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Buying a car for the very first time can be an exciting task. You get to wander around car dealerships, looking for the one that you want. There are numerous types, makes, and colors of cars to consider, and this might make it a little daunting, especially when significant amounts of money are involved.
Your finances will be drawn into question when you buy a car, particularly if it is not a one-off, paid-in-full sort of purchase. If you need a loan, then you need to prepare your finances well ahead of this big purchase. Three of the aspects to consider when doing this have been outlined below, and these aspects are essential in ensuring you buy a car that meets your needs and does not break the bank.
How to Prepare Your Finances for a First-Time Car Purchase
Buying your first car is an exciting milestone, but it’s also a significant financial commitment. Properly preparing your finances ensures you get the best deal without straining your budget. Here are key steps to take before making your first car purchase:
Table of Contents
- Determine Your Budget
- Save for a Down Payment
- Improve Your Credit Score
- Final Thoughts
1. Determine Your Budget
The type of car you can purchase will be determined by the amount of money you can spend. This is why it is essential to determine your budget in advance. The budget should be an accurate price range that you do not want to go over; it must be accurate to prevent any issues or surprises occurring during the purchasing process.
Your budget will influence the age, brand, and condition of the car you can buy. For example, if you would like your car to be no more than five years old, then you might find you will have to spend over $10,000. This is much cheaper than the price of a brand-new car. According to Money Geek, the average price of a new car in 2025 is $48,401. Rarely will a first-time car buyer be able to afford this amount.
When it comes to calculating your budget, you should analyze your current bank statement and/or credit card statement. With these documents, you can see what you are spending on a monthly basis and begin to work out where you can cut costs and save. This often falls into three categories: needs, savings, and wants. Essentials, like rent, are needs, and can’t be reduced. Buying clothes or eating out are wants, and can be reduced or eliminated to increase savings.
When determining your budget, you need to consider:
- Monthly Expenses: Factor in rent, utilities, groceries, and other essential bills.
- Car-Related Costs: Account for insurance, fuel, maintenance, and registration fees.
- Financing Options: Decide if you will pay in full or finance your car with a loan. A general rule is that your car payment should not exceed 15% of your monthly income.
As for savings, you should aim to put away 20% of your monthly income to ensure you can afford your chosen vehicle.
Insider Tip: Use an online car affordability calculator to get a realistic estimate of what you can afford.
2. Save for a Down Payment
A larger down payment reduces your loan amount, monthly payments, and total interest paid over time. In some cases, a larger down payment will result in a shorter-term load, too.
Usually, a car’s down payment will be between 10% and 20% of the total price, although the higher range is recommended.
Here are a few ideas to boost your savings and enable you to make a bigger down payment:
- Automate Savings: Set up a dedicated savings account and schedule automatic transfers.
- Cut Unnecessary Expenses: Reduce discretionary spending like dining out and subscriptions.
- Sell Unused Items: Declutter and sell items you no longer need to boost your savings fund.
Insider Tip: Some dealerships offer incentives for higher down payments, like lower interest rates or cash rebates.
3. Improve Your Credit Score
Your credit score will affect the interest rate and terms of your loan. If you have a good credit score, you are more likely to save money on your car loan. Most lenders will be looking for individuals who have a credit score of 661 or above for the best rates and terms. Being below 661 increases your risk of being rejected outright.
Many first-time car buyers will be young, so they could think about opening a new credit card prior to buying the car. If this is the case for you, you could take out a new credit card, spend a little, then pay it off straight away, and this will drastically improve your credit score. This means you are more likely to receive a loan with favorable terms.
Here are other ways to improve your credit score:
- Pay Bills on Time: Late payments can negatively impact your score.
- Reduce Debt: Lowering credit card balances improves your credit utilization ratio.
- Check Your Credit Report: Review your credit report for errors and dispute any inaccuracies.
Additionally, lenders will request that you provide proof of income when buying a car. This is just to ensure that you have a stable income and can afford the loan. Knowing how to prove your cash income is vital in this process, and you should keep previous pay slips, utility bills, and so on just in case. The dealership you buy from might also run a “buy here, pay here” arrangement with in-house financing services, and proving your income will definitely be necessary in this situation.
Final Thoughts about How to Prepare Your Finances for a First-Time Car Purchase
If you are planning on purchasing your first car, then you must be prepared ahead of time. Your finances are a crucial aspect of this purchase, and lenders and dealerships will look through your history with money and spending to ensure you are a safe candidate for a loan.
By setting a clear budget, saving for a down payment, and improving your credit score, you’ll set yourself up for a smooth buying process and long-term financial success.
I hope you found this post about How to Prepare Your Finances for a First-Time Car Purchase helpful.
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