Used Car Loans with a Green Light Approach
If you shop for your auto loan when buying a used car, it puts you in a better negotiation position and can save you the money over the life of your loan.
Need to Know Information about Used Car Loans
There are different things you need to keep in mind before you apply for used car loans.
The interest rate you get will depend on your income and credit score, the length of the loan, and the vehicle. If you have a loan and make consistent payments and your credit score improves then you could also refinance your used car loan to get a better rate.
Some lenders will offer loans for up to 84 months. It’s best to pay off a car loan as soon as you can since cars, whether they are used or not, depreciate quickly. Owing more on the loan than your car is worth means that you are under water, which can be a bad financial situation. The best interest rates are also available on shorter loan terms. It’s recommended that you have a 36-month loan for used cars.
Hard vs. Soft Credit Pull
Some lenders will do a soft pull on your credit to get you prequalified for the loan. This won’t do damage to your credit score but it also doesn’t mean that you are guaranteed approval or will get the quoted rate. Other providers will run a full credit check. A full credit check temporarily lowers your credit score by a few points. Even with a hard credit check, the interest rate could still differ from what you were quoted. A hard pull is required before the loan is finalized.
There are some lenders that only work with a certain network of dealers. Other lenders don’t lend money when you are buying a used car from a private seller. Lenders can also exclude some types, makes, or models of a car for your used car loans.
Why Preapproval Is Necessary for Used Car Loans
Preapproval for used car loans can help you with the negotiation process and get you in a car quickly. With preapproval, you can avoid the favorite tactic of a car salesman: the monthly payment. If you are negotiating based on the monthly payment, it can be easy to lose sight of the real price of the car. However, when you are preapproved, you are a cash buyer. This means you can concentrate on negotiating the price of the car instead of having to mentally juggle many different figures.
Negotiating the best deal for your car can help you cover any fees and taxes. If you are at a dealership, the finance manager may try to beat the interest rate of your preapproved loan. If the interest rate is lower and the terms are the same, you can take the loan. However, you want to review the contract carefully before signing. There is the risk that the finance manager could juggle numbers in the dealership’s favor instead of yours.
Where to Shop for Used Car Loans
The auto finance business is large and there are hundreds of different institutions making billions of dollars on used car loans every year. This means it can be hard to determine the right place to find a used car loans. The largest lenders are the big national banks but it’s important to remember there are other options out there.
Banks will usually have conservative and very specific loan polices. Some banks may only cater to borrowers with a better credit standing. These institutions are then offering some competitive loan rates. The offerings with banks vary and some banks are more willing than others to give loans to people with bad credit.
You likely already have a good relationship with at least one bank so your local branch can be a good place to start. Many banks also have websites that make it easy to check current rates. When you visit the branch, it can be a good way to avoid any misunderstanding and mistakes and it could result in you getting a better offer.
These lenders do operate a little bit differently than banks but have lower operating costs than banks. Many credit unions will only lend money to their members. However, some also make loans to other people that may not have accounts with them. You may get lower interest rates, better and more personalized service, and have an easy loan application process.
Online can be a very convenient way to borrow money and it’s much easier to find competitive rates. As a precaution, you should check the Better Business Bureau rating for every lender before you file an application online. You can apply to different lenders at once without it having an impact on your credit score. You also can get more competitive rates than traditional banks. However, it can be hard to reach a person for assistance and you can be bombarded with calls and emails from different lenders.
Finance companies used to be more popular in the past. These companies only make loans and don’t offer many of the other products that are typically offered by financial institutions, including checking accounts. Instead, these companies borrow money for banks and then lend to you. Many finance companies cater to niche customers in the auto loan market, such as those with bad credit.
Dealers will typically work with the financial group of the automaker, along with banks and other sources. Shoppers with offers from some of the other sources can negotiate the dealer’s initial loan quote into something more attractive, which is why it’s necessary to do research. Getting your financing from the dealership is convenient since you are already there. However, the interest rate can be higher in order for the dealer to make a profit and may only be available to those with great credit scores.
