Getting a car loan for your first car can seem daunting. Taking on debt is a big step in life, so it’s important to carefully consider what will work for your budget and what you can afford. Here are some things to ponder before setting up your first car loan.
Quick takeaways:
- Affordability is essential – think with your head not your heart when deciding what you can afford in car loan repayments.
- Know all the costs upfront – everything adds up so make sure you take a good hard look at the cost of owning and running your car when assessing the car loan amount that you can afford.
- Be car loan savvy – less time equals less interest and there are many ways that you can reduce the cost of your debt. Find out all the smart ways to manage your loan upfront.
Start with the basics
It’s tempting to jump ahead and start thinking about the car of your dreams, but in an ideal world your first step should be to work out what you can afford.
You probably already have an idea of how much you would like to spend. Setting some boundaries based around your budget will allow you to be realistic when you start shopping for your first set of wheels.
How much can you afford to borrow?
Planning your budget is going to require some research into the costs you’re likely to face. Then you can work backwards from what you can afford in repayments and check that your potential loan value meets your expectations.
Work out what cash you have to play with by reviewing your income vs. your current costs. This will give you a budget for what you can afford to pay for both your car loan repayments and the cost of keeping your car on the road.
Working out the costs of ownership
Exploring your running costs will help you to build an accurate picture of what you can afford in loan repayments. A little desktop research should allow you to build some estimates for fuel costs and maintenance. AA Motoring provides a great way to get running cost information, and details on registration and licensing costs.
Don’t forget to work out the potential cost of insurance before buying your car. As a first time buyer you may find that you pay more for car insurance. There are different levels of cover available: take some time to work out what suits your needs.
How long do you want to borrow for?
There are two ways to think about your car loan. You can borrow the amount you want for a shorter time with higher repayments. Or you can sign up for a longer loan term and enjoy smaller repayments, making it more affordable on a day-to-day basis.
It’s tempting to extend the duration of your loan to make it possible to buy a more expensive car. Responsible lenders should let you know that if you take longer to pay off your car loan, there will be a higher interest cost.
When deciding how long you want your car loan to last for, you may also want to look into the likely depreciation in value of your vehicle. If your car loses value faster than you pay off your car loan, you risk reaching a point where it’s not worth as much as the debt that you owe against it.
Paying off a loan faster is always better if you want to minimise the cost of borrowing and gain full ownership of your vehicle faster. It’s up to you to balance the cash you have available against the amount you would like to borrow, then work with your preferred provider to build a car loan structure that will work for you.
Setting up your car loan
Once you’ve worked out all your costs and taken them away from your income, you’ll have a good idea of how much money you have available to make repayments on your car loan.
You can now contact some car loan providers and talk them through your budget and your preferred timeline for paying off your car loan. It’s always important to contact a range of providers in order to understand exactly what is available. Try to write everything down so you can take some time to review the numbers afterwards and work out the best scenario.
Your credit history
If this is your first time looking for a car loan and you don’t have a history of borrowing (known as a credit history), you may find it challenging to get a loan that works for you. Try working with an experienced and reputable car loan provider and ask them to talk you through your options.
The good news is that the time you put into building an affordable loan will help you to make repayments on time and build a strong credit record which will benefit you for future borrowing.
Remember that a deposit will help you to reduce the size of car loan that you need, and will make you a more attractive prospect to a finance provider.
Buying your first car is an exciting journey. By making sure that you are happy with your budget up front, you can feel confident that you have the money you need to enjoy your ride. That’s because investing time in setting up a good car loan today should allow you to protect your ability to achieve your repayments in the future. So you can go shopping for your new set of wheels confident that you’ve covered all your bases, and ready to negotiate the best price for the car that suits your needs.
