(NerdWallet) – Buying your first car is already an intimidating experience; in the midst of historic supply shortages, it’s easy to feel overwhelmed.
In March of this year, the average price of a used car was $27,246, according to Cox Automotive — an automotive marketplace and data company — or 28% higher than it was a year ago. With those price increases, monthly payments have also swelled. Average payments for used cars reached $488 in the last quarter of 2021, according to Experian. On top of that, the average loan term for used vehicles was just over 67 months, or more than five years.
For many, cars are a necessity. If you have little or no credit, no co-signer or just a limited budget, it can be easy to accept a loan that pushes your budget or binds you to a car for six, even seven years.
Not being ready before stepping onto a car lot can open the door to making a purchase you’ll later regret. Set your limits before you ever stop at a dealership; with the right preparation, you can keep your purchase from becoming a burden.
Secure a loan
Your first step is calculating what loan payments you can afford and the total loan amount that’s within your budget.
Aim 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 under 36 months. If you’re looking for a new vehicle, keep the term under 60 months. Limiting your loan term will save you money on interest and will lower the risk of your loan becoming upside-down — owing more than the car is worth.
Numbers in hand, start looking for a lender that will give you a loan. Getting preapproved for a loan before visiting dealer lots can give you a better negotiating position, keep you from going over budget and reduce what you pay in interest.
With little or no credit history — especially since you have not had a car loan before — your best shot at being approved for a loan at the lowest interest rate possible is to apply with a co-signer. But if that’s not a possibility for you, there are still financing alternatives available:
- One of the first places to look are banks and credit unions, particularly institutions that you have an established relationship with.
- Search your area for lenders with first-time buyer programs, which put conditions on the amount you can borrow and the vehicles you can buy but dispense with some of the credit requirements.
- You can also look for loans from online lenders that offer bad-credit auto loans, since they will often have low or no minimum credit scores. These loans can carry interest rates of over 25%, so a year after taking one on, you can try to refinance for lower rates.
Pick the right car
Finding a cheap car used to be easy — or at least easier than it is now. If you have a $10,000 budget, your options are limited, but that doesn’t mean there aren’t options.
With a limited budget, most choices will be older, used cars, and that increases the annual cost to maintain your car. A 2021 Consumer Reports study found that 2016 model year vehicles cost $205 to maintain over the previous 12 months, while 2011 model year vehicles cost $430.
In addition to maintenance costs, there’s also fuel, insurance, registration and taxes that all add to the cost of owning a vehicle. As you search for a car, look into the cost of ownership, since it will differ from car to car.
The total cost of owning your vehicle, including your loan payment, shouldn’t exceed 20% of your take-home pay. Although some costs can’t be significantly reduced, 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 good maintenance history,” Joey Capparella, a senior editor at Car and Driver, said in an email. “If the previous owner has taken good care of the car and can provide service receipts, that trumps other attributes such as the number of miles or the brand. One-owner cars are desirable for this same reason.”
Service and ownership history can sometimes be found through a service such as Carfax. Use this information, along with total mileage and the car’s age, to narrow down your search. When looking at vehicles for less than $10,000, the car with fewer miles will often be the better choice, if all else is equal.
Once you’ve settled on a car, take it for an extensive test drive, Capparella added, and pay attention to “the seating position, the visibility out of the windows, and the sound of the engine.”
If something about the car isn’t right for you, a different vehicle is likely a better choice, and don’t be afraid to be picky. You may not be buying the car of your dreams, but you could be living with your choice — and making payments on it — for years to come.