When looking for a used car and you plan on financing it, most buyers typically start by checking out cars. That’s a mistake. You should begin by asking your bank or credit union to see if you can really afford to finance a used car.
Note that we’re talking about “used” cars and not new ones. Banks treat the two differently. Because of a used car’s depreciating value, the banks and credit unions are oftentimes a bit more cautious. But this shouldn’t put you off. Go ahead and calculate your auto loan credit score to see if you are qualified to finance a used car.
The good news is that financing a used car is often cheaper than getting a loan for a brand new car. With a great financing deal, you can actually save a lot of money. And thanks to the burgeoning credit industry, you can now buy higher-end used cars than you would afford usually.
How Do I Finance A Used Car?
The process of financing a used car is pretty straightforward. All you need is a high credit score, the right lender (who offers low-interest rates), and an agreement on loan and repayment terms with the car dealership.
Like any other loan, financing a used car requires you to make a down payment with the dealership and then make regular monthly payments on the car until it’s fully paid off.
As the buyer (or borrower), the objective is to find a deal that offers low-interest rates and comes with flexible auto loan repayment terms. We also recommend choosing a financing deal with no prepayment penalties.
When it comes to financing a used car, auto loan lenders take the following three factors into serious consideration:
This is the total monetary worth of the used car you’re looking to buy.
The APR (or Annual Percentage Rate)
This is the interest rate you’ll be paying. It also includes any charges you’ll incur while servicing the loan.
The Loan Term
This refers to the period agreed on to repay the loan.
All these factors are determined by your credit score, which should be high enough to qualify you for an auto loan. It’s also important to note that used cars tend to have higher interest rates than new cars.
5 Steps to Getting the Best Financing Deal for a Used Car
For a great deal on financing a used car, you need to adhere to the following crucial steps.
Step #1: Check and Calculate Your Credit Score
The very first thing is to find out if you are qualified for auto loans. Here, you’ll want to calculate your credit score. The calculations vary depending on the bank, credit union, or private lenders you’re using.
However, despite the various formulas, the factors used in determining your score are the same – Do you pay your bills on time? What’s your credit mix like? What’s your debt-to-income ratio? How much credit do you use per month? etc.
If your score isn’t good enough to finance a used car, it’s best to rebuild your credit score by maintaining a balanced credit utilization ratio, as well as paying off your outstanding debts.
Step #2: Compare Different Lenders
Once you’ve found out your credit score, the next step is to compare offers by different lenders. The objective is to find a lender that’s going to agree to give you an auto loan for a used car at the lowest rate.
The financing should also have a short loan term. You need to complete paying for the auto loan as soon as possible.
Also, make sure the loan’s monthly remittance to the lender doesn’t exceed 10 percent of your gross income. The initial down payment should also be fair.
You could use the 20/4/10 principle. This means that the best offer should have a down payment of 20 percent of the car’s worth, a loan term (or period) of 4 years, and monthly repayments not exceeding 10 percent of your monthly income.
Step #3: Calculate Your APR (Annual Percentage Rate)
While still comparing the lenders, it’s essential to calculate your APR, which is the total interest rate for the loan, calculated annually.
The APR also includes all fees incurred while repaying the loan. Make sure the APR on the auto loan you’re about to take isn’t too high.
Always be on the lookout for hidden charges and taxes imposed on an auto loan you’re about to agree on.
Step #4: Find Alternative Places to Finance Auto Loans
If you’ve compared various lenders but still can’t seem to settle on one particular solution, then you can employ the assistance of online auto loan providers. These are neither banks nor credit unions, but they offer low-interest rates on your loan.
While the auto loan online sites are meant to help you on your search for low-interest rates on loans, some come with hidden charges and fees you’ll only realize once you’ve agreed to their loan repayment package. Still, it’s worth checking them out.
Step #5: Haggle for a Better Financing Deal
Whether you’re dealing with your bank, a credit union or a car dealership, you can never go wrong haggling for a better deal to finance a used car.
Compared to banks and online auto loan providers, credit unions are known for their low-interest rates. You can also get better deals at a car dealership, especially if they have their own financing department. The best dealerships provide what clients need at low, manageable interest rates.
The rule of thumb is to choose one that specializes in financing used cars. This way, you have various auto loan options as well as car varieties to choose from.
Buy Your Dream Car from Motors on Wheels
If you’re in need of a reputable car dealership that offers low-interest rates on your auto loan as well as fast approvals, you’re in luck.
Need further information? Contact us and we’ll be more than happy to help.