How to Buy Your First Car on Credit: A Step-by-Step Guide

Buying a new car or vehicle on credit is a serious commitment. It’s a significant amount of debt, with loan terms that can last as many as six years or more. That’s why the decisions of where to buy the car, when to buy it, and what model to buy are all so important. Ideally, buying a car is something you’ll approach with a rational mind, rather than an emotional one.

That said, not everyone is properly prepared when they walk into a dealership looking for a new ride. Buying a car frivolously can result in high-interest rates, unnecessarily expensive vehicles, and in some cases, buying a model that’s prone to problems. Avoiding a bad buy takes some effort—before, during, and after the visit to the dealership—and it takes a little bit of strategy. The problem is, first-time buyers usually don’t have a map that marks all the pitfalls.

That’s where this guide comes in. Here, we go through the process step-by-step, so you can avoid making the mistakes that many have made when buying their first car on credit. After reading this guide, you’ll be able to buy with confidence, knowing you’re prepared to find the best deal on the best vehicle.

Before You Begin

Before we go any further, there are two numerical values that your loan lender will use to determine how much you can borrow, and what interest rate they’re going to charge you for it:

  1. Your credit score
  2. Your debt-to-income ratio (DTI)

Credit Score

Your credit score is a number that’s assigned based on your credit history. A healthy credit history means a higher score, while a bad track record will result in a lower one. What’s more, if you’ve never used credit before, or have used it very little, you’ll either have a low score or no score. In many cases, lenders are less amiable to those without credit scores than they are to those with bad or average credit.

Getting a high credit score takes two things: using credit responsibly, and paying it off reliably. This is often difficult to do prior to your first vehicle, as this is usually the first significant amount of debt you’ll acquire. This is problematic since lenders primarily base your interest rate on a loan by looking at your credit score to determine the level of risk you represent. While a difference of a percent or two doesn’t seem like much, it can make a huge difference over the course of a six-year loan.

Your best bet is to build credit with a credit card by using it for basic purchases (like, say, buying gas), and then paying off the entire balance each month. Keeping the value low or at zero is key to building a better credit score, and it’s also healthier for your finances. It takes time, but boosting your credit score this way can do wonders when it’s time to actually buy the car.


Your DTI is a measure of your ability to pay off your current obligations. To calculate it, the lender will take your monthly income, and compare it to your monthly expenses related to financial obligations. This calculation doesn’t account for things like utility bills and Netflix subscriptions. It’s only looking at obligations like other forms of credit (student loans, credit cards, mortgage, etc.), alimony and child support, and rent payments.

Comparing the monthly income to monthly expenses gives the lender a percentage that they can use to determine how much of your finances are already spoken for. They use this as a way to measure whether or not you can feasibly afford the loan. They’re not doing it out of charity, though. If you default on a loan, it costs them money, and they’re trying to avoid that. So they use the DTI to determine how risky loaning to you is. If the risk is too high, they turn you down.

What this means for you: when you go to buy a car, you want to make sure your DTI is as low as possible. While most first-time car buyers don’t usually have a lot of debt obligations, some do (often in the form of credit cards). You need to be aware that having too much will make it difficult to secure a loan for a car, or at least, to secure a large enough loan to buy the car you actually want.

Like the credit score, this takes time to fix, but you’ll want to do something about outstanding debt before you head to a dealership. Are you ready? Great! Read on to find out how to buy a car.

Step 1: Talk to a Lender (Not a Dealership)

Much like buying a house, you’ll want to start by pre-qualifying yourself with a lender. While dealerships can help you obtain financing, you can usually get yourself a better deal by talking with a bank you already do business with (or have done business with in the past). Many banks offer what are called “relationship discounts” to those that bank there when they take out a loan.

The other reason it’s a good idea to talk to a lender first is because they can give you an idea of how much you qualify for, and what it will cost you in monthly payments. With that information, you’ll be better equipped to decide what you can actually afford, and what that amount can purchase for you.

Taking out a loan never gets easier or less painful than it does by working with Lift Credit. With an application that takes 5 minutes or less, you’ve got nothing to lose by finding out how we can work with you to meet your lending needs.

Step 2: Determine What Car You Can Afford

Take the information you got from the lender, and start budgeting things out. You’ll want to take the amount that was offered you (which will be close to the maximum you can take out as a loan), and see how it fits in with your other expenses. Remember, your DTI doesn’t account for things like food expenses and paying for fuel for your car, so it’s not a foolproof guide to how much your budget can handle.

A good practice is to reduce the amount you expect to take out by 10 or 20% of what’s been offered to you. By underbuying a little bit, you leave wiggle room in your budget, which can enable you to save, pay off the loan faster, or allow for emergencies and surprise expenditures. Plus, it gives you a little bit of room to play with if you find a car near that number, but a little over.

Once you’ve determined your target price, you’re finally ready to start thinking about cars.

Step 3: Determine What Car You Need

At this point, you need to prioritize the features you’re looking for. Not everything on your list will be an absolute necessity, and you need to have a realistic idea of what you can give up, if you need to, in order to stay under budget.

Make a list of features you’re hoping for, assigning each to one of three columns: “Must Haves,” “Should Haves,” and “Nice to Haves.” For your “Must Haves,” list things that are absolute necessities. For example, if you’re married and have four kids, a sedan won’t meet your needs (unless it’s just a commuter car).  For this list, ignore everything that doesn’t hinder the actual functionality of the vehicle for you.

