment.
• Pay more than the minimum monthly payment if possible.
• Consider adding GAP coverage to take care of the difference.

As a first-time car buyer, you may not have a credit history, but you can still build your score to ensure you’re in a good position when applying for financing. Some ways to do so are:

• Paying bills on time: This is one of the most significant factors affecting your credit score.
• Paying off existing debts: Consistently paying off credit cards or other loans shows lenders you're financially responsible.
• Building credit history: If you're new to credit, consider applying for a secured credit card (these require a deposit that then becomes your credit limit) or becoming an authorized user on a family member's account.
• Keeping spending low: Aim to use only a small percentage of your available credit limit, typically below 30%, to show lenders you can manage credit responsibly.
• Holding off on new credit applications: Avoid applying for multiple credit accounts in a short period. Each application generates a hard inquiry that can temporarily lower your score.
• Monitoring your credit report: Check for any errors or outstanding issues and address them promptly. You can access your credit score for free through many credit card providers and banking apps.

Your credit score is one of the things that has the greatest impact on the financing offers you receive. Lenders use this number to help determine your creditworthiness, or how likely you are to pay back the financed amount on time. A higher credit score tells lenders you’re a lower risk, which may mean you'll qualify for lower interest rates.

The more money you put down at the time of purchase, the less you’ll need to borrow, which can help lower your monthly payments or pay off your car sooner.

But those aren’t the only benefits. Larger down payments can help:

• Reduce the amount of interest you pay: A smaller amount financed means you'll pay less in total interest over time. Since interest is calculated on the amount you owe, a larger down payment can often help you save hundreds or even thousands over the course of the loan.
• Better financing terms: Lenders often view a significant down payment as a sign of financial responsibility and lower risk — which could help increase your chances of getting approved or even help you qualify for a more competitive interest rate.
• Avoid negative equity: As mentioned above, cars depreciate quickly. By making a larger down payment, you can reduce the risk that you’ll owe more than the vehicle’s worth should it be totaled or if you need to sell or trade it in before your car is paid off.

The APR (annual percentage rate) on your financing agreement is the yearly cost of borrowing money. When people talk about interest rates, it’s often the APR they’re referring to (though there is a slight difference between the two). When it comes to financing a car, you want as low of an APR as you can get. There are a number of things that can affect the rate you’re offered, including:

• Credit history: First-time car buyers who haven’t borrowed money before or used a credit card often face higher APRs because lenders may see them as a higher risk since they don’t know what to expect. On the other hand, buyers with established credit histories and higher scores will typically see lower rates.
• Money down: Making a larger down payment is a signal to lenders that you’re likely financially responsible and therefore a lower risk. This combined with the smaller amount financed can sometimes lower your APR.
• Loan terms: The length of your financing term can also have an impact on the APR you’re offered, with shorter terms typically leading to lower rates.

If you lack a strong credit history or have a lower credit score, asking a family member or close friend with better credit to cosign could help improve the financing terms and lower your monthly payments. But, there are some important things for you and your potential cosigner to keep in mind:

• They’re responsible if something goes wrong: By cosigning , that friend or family member is agreeing to share full responsibility for the financed amount. That means if you miss a payment or stop paying altogether, they’re on the hook, too.
• Their credit score is on the line too: Any missed or late payments will not only have a negative effect on your credit score but will hurt theirs too. It takes time to build scores back up, which could mean your cosigner gets less favorable terms if they need to apply for financing themselves.
• It's all about trust: Agreeing to cosign is a big commitment that requires a lot of trust, so it’s important that you’re honest about your financial situation and ability to make payments. Make sure they fully understand the risks involved before agreeing to help.

Buying your first car can be intimidating, but at Enterprise Car Sales, we make it easy. You can apply for financing and explore offers from our network of trusted lending partners to find the right financing terms for you. Visit your local dealership where one of our knowledgeable sales consultants can explain everything you need to know about financing as a first-time car buyer.