Buying Your First Car: A Guide for Students

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Article QuickTakes:

• How to prepare to buy a car
• Estimating and gathering your down payment
  
• Doing your research and comparing needs vs wants
• Inspecting and test driving your chosen car
• Closing the deal

College Student's Guide To Buying a Car

The college experience is all about learning how to be independent, and for many students, it’s the first time. This newfound independence can include making different kinds of large-scale purchases you’ve never made before—including purchasing a car. Having a car is an essential part of independence. According to Scientific American, owning a car can symbolize choice, freedom, and control over your life. This can be particularly true for those living in areas without reliable public transportation, which as of 2021 was about 45% of America.

Unfortunately, car prices have dramatically increased in the last year, due to insufficient supply. These shortages have decreased the amount as well as the types of cars available and increased the prices of available inventory. This makes it much more difficult for young people to afford reliable cars. However, there are still ways that you can buy a quality car on a budget as a college student. This guide will help you understand how to buy and manage your first car purchase, and what pitfalls to avoid.

Prepare To Buy a Car

There are several steps you need to take before you even visit a car lot. These steps include getting your finances together, understanding your priorities and what you should be looking for in a car. Even if you’ve bought a car in the past, it’s important to be diligent with your research and keep your financial records straight. Staying organized can help make the car buying process easier, and give you a realistic idea of what you can comfortably afford.

Understand Your Personal Finances

The first step you need to take when you start thinking about buying your own car is understanding your personal finances. Taking inventory of your income and financial goals will allow you to select the financing option that works best for your near and long term needs.

Purchasing the car, and will likely be a large part of your monthly budget for several months, or years. The most common financing option for a car purchase is an auto loan. However, if you have enough liquid capital, you can buy a car in cash. There are pros and cons to both of these approaches.

Weigh the Pros and Cons of Financing, Leasing or Cash-Purchase

Using a car loan allows you to put down less money upfront, and can typically expand your buying budget. However, you will have to make monthly payments on the loan, including interest, for a few years. Purchasing a car with cash comes with fewer strings attached, however, it can seriously reduce your budget, and you may have to do an extra step during the buying process to protect yourself against fraud.

Another financing option is leasing a car. When you lease a car, you’re effectively renting the use of the vehicle. Leasing a car may allow you to get into a nicer car. However, there are typically more hoops to jump through, and any damages to the car, even minor ones, can be costly, as it isn’t technically yours.

Cash purchases aren’t insured the way that loan purchases are, nor do they have the same amount of paper trail. Due to this, particularly if you’re buying a used car, you may have fewer areas of recourse if you’re sold a vehicle that isn’t what you expected.

Understand Your Credit Score

Your credit score is an important number when it comes to making big purchases with a loan. This score indicates your creditworthiness to lenders and is a general representation of how you’ve handled debt in the past. This may be an obstacle for some college students, as they may not have a very high credit score due to limited credit history.

Generally, the better your credit score, the better loan terms you can get. However, you can still get a loan with low or no credit, you just have to be wary of the terms. These kinds of loans typically come with much higher interest rates because people with lower credit scores are seen as a bigger risk to lenders.

If you’re looking to improve your credit score while in college, here are some things you can do:

• Open a credit card and pay off the balance in total each month: Many credit card companies offer special cards for college students with the express purpose of helping them build credit. The credit bureau Experian points out that by paying off your balance every month, you’re increasing your repayment history, which is one of the factors your credit score is based on.
• Start making payments on your student loans: This is another way you can increase your repayment history. According to Experian, even if no payment is due, making payments on student loan debt positively influences your repayment history, and by extension your credit score.
• Become an authorized user on someone else’s card: This option is a bit of a double-edged sword. According to Credit Karma, becoming an authorized user on someone else’s card can be a great option if you don’t qualify for a credit card. However, it’s important to note that you inherit their credit score when you become an authorized user. This can be great if they have a high credit score and can be a serious obstacle if they need credit repair.

Once a year, you can use the website AnnualCreditReport.com to request a free credit report from the three major credit bureaus—Equifax, Experian, and TransUnion. Or, you can request a separate report from each of the bureaus throughout the year. According to the Federal Trade Commission, AnnualCreditReport.com is the only federally authorized source of free credit reports for consumers. If you’re interested in monitoring your credit score via other sources that offer “free credit score” information, the FTC warns that they may be seeking to collect your personal information.

