5 Steps to Financing Your First Car

Time to treat yourself by saying goodbye to old faithful

here and stepping up to your dream car.

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Imagine cruising up the coast, the wind in your hair,

making your friends jealous.

But wait, that dream car you want

costs more than your savings.

And that means that you're going to have to tackle

the world of financing.

If you've never financed a car before, it sounds scary, right?

But don't worry because we're here

to make sure that you avoid some common mistakes

and to make sure that you are really living the dream.

Hey, everybody.

I'm Desola from Edmunds, where we're

known as car testing pros.

Now, we've teamed up with the experts over at CarMax

to help you find the right car for your needs.

They say a dream with a date is a goal, a goal with steps

is a plan, and backing those steps with action

is how you make your dreams come true.

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In this case, the steps are simple.

First, check and fix your credit.

Next, be realistic about what kind of car

you're going to buy.

Then think about how much you can afford each month.

Think about reliability and extended service plans.

And finally, there's insurance.

If this feels like information overload,

don't worry, because we're going to break it all down for you

starting with credit.

We get it; You got that first paycheck,

and you want to rush out and spend it.

But take a deep breath, and start your plan

early by checking your credit.

And when we say check it, we mean check it months

before you're actually ready to buy.

That's because your credit score will directly

impact your interest rate, which affects your monthly payment.

And you don't want to find your dream car only

to have the dealer slap you with a crazy interest rate.

The good news is that it doesn't have

to cost a dime because you can get a free credit

report every single year.

It's simple, and you can see how by checking out this link.

If your report comes back at 661 or above, good news.

You're already in good shape.

And you'll probably get a pretty good interest

rate on your loan.

But if you're below that, especially if you're

below 600, in the subprime area, it's

worth sticking it out with old faithful a little longer

until you can repair your credit.

That means paying your credit cards on time

and keeping the balances low.

Now, do not open up any new credit cards.

And make sure you pay off everything and anything you're

behind on.

Once you establish a good track record,

the score will start to come up.

Now, if your credit score is really low, like below 500,

then you're probably going to need a cosigner.

But if you can, just keep on driving

old faithful until your credit score goes up.

And yeah, we know financial prudence isn't the fun

part about buying a car, but the payoff

is a lower monthly payment or an even nicer car.

And that's worth it, right?

Now that your credit's in good shape,

it's time to think cars, which is the fun part.

But first, you got to get real.

Now, I've always wanted a little two-seat sports car, maybe

something with a little more power.

No-- I tend to overdo it at the grocery store sometimes.

So yeah, something with a bigger trunk and a back seat

makes a lot more sense.

Look, live that dream, OK?

Get a cool ride, like you've always wanted to do.

But just remember the realities of your day-to-day life,

and make the right decision for your lifestyle.

Live that dream.

Live-- wait a minute; I'm getting too ahead of myself.

All right, so if you need any help

deciding what's best for you, we've

got your back at this link.

Since you're going to be financing,

you need to budget how much you can afford to pay each month.

Broadly speaking, you don't want to spend more than 10%

of your monthly income on your car.

And that includes things like insurance, gas, and so forth.

The math is simple.

Let's say your monthly net pay is $5,000.

10% of that is $500.

And man, that buys you a lot of car, right?

But remember that's going to cover not just the car payment,

but also your insurance and gas.

And suddenly, the amount left over for the actual car

is quite a bit less.

Also, that 10% is just a guideline.

There's not a universal law.

So if you have higher payments somewhere else,

then that percentage may be a little lower.

Or if you're otherwise super frugal,

that percentage may be a little higher.

Listen, nobody knows your financial situation

better than you do.

But most importantly, just be honest with yourself.

Nobody wants their car to be in the shop all the time.

And reliability is a key consideration

when you're buying.

So there are two ways to avoid those problems down the line--

reliability.

One, is just to buy a car that is so reliable

that an extended service plan isn't needed.

But if the original factory warranty on your dream car

has expired or is close to it, an extended service plan

is a good way to hedge your bet against future problems.

Extended Service Plans, or ESPs, are different from the factory

warranty because it's an add-on purchase, not something that

comes with the car.

ESPs come in different sizes.

Some only cover big-ticket items,

you know, engine, suspension, transmission, stuff like that.

Now, these tend to be less expensive.

And there are also more comprehensive,

bumper-to-bumper plans that cover just about everything.

Not surprisingly, they cost more.

If you're going to get an ESP, make

sure to tailor it to your own comfort levels.

So if you're shopping a brand that's

known for being reliable, then maybe a big-ticket warranty

makes sense, you know, just in case something goes crazy.

Now, if you're shopping a brand that's

got a bit of a reputation, then a more comprehensive ESP

should definitely be factored into your budget.

If you've never financed a car before, here's a little secret.

You don't actually own the car until that loan is fully paid

off.

And the bank that lent you the money to get behind the wheel

wants to protect this investment, which means

a bigger insurance payment.

You already have liability insurance.

But your lender is going to require that you add collision

and comprehensive insurance.

Liability only pays for the other cars damage

if you cause an accident.

Collision, well, that's pretty self-explanatory, right?

It covers expenses to repair your car in case of a crash,

regardless of who's at fault. Now, comprehensive insurance

covers damage from pretty much anything else,

like vandalism, storm damage, or hitting an animal.

And a lot of times, finance companies

will actually require higher limits on things like liability

as well.

Yes, prepping to finance a car is, well, kind of dull.

Getting your financial house in order

is kind of like the "eat your veggies" part of buying a car.

But just how eating those veggies

helps keep your body healthy, planning before you buy

can also help keep your finances healthy in the long run

and let you live that dream.

So what's your dream car?

Sound off in the comments down below.

Don't forget to like and subscribe.

And click the link down below for an in-depth article.

Thank you so much for watching.

And we'll see you guys next time.

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