How to Get an Auto Loan
If you are going to borrow money for a car purchase, it’s important to shop around in order to get the best possible rate.
How Much You Can Spend
The first step when learning how to get an auto loan is to determine how much you can afford to spend. Ideally, you want to pay off the car within three years since this can cut down on the interest you will pay and help prevent you from becoming underwater. You may qualify to borrow more money in order to purchase a nicer car but this doesn’t mean that you should do so. Just because you can afford the payment doesn’t mean that it makes financial sense to do so. You don’t want to be unable to afford your payments.
Start Auto Shopping
Start with banks and credit unions to see what the interest rates are. It’s important that you do a lot of research in this step. You should also look at other ways to save on your loan. This can include setting up automatic payments or switching banks in order to qualify for a lower interest rate.
Be Prepared with Your Financial Information
When you are going through the preapproval process, you could be required to provide proof of your income. If you aren’t required to do this during this stage then you will be required to do this when you sign the loan. Some companies are stricter about the preapproval process than others. If you are not able to save up for an auto loan then you need to save up and purchase the car with cash, which will limit your options.
Start Shopping for a Car
Once you have been preapproved then the fun part of shopping for a car begins. Take the time to look for the best car available and you shouldn’t be afraid to negotiate a lower price. If you are able to secure your own financing then you have leverage sine you aren’t depending on the dealership for financing. When shopping for a car, you could be tempted to trade in your old car. It may be better financially if you sell your old car and apply the funds to a new down payment. You shouldn’t roll any current car loan into a new one. This causes you to be upside down on your new car.
Other Tips for an Auto Loan and Car Shopping
When shopping for used car loans, there are some other tips to keep in mind to save you money. Buying a car is not an investment. Even if you shop for a used car, you are still taking a loss as it depreciates. When not relying on dealership financing, you should negotiate as much as possible. This can save you a lot of money. You should have the used car checked by a mechanic before you purchase it.
This is even more important if you don’t know anything about cars. This prevents you from buying a car that will need a lot of repairs or has already been in a serious accident. Be ready to have car insurance as soon as you are purchasing the car. If you already have insurance, you can add the new car to your existing policy. If you don’t have an existing policy then you need to set up one.
You don’t want to finance the fees and extras. It can be easy to roll any fees into the financing but this is a bad idea. And it can make your loan exceed the value of your car and then puts you in financial trouble should anything happen to your car. Also, it adds to the true cost of the items you are adding. For example, if your dealer tells you that a paint protection package adds just $15 a month to the payment, unless you do the math you won’t realize it can cost you $1,080 plus interest on a six-year loan.
Many lenders will be willing to loan you the money for six or even eight years and this can give you a lower payment. It’s also a risky financial move. Long car loans usually have higher interest rates and can be more expensive in the long run. Even if you do qualify for this then you risk having the car‘s depreciation outpace the rate you are paying it back.
Why Does Used Car Financing Cost More?
When you start shopping for a used car and financing you will see that it typically comes with higher interest rates and shorter loan terms than you find on new car loans. There are also restrictions on the value of the vehicle and the age. The reason for this is the risk of the loan. Lenders have found that there is more risk when they lend money on used cars. The additional costs that lenders face means higher interest rates.
The short term and other restrictions can lower the likelihood that the lenders take a major loss. Depending on the car you choose, some lenders can treat it as a new car. Vehicles that have lower miles or aren’t very old will be treated this way. Some lenders also offer new car interest rates for any manufacturer-certified used cars.
Comparing Used Car Loans
When comparing options for used car loans, it’s very tempting to just look at the monthly payment. This is not the only thing you should be focusing on in order to determine if it’s a good offer or not. Some lenders have variable rate loans but most borrowers will seek fixed loans.
Instead of looking at monthly payments, you want to look at the total cost of the car, including the total of all the payments during the loan and the amount you have to pay upfront with fees. You can use a used car loan calculator to help you figure this out. Here is an example. If you are buying a three-year-old SUV for $25,000 and have $5,000 for the down payment, this means you need a loan for $20,000.