How Much of a Down Payment Do You Need?

When saving for a car, particularly if you’re getting a car loan, it’s important to calculate what kind of down payment you can make. Down payments are represented in percentages of the total price—for example, a 10% down payment on a $60,000 car would be $6,000. Knowing the kind of down payment you can make is essential for a couple of reasons.

One, the bigger the down payment you make, the less money you have to borrow. This means that your loan term will likely be shorter, and you’ll have less interest to pay in the long run. Additionally, some lenders offer more favorable terms to borrowers who can make a bigger down payment. Whether you qualify for better interest rates or higher borrowing limits, a bigger down payment usually signals to lenders that you have a steady income, and will be able to use that income to pay back your loan.

According to NerdWallet, a “good” down payment for a car is typically around 20% for a new car, and around 10% for a used car. This can be quite a lot of cash, depending on the car you’re looking to buy. Talk to your lender about what kind of down payment you’ll need to get approved and make sure it works with your budget before you enter into a loan agreement.

Essential Auto Loan Terminology

Before you take out a loan, you must be conscious of auto loan key terms. This way, you can fully assess what taking on a loan entails, including your responsibilities where the loan is concerned. Here’s a glossary of essential auto loan terminology:

• Annual percentage rate (APR): APR is a percentage used to calculate the yearly interest charged on loans. You can use an APR to see what the year-to-year cost of a large-scale purchase, like a car, would be.
• Principal: The principal is the money that you originally agreed to pay back. It is the base amount of the loan, without interest or fees.
• Deferment: When you defer a loan, you are postponing the payments for a period of time. This option usually becomes available if you have restricted income. It’s important to note that while deferment pauses your required monthly payments, it does not stop interest from accruing.
• Delinquency: Delinquency describes someone who is behind on payments for loans that are not in deferment. Once your loans have been delinquent for a certain period, they may be sent to collections and considered defaulted.
• Default: Defaulting on a loan is when you don’t pay the loan back for an extended period, and the lender has sent you to collections. When you default on a loan, you may be taken to court.
• Base price: Base price is the minimum cost of a car without options and dealer fees included. When you’re applying for a loan, the base price will help determine the minimum loan amount.
• Depreciation: Depreciation is a dollar amount that reflects the wear and tear on a vehicle. In other words, the value of a new or used car depreciates after you drive away from the dealership because mileage naturally degrades the car’s condition. Because depreciation can add up fast, the amount you’re able to get for the resale of the vehicle may be less than the principal you owe on the loan you used to buy the vehicle.
• Book value: Book value is the original cost of a vehicle minus depreciation. If you’re using a loan to buy a used car, the book value will figure into the loan amount.

Understanding these terms can help give you a better picture of what it means to take out a loan. It can also help you understand your situation, if you’re not able to pay that loan.

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Choosing a Car

Now, it’s time for you to choose your car! Make, model, year, and whether you want to buy new or used are all incredibly important factors to consider. Every car needs regularly scheduled maintenance, however, some cars may have higher maintenance costs and requirements than others. It’s important to understand what the ongoing care requirements are before you buy a car, as you’ll likely be saddled with them for the next several years.

Identify Your Needs vs. Wants

In addition to having the means to get from place to place, think about what features you need to get the most utility out of your car. Do you need a car that has towing capabilities? Will you be driving in winter weather? These factors are just as significant as the quality of the car, as they heavily influence its usefulness to you over its lifetime.

The easiest way to keep the price from creeping up is to make a list identifying the features you require, versus the nice-to-have and luxury features, then stick to adding on only the features that fall within your budget. Some features you determine are essential may be standard in newer vehicle models, such as:

• Bluetooth: Standard in practically every car manufactured after 2015;
• Backup camera:  Standard feature as of May 2018, per federal requirement.

Once you’ve identified your needs, then you can think about your wants. These should be things that will improve your enjoyment of the car, but aren’t necessarily dealbreakers. Nice-to-have features may include:

• Heated seats
• Blind-spot monitor
• All or four-wheel drive
• Sunroof or moonroof
• Navigation system
• Remote start
• Apple CarPlay or Android Auto

These can all be helpful additions. It’s important to note that cosmetic add-ons will increase the price of the vehicle. However, these increases may not be listed with the lot price. You can ask your dealer what any desired add-ons may cost on top of the price of the car.

