If you’re buying a car for the first time and need financing, it’s important to set a budget and get pre-approved. This gives you the best shot at a favorable rate and you can plan your payments.

Finding and signing off on a

car loan

may seem scary—but you’re more in control of this process than you think! Some lenders even offer first-time buyer programs as a resource for young or inexperienced consumers.

Just remember one hidden expense of financing: you’ll likely need to purchase full-coverage insurance for your vehicle until you finish paying the loan. Comparing

car insurance quotes online

can help you find the best rates for any coverage level.

Jerry,

the

trustworthy insurance comparison app

and licensed broker, has some step-by-step tips for taking out a car loan as a first-time buyer.

Start by setting a budget

Before you set your sights on a particular car or lender, set an initial budget. As a rule of thumb, no more than 15–20% of your monthly income should go toward your car payment.

So, if you’re making $2,000 per month, you’ll want to limit your payments to between $300 and $400.

To get a better idea of how much you’ll have to spare on loan payments, account for all your foreseeable monthly expenses—including potential gas, maintenance, and

car insurance

costs for your new car.

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Shop around for lenders

Now that you know the numbers to aim for, it’s time to find the lender who will give you the best rate. Be sure to check out loan terms from various places:

Banks

Credit unions

Dealerships

Online lenders

You may be eligible for a first-time car buyer program, which can make it easier for you to get approved.

It’s a good idea to apply to multiple lenders in case one doesn’t work out. Here’s the documentation you’ll need:

Driver’s license

Social security number

Proof of income (e.g., pay stubs)

Proof of residence (e.g., utility bill)

Vehicle information/details of the car type you want

Pro Tip Each hard inquiry will temporarily drop your credit score by 5 to 10 points. Apply for all your loans within a 14-day window to only receive one hard inquiry on your credit report.

Get pre-approved

Pre-approval

allows you to get an estimate of your monthly payments and interest rate before you sign on to the loan. It can also be a good negotiating tool.

Lenders also respond to pre-approval applications more quickly than to regular applications, which gives you a chance to apply to more companies within the 14-day window if you’re rejected.

Remember that even people with great income and credit scores don't always get approved. If you’re rejected by one lender, move on to the next.

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First-time buyer car loan rates

Car loan rates vary depending on income and credit score. If you’re making around $2,000 per month, your chances of approval are relatively low unless you live with your parents and have a co-signer.

To enjoy the best rates, you’ll need prime or superprime credit (generally 660+). While a lower credit score might not disqualify you from getting a loan, you’ll be subject to higher interest rates.

MORE: What is a good credit score for a car loan?

First-time buyers with no credit history or low credit scores

Many young drivers or first-time car buyers will have limited credit history or no credit at all. Unfortunately, no credit is bad credit as far as lenders are concerned. Even if you don’t have existing debt, lenders will see your lack of credit history as a lack of proof that you can pay back on debt.

If this is you, there are a couple of options:

Wait 1–2 years to build up your credit

Get a cosigner or co-borrower

with a great credit score and steady income

Cosigners and co-borrowers are third parties to your loan who agree to pay for the loan if you default or stop making payments. Co-signers are easier than co-borrowers to remove down the road.

Pro Tip Parents, relatives, spouses, and trusted friends can make good cosigners—just make sure the person has sufficient income and a high credit score.

Choose your make and model

Once you gain pre-approval from a lender, you’ll be able to see the total amount you’re allowed to borrow and your estimated monthly payments and interest rate. Then, you can actually

buy your first car

Buying from a dealership

Going straight to a dealership can be a good idea when you want a new car—but be aware of “purchase fees” and other hidden costs.

If you don’t already have preapproval, the dealership may try to convince you to buy a car and take out a loan with them. While some dealerships will give you competitive rates, others are partnered with third-party lenders and charge higher rates.

Buying a used vehicle

Used cars are often more accessible for first-time buyers

. That said, used cars are more likely to have defects or incomplete histories, so some lenders may be hesitant to approve loans for them.

Ask your seller for a full history report, including accident history and any past maintenance issues. Have a trusted mechanic examine the car before you agree to buy it and review your state’s

lemon law

to understand your legal options if you’re sold a defective vehicle.

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Negotiate and secure the loan

Once you’ve decided on a new ride, it’s time to reconvene with your lender and sign your contract! The lender will verify that your car fits the loan budget well by calculating your

loan-to-value ratio

If you’re looking to negotiate a lower interest rate, come prepared with a down payment (10–20% of the value of the car is ideal). A down payment will help put the lender’s mind at ease if you’re a first-time buyer.

Be sure to take time and

review the car loan agreement

in detail before you sign.

And voilà, you just got your first car loan!

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The best car insurance for your financed vehicle

Securing cheap car insurance is much easier than taking out a car loan—thanks to

Jerry

Here’s how it works: download the Jerry app (it’s free!), complete a quick 45-second sign-up, and then you’ll be presented with dozens of competitive quotes from top names like Progressive and Travelers.

When you find a new policy you like, Jerry can help you cancel your old policy and register for your new one. With the Jerry app in your pocket, you’ll have access to digital proof of insurance 24/7 and a team of agents happy to answer questions over text.

“I usually don’t leave reviews, but this app was amazing! I’m young and wanted a nice car, so I thought insurance companies would charge me extra. But
Jerry
chopped my usual payments in half! Thanks, Jerry.” —Gabby E.

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