Used Car Loans: What You Need to Know for a Smooth Financing Experience
April 04 2023
Did you know the average cost of a new vehicle in the United States is a whopping $48,000? Most families can’t afford that, which is why more people are turning to used cars as a financially savvy alternative. By following this guide to used car financing, you can make a smart and savvy purchase.
Understanding Your Used Car Financing Options
The first step in financing a used car is understanding the various options available to you. This will largely depend on your circumstances and financial status.
One of the most popular options is dealership financing. This is the most convenient method, as it lets you purchase your vehicle and secure your financing in one location. However, convenience comes at a cost. Dealerships often work with a network of banks and credit unions, increasing the interest rate on each loan to make a profit.
Some dealerships offer in-house financing with a “buy here, pay here” option. This means they don’t use third-party lenders such as banks or credit unions to secure financing. These no-credit-check loans most often appeal to people with poor credit who can't get financing elsewhere, and they tend to be the most expensive method, with interest rates between 15% and 20%. Compare that to the average 8% interest rate on loans for used cars, and you can see why you may want to avoid this option if possible.
Bank & Credit Union Financing
You can work with banks or credit unions directly to get a loan before heading to the bank. Financial institutions typically offer used car loans at competitive rates and terms, making them a sound choice for many buyers. Credit unions, in particular, are known for their low financing rates and excellent customer service.
Consider financing a used car through an online lender, which promises convenience and a fast approval. However, this is often balanced by higher interest rates compared to financial institutions and more impersonal customer service. If you have questions about your loan, you may need to read through an FAQ section or talk to service chatbots before you find a phone number to call for help.
Avoiding Common Pitfalls in Used Car Financing
Avoiding common mistakes is key to securing the best deal on your used car financing. Here are some of the most common pitfalls and how to avoid them.
Neglecting Your Credit Score
Before applying for auto loans, review your credit score and report. Your score is an indicator of your creditworthiness and will significantly impact your interest rate and loan terms. In other words, having a higher credit score can lead to better loan offers. Always clear up credit report discrepancies or account problems before you buy your car.
If you have no credit history or a poor score, don't worry! Allcreditautos.com specializes in financing for individuals with low or no credit. Check out our guide on getting preapproved for a car loan with bad credit to learn more about how to secure financing for a used car.
Not Making a Down Payment
The down payment is the money you pay upfront when financing a used car. A larger down payment can reduce the total amount of the loan, which will lower your monthly payments and save you money on interest over the life of the loan. When you put more money down, lenders will view you as a less risky borrower, helping you secure better financing terms and lower interest rates.
Making a larger down payment also reduces the risk of negative equity, which is when you owe more on the car than it is worth. This can occur if you finance the full cost of the car without a down payment and the car's value depreciates more quickly than you pay off the loan. If you need to sell or trade in the car, you will owe more than the car's value, making it difficult and costly to get out of the loan.
Getting preapproved for a loan can give you a clear idea of what a financing company is willing to offer you in terms of the loan amount, interest rate, and loan period. It also lets you compare rates and terms from different lenders, helping you secure the best deal. You'll lose powerful negotiating power if you head to the dealership without a pre-approval.
Not Considering the Total Cost of Ownership
While used cars are often cheaper than new ones, they can come with hidden costs. Remember to factor in insurance, maintenance, and fuel costs when financing a used car. Failure to consider these additional costs can lead to financial strain later on.
For example, while many used cars are sold with a warranty, you will eventually need to pay for repairs out of pocket. Oil changes, tire rotations and other regular maintenance necessary to keep the car running smoothly add up over time.
Focusing Only on the Monthly Payment
While ensuring your monthly payments are affordable is important, focusing solely on this aspect can be misleading. For instance, a lower monthly payment stretched over 60 or 72 months means you'll be paying more interest over the life of the loan. Plus, you risk being "upside down" on your loan, meaning you owe more on the car than it's worth. It's essential to consider your interest rate and loan term, along with your monthly payment, to determine the overall cost of the loan.
If you can comfortably afford higher monthly payments, a loan that is 36 to 48 months or less will ultimately save you money. A shorter loan term can also help you build equity in the car faster, meaning you'll owe less than the car is worth sooner. This can make selling or trading in the car easier without worrying about negative equity.
For more advice on choosing the right loan term, check out our auto refinancing guide to lowering car loan payments.
Not Getting a Vehicle History Report
When considering buying a used car, a vehicle history report can be invaluable in helping you make an informed decision about whether to buy and negotiate a lower price. A vehicle history report will show if the car has been in any major accidents or has sustained any damage that could affect its value or safety. It will also reveal any title issues, such as salvage titles or liens, that could make it difficult or expensive to register the vehicle in your name.
The service history section of the report shows you the maintenance and repairs that have been done on the car, including regular oil changes, brake repairs, or transmission work. This information can give you insight into how well the car has been maintained and whether it needs major repairs or replacements.
It's important to note that not all vehicle history reports are created equal, and some may not include all of the information you need. Always use a reputable provider such as Carfax or AutoCheck and review the report carefully before making a purchase.
Not Having the Car Inspected
Take advantage of the opportunity to have a used car inspected before you buy. A thorough inspection can reveal potential issues with the vehicle that may not be apparent during a test drive or a visual inspection.
During a pre-purchase inspection, a mechanic can inspect the car's engine, transmission, brakes, suspension, and other critical components to ensure they are in good working order. They can also check for signs of wear and tear, such as rust or corrosion, that could indicate underlying problems. This information can give you negotiating power if you decide to move forward with the purchase.
Securing Used Car Financing With Confidence
Financing a used car can seem complex, but with careful planning and informed decision-making, you can navigate toward a deal that suits your budget and meets your needs.
At Allcreditautos.com, we can help you find the used car of your dreams. Our hassle-free online application matches you with car dealers offering the best rates, regardless of your credit background. Get started today, and let us help you find a used car and auto loan that fits your budget.