Question: I’m a first-time buyer trying to borrow $16,000 for a car, and most of the lenders are telling me that I’ll pay 14-21% interest rate as well as providing a big down payment. One lender even told me that I’d pay a high interest rate AND have to put $6,000 down. Is there anything I can do to reduce the rate and/or down payment requirement?

Answer: Yes. Especially if you can delay your purchase a few months.

How First-Time Car Buyers Can Save Money

Generally, first-time buyers are expected to pay both a high interest rate AND a hefty down payment. This is because there’s considerably more risk with a first-timer than someone with established credit.

However, there are some things you can do to improve your credit score and address both the interest rate and down payment:

1. If possible, delay your purchase for 6 months. Then:

  • Go get yourself a couple of credit cards (preferably cards with no annual fee)
  • Use each card precisely one time right when you get them, then throw the card in a drawer and forget about it
  • Be sure to pay the bill for each card in full as soon as you get it in the mail

Whatever you buy with your card doesn’t matter – you can buy a bag of groceries if you like – the key is to pay the card in full and then to set the card aside. Doing so will both establish a history AND improve your ratio of credit in use to open credit available…which will raise your credit score…which should make it easier to buy a car (lower down payment, lower interest rate).

2. If you can’t delay your purchase, join a credit union. While some credit unions won’t lend to first-time buyers, many will do so at favorable terms.

3. Finally, you can always buy the car at the interest rate and down payment the lender demands and refinance.

  • First, you’ll want to make sure that there’s no penalty for paying off the loan early
  • Then after six months of payments have gone by (and I’m assuming the payments will all be on time), you can probably refinance
  • Check on refinancing at your local credit union

TIP: If you use my ‘credit card trick’ in addition to making payments for 6 months, refinancing should be easy

Three Ways First-Time Buyers Can Reduce Interest Rates and Down Payments

  1. Get your credit established with a couple of credit cards that you only use once
  2. Get with your local credit union
  3. If you have to pay a higher interest rate, remember that you may be able to refinance in as little as six months (assuming you pay all your payments on time)

Last but not least, think about buying or leasing a new car. Believe it or not, it’s often easier to buy or lease a new vehicle as a first-timer than it is to buy a used car. You’ll often get a better interest rate, better vehicle, and a great price. If you lease, you’ll be able to upgrade/change vehicles in as little as 2 years.

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