Getting Your First Car Loan

OUR READER

Who: Devon Madison, 23

Where: Philadelphia

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Question: I graduated last year and need to buy a car. How do I get a loan?

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Devon works as a special education elementary school teacher, her first job since graduating from Vanderbilt University last year. She has been driving her parents’ 2002 Honda Civic, but she wants to cut the cord. "I want to buy a reliable used car that’s not a clunker," she says.

Like many young people, Devon can't afford to write a check for a trouble-free used car, which she figures would take at least $10,000. She has some savings for a down payment, and she'll need to borrow the rest—and that's the problem. A few months ago, she found a car and applied for a loan at her own bank. She was turned down. Then she applied to another bank. No dice. Devon even talked to a credit union, but the prospects didn’t seem encouraging so she didn’t apply.

There's no indication that Devon is a high-risk borrower. She applied for and got a credit card when she graduated, pays her rent and other bills on time, and is starting to repay her college loans. Both banks said her credit score was more than respectable (See 6 Things to Know About Credit Scores). So what’s the roadblock?

"Not having any negatives on her report is a plus, but the lack of a solid credit history definitely makes it hard to get her first loan," says Gerri Detwiler, director of consumer education for Credit.com. Because rent and utility payments aren't reported to credit bureaus unless you're delinquent, a credit card can build a history if you make small purchases and pay them off like clockwork. But what if you need a loan right away?

It may pay to skip banks and head straight to the car dealer, says Claes Bell, auto expert at Bankrate.com. "Dealer financing tends to have looser standards," Bell says. Dealers often set up agreements with lenders to send buyers their way in exchange for lenient loan criteria. Also, some manufacturers, such as Honda and Toyota, offer recent graduates (within two years) special loan programs for new and certified used cars through their captive finance companies. For example, Honda offers deferred payments for three months with two months of zero interest if you put at least 5% down and have proof of employment.

Regardless of your credit history, the more cash you bring to the table, the more likely you are to get the keys. Devon has about $2,000 saved toward a $10,000 vehicle; for used cars, lenders like to see 20% down, so she’s in good shape. Plus, auto loans are historically cheap, with rates for 60-month loans averaging 4.5%. So even if Devon doesn’t get the best terms, her payments should be affordable.

She did it! Shortly after our interview with Devon, she found a 2008 Honda Civic for just under $12,000. She persuaded the dealer over the phone to lower the price to $11,000. She was preapproved for financing on the dealer's Web site, and she got a rate of 5.2%. The car was not certified, so she couldn't apply through Honda's new-grad program. But a certified car would have been more expensive, and Devon wanted to stay close to her budget. The payments for six years are a manageable $200 a month and will build her credit history.

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Anderson has been with Kiplinger since January 2004, when she joined the staff as a reporter. Since then, she's covered the gamut of personal finance issues—from mortgages and credit to spending wisely—and she heads up Kiplinger's annual automotive rankings. She holds a BA in journalism and mass communication from the University of North Carolina at Chapel Hill. She was the 2012 president of the Washington Automotive Press Association and serves on its board of directors. In 2014, she was selected for the North American Car and Truck Of the Year jury. The awards, presented at the Detroit Auto Show, have come to be regarded as the most prestigious of their kind in the U.S. because they involve no commercial tie-ins. The jury is composed of nationally recognized journalists from across the U.S. and Canada, who are selected on the basis of audience reach, experience, expertise, product knowledge, and reputation in the automotive community.