How to Finance a Car Loan for First-Time Car Buyers

Buying a car can be a harrowing process for experienced car buyers let alone first-time car buyers. But with preparation and foresight, headaches can be minimized.

What Is a Car Loan?

A car loan is a type of secured loan whereby the borrower pledges the car as collateral for the loan. This loan can take the form of either a direct or an indirect loan.

With a direct car loan, the bank loans money directly to the car buyer. But the loan favored by car dealerships is the indirect car loan whereby the car dealership acts as an intermediary between the bank and the car buyer.

What Is Car Loan Amortization?

In short, amortization means the shrinking of a debt. In the case of a car loan, it means the entire process of paying the lender monthly in order to eventually pay off the car altogether.

In the beginning, the car buyer will pay off mainly the interest on the car loan. But as time progresses, the car buyer will increasingly pay down the principal until the entire car loan amount is paid off.

Many factors go into car loan amortization including loan amount, interest rate, and length of the car loan. Car buyers can search the web for amortization calculators to estimate their price point for a car purchase. For example, About.com features an amortization calculator for car loans.

What Car Loan Length Should the Car Buyer Choose?

Car loan length depends on a variety of factors. If the car buyer can afford higher payments and plans to trade in the car after 3-4 years, a 36-month car loan may be worthwhile.

A majority of people choose a 48-month car loan, while some who plan to keep the car for 8-10 years and need lower monthly payments opt for a 60- or even 72-month car loan.

Does the Car Buyer Have Money for a Down Payment and/or a Trade-In?

If the car buyer plans to trade in his or her car and use the dealership's trade-in offer as a down payment on the new car, it can lower the cost of monthly payments. Whatever the case may be, a down payment somewhere in the range of $2,000 to $4,000 is standard for the average priced car.

Before Entering the Car Dealership

Before heading out to the car dealership, the car buyer should shop around for car loans and choose the car loan with the most competitive interest rate.

When the car buyer is sitting in the finance office at the car dealership, he or she should present the finance salesperson with the loan offer at the most competitive rate. At this point, the finance salesperson will likely offer an even better deal because the dealership would rather the car buyer go with their financing.

For the first-time car buyer, car loans can be somewhat confusing. However, with a good understanding of how car loans work, proper financial planning, and learning what to expect at the car dealership, the first-time car buyer can walk into the car dealership with confidence and a good understanding of how much car he or she can afford.