Car Loans for Young Drivers: Everything You Need to Know

Nothing beats the thrill and bliss of passing your driving test. The ability to go anywhere at any time with your driving license gives you the freedom you have been looking for. This is whether you are a delighted first-time passer or a person who has finally managed to pass the test after months of hard work. It’s time to pull together all the theory you have learned and put it into practice. However, to achieve this, you are going to require a car.

While buying your first car is an exciting experience, it can be quite challenging if you are a young driver applying for an auto loan for the first time. Most lenders are less willing to do business with teens who have yet to build a strong credit and earnings history.

However, that doesn’t mean you cannot get your dream car. With a co-signer, some financial institutions, like myAutoloan, can help you finance the car you want with affordable monthly payments. Here’s everything you need to know before searching the market for the best car finance deals for young drivers.

What makes it difficult to get an auto loan as a first-time or young driver?

While it’s possible to get a car on finance if you are a first-time buyer or young driver, you might be in an unfavorable position than other borrowers through no fault of their own. There are several factors that make young drivers high-risk, meaning some lenders may put restrictions on the car loans they offer. Here are a few reasons why young drivers struggle to get car finance.

Having little or no credit history

Lenders often examine credit history and scores when you apply for a loan. However, since you can only take out credit if you are over 18, young drivers might not have had time to build up their credit score to a level that would reassure the lender. That means you are less likely to be approved for car finance.

Lack of income or having a low income

Lenders want to be sure that you will be able to pay them back if they give you a loan. However, it’s more likely you have no or limited income when you are under 21.  Higher salaries usually require qualifications and experience; in most cases, the minimum wage is lower for young adults aged below 22. Not having income or a low income can affect the amount you can afford to pay towards a car loan, limiting your credit options and eligibility.

Young drivers are more likely to cause an accident

When you take on a car loan agreement, the vehicle usually doesn’t officially belong to you until you pay off the total amount. Unfortunately, it’s statistically true that young drivers are more likely to get involved in road accidents. In fact, according to the AAA Foundation for Traffic Safety, motorists between the ages of 16 and 19 are more likely to be involved in vehicle accidents compared to drivers from other age groups. To a potential lender, that means the car is more at risk when compared to older populations known for safe driving. This can also increase how much you pay for auto insurance.

How to get an auto loan as a young driver

Securing an auto loan at 18, 19, or even in your 20s can be challenging, but getting your first car finance approved is still possible. Here are a few things you can do to improve your car loan eligibility as a young driver.

Get a job

If you are a student or have recently graduated, securing a full or part-time job can boost your eligibility for a car loan. For instance, you can look for a part-time job to supplement your student loan, which can make the loan provider more confident that you will have enough money to make your payments. On the other hand, a full-time job will show potential lenders that you have a reliable source of income, giving them more confidence and making you more attractive.

The more disposable income you have available, the more likely you will be able to afford a car loan monthly payments. You can also save as you work so that you can put down a larger down payment and reduce the amount you need to borrow to purchase a car.

Consider a co-signer

Car financing options can be discouraging without a credit history, and most young drivers have to deal with this scenario. Luckily, you don’t have to finance a car alone; you can co-sign the loan with your parents or anybody you trust and who trusts you enough.

When you co-sign an auto loan with a parent, the loan and the car are still in your name. The lender is assured that you are not solely responsible for repaying the loan since the parent’s income and credit history play a role as well. This can help you secure a reduced interest rate and allow you to borrow more money.

However, it’s important to note that co-signing a car loan puts both parties at risk should you fail to make on-time monthly payments. While the loan and the vehicle are in your name, missed loan payments will negatively affect both parties’ credit scores.

Improve your credit scores

A young driver is unlikely to have a solid credit history, which can impede their ability to secure a suitable auto loan. Most lenders won’t offer loans to individuals who don’t meet credit qualifications, including those without good credit scores or who have no credit history.

Before you apply for a car loan, take steps to improve your credit. You can improve your score by registering on the electoral roll, taking out a mobile phone contract or credit card, making fewer purchases, and paying off the full balance each month. Be sure to take out what you can afford, as falling behind with your repayments can hurt your credit score.

Apply with a car finance broker

That means they can look around for auto loans for individuals with different financial circumstances. The best car finance broker will find you the best available deal, and applying for a no-obligation quote won’t hurt your credit score.

Furthermore, since car finance brokers are well-connected with lenders, they can negotiate lower interest rates and better loan terms, which can save you hundreds of dollars over the life of the auto loan.

Consider a loan from a credit union

Most new car buyers think the only way to finance a vehicle is through the dealership. However, that is far from the truth. You can get an auto loan from banks, credit unions, or online lenders.

Credit unions can be a great option for new borrowers, as they usually offer lower interest rates than traditional banks. In addition, credit unions are not-for-credit organizations and customer-owned, meaning they can be more flexible than larger banks when it comes to unique loan situations.

Allow open banking

Not all lenders offer open banking, but it can help individuals with no credit history or a poor credit score secure an auto loan. Once you agree to open banking, you will allow the lender to investigate your finances, which can give them a clearer picture than your credit score and will be more up-to-date. For instance, if you have a reliable income and don’t use an overdraft but haven’t yet built your credit, open banking can reassure potential lenders that you can afford a loan.

Look for a cheaper used car

A used car is undeniably far more affordable than a brand-new ride. Therefore, you won’t need to borrow as much when you choose to buy a cheaper used car. Getting a cheap used car also reduces the cost of replacing it, especially when you only opt for cheaper third-party insurance that covers other people but not you.

On the other hand, if you choose to finance an expensive, brand-new vehicle, the lender might be less likely to offer you a loan. This is because the payments are likely to be more expensive and, therefore, might be unaffordable.

Compare different car finance options

Be sure to compare different car finance deals until you find one that best suits your requirements and financial situation. Car dealers and manufacturers won’t necessarily offer you the best terms for auto loans. Therefore, don’t go for the first option offered to you or get into an agreement unprepared. Instead, take time to understand your options and only apply for car finance if you are confident you will be successful. You should also ensure you will be able to make monthly payments alongside the other costs of owning a car.

Summing it up

Buying a car is a very exciting experience, but it can be a bit challenging, especially if you are a young driver applying for credit the first time. Luckily, with the above tips, you can improve your chances of being approved for car finance and tapping into the benefits of auto loans, such as access to new cars. There are many finance opportunities for you to explore, whether you are a young driver or you don’t have money to put down.