Do Your Research

Once you know what you want out of a vehicle, now it’s time to research your options. This includes finding out which manufacturers have models that will fit your needs, sellers in your area, and safety ratings. Several online tools can simplify the research process. Online directories can provide you with a list of dealers and vehicles for sale near you, as well as reviews, awards or certifications, and contact information. These can be a great tool for comparing and contrasting dealerships before visiting them in person.

Another part of the research process is understanding the true cost of owning a vehicle. The price of the car is only a fraction of the overall cost of vehicle ownership. Other costs associated with vehicle ownership include:

• Insurance
• Fuel
• Parking fees
• Registration
• Maintenance and parts

Additionally, you’ll most likely see an increase in the cost of car ownership if you purchase accessories, such as seat or floor covers, that can preserve the quality of your interior.

Inspecting and Test Driving the Vehicle

Inspecting and test driving the vehicle before you buy are important, particularly if you’re buying used. While online car merchants like Carvana have cut out this process, many first-time car buyers may find their own evaluation leads to higher satisfaction in their purchase decision. That’s because seeing and test driving a car can help you be more confident in your decision. A survey by Deloitte found that the majority of people still prefer to purchase a vehicle in person. Respondents revealed that they don’t want to buy a car online because they want to view it and test drive it first.

The viewing and test driving process will both alert you to any needed maintenance for the car, and help you get familiar with the car's controls. You can, and should, request a vehicle history report for used vehicles that will tell you the following:

• Previous owners
• Odometer readings
• Open recalls and damage
• Accidents
• Repairs

This report will give you a full picture of the wear and tear of a car before you buy it. You can request this report even if you’re unable to inspect the car in person. Companies like Carfax compile these histories for you and can be a good resource for first-time buyers.

Making the Deal

Once you’ve picked out the right car, you have two types of loan options to consider: direct or indirect financing. A bank or other lending institution offers direct financing to borrowers, meaning the money for the loan is coming directly from the lender. For car loans, dealerships typically offer indirect financing. The dealer is a third party that partners with a lender to offer car loans.

Indirect financing can seem appealing because some dealers tempt buyers with loans that require no down payment. Or, the dealer may be offering no-credit-check or bad-credit loans. These loans typically come with higher interest rates and less advantageous terms than direct loans from a lender.

However, a direct lender may require the buyer to undergo a credit check to qualify for a loan with better terms. As you’re considering your options, order your free credit report and look at what it takes to qualify for a loan with reasonable terms. You don’t want to be stuck forking out high interest payments that will hamper your budget down the road. With indirect financing, you could end up paying far more than you bargained for.

Once you’ve secured your loan and picked out your car, it’s time to finalize your deal with the seller. In some cases, you may be able to negotiate with the dealer for a better price, or a more favorable repayment plan. The basic elements of a car sale contract include:

• Annual percentage rate (APR): The APR is used to calculate yearly interest on your car financing.
• Amount financed: This number will be the full price of the vehicle minus your down payment. It will represent the amount you’ve been financed for, including APR.
• Total payment: This number represents exactly how much your car payments will be for the full term of the contract. This number is found by multiplying the monthly payment amount by the number of total installments.
• Total sale price: This includes the entire sale price of the vehicle, including any add-ons, fees, and taxes. Once you have paid off your vehicle, you’ll receive the vehicle title from the DMV.

Your specific contract may have other elements, depending on the standard practice of the dealer and the circumstances of your car purchase.

Additional Car Buying Resources for College Students

There are several programs out there designed to help college students with big life-milestones, including buying your first car. Special deals and resources for students may include:

• Car insurance deals for students: Several large insurance companies, including Geico and Allstate, offer student car insurance. These insurance policies often come at a cheaper monthly rate, to make them more accessible to students buying their first car.
• Defensive driving discounts: Several car insurance companies offer discounts to those who take defensive driving classes. This can be an easy way to get a discount on your car insurance, which may also help you secure safe driving scholarships.
• Road safety scholarships: There are even scholarships for college students who can demonstrate road safety skills. While these scholarships can’t be applied to the price of a car, they can help pay for school-related expenses, which can free up more of your funds for a car purchase. As mentioned, taking a defensive driving class may help give you a competitive edge on a road safety scholarship application.

Buying a car is a significant step toward financial independence. For many, it’s their first time applying for a loan and managing a large monthly payment. The car-buying experience helps prepare you for other financial obligations in adulthood—both the work that goes into them, as well as the reward.