First Time Auto Loan: Rates and Terms to Expect
Getting a car loan, especially if you are a first time auto loan borrower, is certainly not impossible, but you should expect the car loan terms to be on the less favorable side. Without running your credit report and factoring all of the variables that go into determining what interest rate and loan terms you will receive, it's impossible to say with certainty what they will be. However, you can be sure that you will not be considered a prime borrower, for the simple fact that you have not taken out a loan for a car before. Whether you apply for a new car loan or a used car loan, expect the rate and terms you receive to reflect the risk you pose to the lender.
Auto Loan Lender Evaluations
Auto loan lenders loan money for the purchase of new or used cars based on the evaluated risk of a potential borrower. Many things go into determining a borrower’s risk, from age to income to credit history. Quite reasonably, new borrowers who have never taken out a loan for a car will have a harder time securing the prime rates. Their credit score may be great and their income higher than average - two variables that will undoubtedly help. However, because they have not borrowed money for a car, lenders will be cautious.
Rates and Terms for New Borrowers
Even if interest rates are advertised as being historically low, new borrowers should not expect to be eligible for such low rates. They're typically reserved for older borrowers who have valuable trade-ins and higher incomes, not to mention a long borrowing history. Unfortunately, financial responsibility is not a guarantee of a good rate. A good credit score will help, but borrowing history carries at least as much weight, if not more, to a lender.
Another factor is where you go for the car loan. Banks and credit unions that give loans for cars do so cautiously, and they will evaluate every aspect of your credit history. You can be sure that the rate you receive from such a lender has been meticulously calculated. Borrowing from car dealerships may be an easier way to get a loan, but keep in mind that auto loan brokers at dealerships almost always add a percentage point or more to your approved rate as profit for the dealership. You may end up paying a lot more on a dealership auto loan than you would through a bank or credit union.
Another option is to go through a third-party lender found online. This is often the most surefire way to receive an auto loan, especially if you're a new borrower. However, it doesn't mean that the rate you receive won’t be adjusted upward to compensate for the risk you pose. Loan terms can also be unfavorable for new borrowers. Much of this is due to the fact that new borrowers often don’t understand the terms they are agreeing to. Penalties for early repayment, adjustable interest rates that reset to higher levels or other hidden fees may be lurking in the terms. Be sure you understand what it is you're signing before doing so.
The only way to get a better rate is to go through the process of being a new borrower. Every borrower has been there, and only by paying the higher rates and being consistent with payments will you eventually build your credit history and receive lower, more favorable rates on car loans.