Finance a Used Car
Most people buy used cars in an attempt to limit the cost of a vehicle. Therefore, it is always best if you can buy a used car without financing it. However, even used cars can be very expensive, and many buyers finance them. Used car financing is available from dealerships as well as private lenders.
Get a Direct Loan
- Request a copy of your credit report and credit score before applying for financing. Lenders will use your credit report and score to determine whether to approve the loan, and if so what interest rate to offer you.
- If your credit score is 680 or above, you are considered a prime borrower and are eligible for the best interest rates available. The higher your score, the more bargaining power you have to negotiate a low interest rate.
- Contact local banks and credit unions to find out the terms and interest rates they are offering on used car loans.
- Many lenders offer 5 year loans, as long as the car you are purchasing is less than 5 years old. Most vehicles older than 5 years are only eligible for 1 to 2 year loans, if the lender will even finance them. Lenders are fearful that an older car will not last for 5 years.
- Additionally, lenders often impose minimum mileage restrictions (often 100,000 miles) and will not finance salvage-titled vehicles. Typically they will only fund loans for vehicles purchased through a franchised dealership, not through a private party or independent dealer.
- Solicit rate quotes from several lenders before agreeing to a loan. The interest rates offered on used car loans are generally 4 to 6 percent higher than rates offered on new car loans.
- Ask the lender with the best rate offer for a pre-qualification letter outlining the terms and conditions of the loan. Bring this letter with you to the dealership when shopping for the car.
- Provide the lender with information about the vehicle you choose. You will need to provide the car's make, model and VIN number, among other things. The lender will then originate the loan.
Get a Dealer Loan
- Apply for financing through a used car dealer.
- In general, interest rates offered by dealerships are higher than interest rates you can find directly from a lender. Therefore, you may want to apply for a direct loan first.
- Dealers will typically finance any used car they sell, regardless of its age. Therefore, you may want to apply for a dealer loan if a direct lender denies you financing.
- Make sure you research competitive interest rates based on your credit score.
- Dealers sometimes "pad" the rate from the lender, charging you a slightly higher interest rate than you qualify for, and keeping the additional profits. Therefore it is imperative to know not only your credit score, but the interest rate you deserve based on that score.
- Offer a down payment in cash or trade equivalent to 10% of the vehicle's purchase price.
- Vehicles are depreciating assets, which means that negative equity can be an issue. Providing a down payment of at least 10% of the vehicle's purchase price will not only increase your chances of dealer approval, but it will minimize any risk of being "upside down" on your new vehicle.
- If your credit score is not high enough to get a good interest rate on a used car loan, consider asking someone to co-sign on a loan. A co-signor with a high credit score may help you to secure a lower-interest loan.
- If you finance a used car, be prepared to take out comprehensive insurance on the vehicle. Lenders require that you carry comprehensive insurance to pay for damages to the car, up to full value of the vehicle, to protect their investment. When you own vehicle, you have the option of just purchasing basic liability insurance, which pays for damages to the other driver's car in the event of an accident, but does not pay for damages to your own.
- Even if you have a bad credit score, be wary of "buy here pay here" car lots and other dealers who advertise financing with "no credit check." Typically, these car lots sell only high-mileage vehicles with inflated down payments and interest rates. They are notorious for their predatory sales tactics, and they seldom report client payments to the credit bureaus, which means you could spend 24-72 months paying off your vehicle as agreed, only to gain no boost in your credit score.
- Use Insurance Investments for Loans
- Use a Dealer to Finance a Used Car
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