Getting A Car Loan At Age 19: What You Need To Know

Quick answer

• At 19, lenders see you as a higher risk, so expect higher interest rates and stricter terms.
• A co-signer with good credit can significantly improve your chances and loan terms.
• Building a credit history is crucial; even small, well-managed accounts help.
• Be realistic about the car you can afford, factoring in insurance, maintenance, and fuel.
• Shop around with multiple lenders, including credit unions and online lenders, not just dealerships.
• Understand all loan terms, including the interest rate, loan term, and any fees, before signing.

What to check first (before you choose a payoff plan)

Your Credit Score and History

Before you even think about specific car models or loan amounts, understand your credit standing. Lenders use your credit score to assess your risk. A higher score generally means a lower interest rate and a better chance of approval. If your credit history is thin or nonexistent, lenders may see you as a greater risk.

Available Income and Budget

Determine how much you can realistically afford for a monthly car payment. This isn’t just about the loan repayment; it includes insurance, gas, maintenance, and registration fees. Creating a detailed budget will prevent you from overextending yourself and ensure you can comfortably manage the loan payments.

Potential Down Payment

Having a down payment can significantly improve your loan terms. A larger down payment reduces the amount you need to borrow, which lowers the lender’s risk and can lead to a lower interest rate. It also shows lenders you are serious and financially responsible.

Loan Terms and Fees

Understand the total cost of the loan. This includes the interest rate, the loan term (how long you have to repay), and any associated fees (like origination fees or early repayment penalties). A longer loan term might mean lower monthly payments, but you’ll likely pay more interest over time.

Your Car Loan Payoff Plan: Step-by-Step

This section focuses on managing your loan after you’ve secured it.

1. Understand Your Loan Agreement:

• What to do: Carefully read your entire loan contract before signing. Pay close attention to the interest rate (APR), loan term (in months), total amount financed, monthly payment, and any fees.
• What “good” looks like: You fully comprehend all terms and feel comfortable with the repayment schedule and total cost.
• Common mistake: Signing without reading thoroughly.
• How to avoid it: Take the contract home, read it in a quiet place, and ask the lender to explain anything you don’t understand. Don’t feel pressured to sign immediately.

2. Set Up Automatic Payments:

• What to do: Arrange for your monthly payment to be automatically debited from your bank account on or before the due date.
• What “good” looks like: Payments are consistently made on time, avoiding late fees and negative marks on your credit report.
• Common mistake: Forgetting to make a payment.
• How to avoid it: Automatic payments are the best way to prevent this. Ensure you always have sufficient funds in your account to cover the payment.

3. Track Your Payments:

• What to do: Keep a record of each payment made, including the date and amount. Many lenders provide online portals for this.
• What “good” looks like: You have a clear history of your payments and can easily see your remaining balance.
• Common mistake: Relying solely on memory or assuming the lender’s records are perfect.
• How to avoid it: Use a spreadsheet, a budgeting app, or your lender’s online portal to log payments.

4. Monitor Your Loan Balance:

• What to do: Regularly check your remaining loan balance, especially in the early stages of the loan.
• What “good” looks like: You know how much you still owe and can see progress towards paying it off.
• Common mistake: Not knowing how much you owe, which can lead to complacency.
• How to avoid it: Check your lender’s online portal monthly or review your statements.

5. Consider Extra Payments (When Feasible):

• What to do: If your budget allows, make extra payments towards the principal. Specify that extra payments should go towards the principal.
• What “good” looks like: You’re paying down the loan faster, saving on interest, and becoming debt-free sooner.
• Common mistake: Making extra payments without specifying they should go to the principal, leading them to be applied to future payments instead.
• How to avoid it: Always instruct your lender (either online or in writing) that any extra amount is to be applied to the principal balance.

6. Avoid Late Payments:

• What to do: Ensure your payment is always submitted before the due date.
• What “good” looks like: You never incur late fees and maintain a perfect payment history.
• Common mistake: Missing the due date by even a day.
• How to avoid it: Set payment reminders in your phone or calendar, and use automatic payments.

7. Understand Prepayment Penalties:

• What to do: Check your loan agreement for any penalties for paying off the loan early.
• What “good” looks like: You can make extra payments or pay off the loan early without incurring extra charges.
• Common mistake: Assuming all loans allow early payoff without penalty.
• How to avoid it: Read your contract carefully. If there’s a penalty, factor that into your decision to pay extra.

8. Review Your Loan Periodically:

• What to do: At least once a year, review your loan’s progress and compare it to your financial goals.
• What “good” looks like: You’re on track to meet your payoff timeline or can adjust your strategy if needed.
• Common mistake: Setting it and forgetting it without checking if your financial situation or goals have changed.
• How to avoid it: Schedule an annual “loan check-up” in your calendar.

Options and Trade-offs for Car Loans at 19

• Secured Loan (Traditional Car Loan): This is the most common type, where the car itself serves as collateral.
• When it fits: This is often the primary option for car purchases, especially for younger borrowers. It’s generally easier to qualify for than unsecured loans.

• Co-signer: Having a parent or trusted adult with good credit co-sign the loan.
• When it fits: If your credit history is limited or weak, a co-signer can help you get approved and secure a better interest rate. Be aware that the co-signer is legally responsible if you default.

• Dealership Financing: Getting a loan directly through the car dealership.
• When it fits: This can be convenient as it’s done at the point of sale. However, rates may not always be the most competitive, and it’s crucial to compare them to outside offers.

• Credit Union Loans: Loans from local or national credit unions.
• When it fits: Credit unions often offer competitive rates and more personalized service, especially for members. They may be more willing to work with younger borrowers.

• Online Lenders: Companies that specialize in online loan applications and approvals.
• When it fits: These lenders can offer quick pre-approval and a wide range of options. Shop around to compare rates and terms from various online providers.

• Buy Here, Pay Here (BHPH) Dealerships: Dealerships that provide their own financing.
• When it fits: These are often a last resort for those with very poor credit. Be extremely cautious, as interest rates and fees are typically very high, and terms can be unfavorable.

• Leasing: Instead of buying, you pay to use the car for a set period.
• When it fits: Leasing can offer lower monthly payments and the ability to drive a new car every few years. However, you don’t own the car, and mileage restrictions apply. It’s generally not ideal for building ownership equity.

• Secured Personal Loan: A personal loan backed by an asset, though less common for car purchases than a dedicated auto loan.
• When it fits: If you have other assets to pledge and can secure a better rate than an auto loan, this might be an option, but it’s less typical for car buying.

Common Mistakes (and what happens if you ignore them)

| Mistake | What it causes