For the “Should Haves” list, write down everything that you’re willing to pay extra for, but aren’t strictly necessities. This list will vary depending on what’s important to you, but some examples might be backup cameras, hands-free functionality, or automatic doors. Lastly, write down your “Nice to Haves” list. These are features that you’d enjoy, and their absence won’t be a dealbreaker.

Your lists should include things like age and mileage somewhere on them. Most car warranties expire at around 100,000 miles, and (depending on the make and model), vehicles start needing more regular maintenance beyond this point. Hondas, for instance, typically utilize a timing chain in their design, which has to be replaced at the 100k mile mark. Failing to do so can result in the chain breaking during use, which ruins the engine (and you don’t want to have to replace an engine!).

That said, you can often meet most of the requirements on your lists if you’re willing to buy used, and fold a little on the mileage. Be leery of anything over 200,000 miles (unless you’re on a really tight budget), as some vehicles aren’t expected to last that long.

Step 4: Research Vehicle Models

Now that you have an idea of what functions your car needs to fill, you can start researching makes and models. There’s a lot that goes into this step, as this is the step that will prevent you from buying a lemon. Don’t take the word of family or friends at face value on this. You may come from a long, prestigious line of (insert car manufacturer here) owners, but that won’t do you any good when you’re broken down at the side of the road.

There are a number of websites where you can find information on the safety, reliability, and market value of vehicles, which you should very much utilize to investigate your chosen models. Compile a list of vehicles you’re willing to accept, complete with years and mileage. This, plus the loan amount you determined earlier, is what you’ll take with you to the dealer as your cheat sheet. Sticking to it will help you get the car you want at a price that won’t bleed you dry.

Step 5: Be Patient

From this point on, you need to make sure your approach is cool, calm, and collected. Don’t make an emotional, on the spot decision; you’re liable to buy the wrong car at the wrong price that way. Take your time, don’t decide too quickly, and don’t be afraid to walk away from any offer that doesn’t meet your needs. If a salesperson is being pushy and making you feel uncomfortable, go elsewhere. There are plenty of options out there.

Additionally, picking your moment can go a long way toward saving you money. Most dealerships have sales at certain times throughout the year, the biggest usually being at year-end. That’s because, with new models coming in at the beginning of the new year, they need to clear out old inventory, so they’re looking to make a quick sale. This leaves them prone to dropping prices further than normal. So wait to strike until the moment is right, if at all possible.

Step 6: Shop Around

Never buy a vehicle without visiting multiple dealerships first. There’s an important reason for this. Each dealership varies in what they’re willing to offer you. This is because each dealership is working off of its own sales. The first dealership you visit may be seeing a lot of business and isn’t in any hurry to move inventory. Others may be suffering a bit of a drought, and thus are hungry for a sale. So bounce around, comparing prices and vehicles. You never know when you’re going to hit the jackpot.

Step 7: Test Drive Your Shortlist

Once you start finding vehicles that meet most of your requirements, take them for a test drive. This is especially important if you’ve never driven the model before. You need to know how it feels to drive, how easy it is to get in and out of (especially if you’re a little taller or shorter than average), and whether it looks nice. That last one may sound a little unnecessary, but let’s face it—we all want to look like we can afford an amazing car. All other things being equal, we want the more attractive machine. So don’t be afraid to be picky about looks and color.

Step 8: Take a Closer Look

If you’re buying used (as first cars often are), you’ll want to have an expert look at any vehicle you’re serious about. Many a buyer has run afoul of deceptive or negligent dealerships that sold the car without fixing pre-existing problems. If you’re able to do a thorough check yourself or have a friend or family member who’s an experienced mechanic, great. If not, take it to a mechanic you trust, and be willing to pay for an inspection. It may cost you a little up front, but it can save you thousands in the long run.

Step 9: Don’t Be Afraid to Haggle

The price of a car is never fixed. Usually, there’s a value that the salesmen aren’t allowed to go below, at least without manager approval. Depending on how ready they are to make a sale, you can often push back on the list price, and get them to knock off a few thousand. You won’t necessarily cut the price in half, but you can often see significant savings by standing your ground.

If the idea of pitting your will against theirs fills you with anxiety, then cut yourself some slack, and bring along someone who’s willing to go to bat for you. Doing this has an added bonus: the third party is usually a little detached from the situation, so they’re going to be less emotional about the decision.

Step 10: Scrutinize the Fine Print

When you’re getting close to the final sale, pay attention to what they’re trying to sell you. Not every dealership is shady and deceptive, but many are, and some will try to sneak in additional costs without you noticing. There’s a lot of them out there, so be on your guard.

Step 11: Sleep on It

Here’s our last piece of advice. Before you commit to any deal, sleep on it. You may know how to buy your first car now, but don’t rush into anything. Take at least one day to process everything, consider your options, and decide if the deal is right for you. You’re making a serious commitment, one that can either benefit you dramatically or give you a lot of headaches and ulcer-inducing stress. It’s best to make decisions like this with a clear head.

For more information on how to finance the car of your dreams, contact Lift Credit today.

Apply for your quick & easy installment loan today!

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