The best offer you can find is a five-year auto loan at a 6% annual percentage rate. Using the calculator, you see that the monthly payment is $387. You then multiply that by 60 since that is the number of months you will be paying. This means the total cost is $28,220. If you choose a three-year loan with a 4.5% interest rate, this increases your payments to $595 a month but then the total cost is only $26,420. This can save you more money if you are able to work that payment into your budget.
Working with the Dealer on Your Used Car Purchase
When you have financing in place, you then need to start shopping for the car. Buying a used car can involve some more steps than when you are buying new. You want to make sure to get a vehicle history report. If the dealer resists your efforts for this then you should walk away from the deal.
Car salespeople usually try to merge the price of the car, trade-in, and financing into one transaction. When they bundle the deal, it can allow them to move savings and costs from one part of the deal to another. This confuses you about whether you are getting a good deal or not. For example, they could be able to give you a great trade-in deal but then they are boosting the cost of the car you are buying. You want to keep each transaction separate to focus on the price of the vehicle you are considering. Be polite but firm throughout the negotiation process. You want to get the best deal you can but they want to earn profit. Keep in mind that you may only buy a car every few years but they do this every day.
You are more likely to get a good deal on a used car if you make a larger down payment. Putting money down reduces the amount you have to finance and this gives you lower monthly payments or a shorter loan term. It can lower your loan-to-value ratio, which shows how much the car is worth in proportion to how much you owe on it. The lower the number, the more likely you are to get a better deal. A substantial down payment reduces the possibility that you will owe more than the car is worth.
Watch out for yo-yo financing. Dealers let you take the car home with the financing paperwork set. Then you get a call from the dealer saying that the financing fell through and then you need to sign different papers. Those new papers cost more than what you negotiated earlier. Sometimes there can be legitimate problems with financing but many times the dealership knows all along that you don’t qualify. You get to take the car home so you get attached and then are willing to pay the higher cost.
Working with a Private Party for Your Used Car Purchase
When you going to purchase a used car from a private party, you have no choice but to get financing from a credit union or a bank since you won’t be able to use dealership financing. It’s important that you get a vehicle history report since some lenders offer them as a benefit of you using their auto financing. Unlike when you work with a dealer, you have to do the paperwork yourself and ensure that you transfer the title to your financial institution. Some private sellers can accept peer-to-peer financing and take the third-party lender out of the picture. This auto financing is actually pretty rare so you shouldn’t count on it.
Getting an Auto Loan with Bad Credit
If you don’t have the best credit, there is still the possibility that you can get bad credit auto loans.
It helps to know your credit score before you begin the auto loan shopping process. There may be factors that you aren’t able to address immediately, such as making late payments, but there may be factors that you can fix quickly, such as an error on your report.
If you need auto loans with bad credit, you need to research as much as possible so you aren’t caught off guard when the time comes. Research should include key terms and the APR. When buying a used car, you should also know the Kelley Blue Book value of the car you are interested in.
You can’t limit yourself to just one lender. There are a variety of different lenders that give used car loans for bad credit. Each one wants your business. Even two candidates that have the same credit scores may not be the same for the lender. For example, you may have a better chance then someone with the same score but with no credit history. It’s important to do your research but you don’t want to wait too long. Lenders running a hard credit check will hurt your score. It’s best to visit three different lenders in a 14-day period in order for there to be minimal impact on your score.
Avoid borrowing from subprime lenders. These lenders are going to be a sure bet if you are wondering how you can get a loan with bad credit. Since these lenders cater to customers with low credit scores. It seems like these lenders will make the car buying process stress free and easy. However, these loans come with sky-high interest rates and won’t really do much to improve your credit score.
Many of these loans can also use your vehicle as collateral. If you fail to make payments then you can lose your car. You should only be considering subprime lenders if you aren’t able to find other financing options. It’s best to work on your credit score and save up some cash instead of going through subprime lenders.
You can ask a friend or relative to go with you and consider a co-signer. Even if you don’t want to consider a co-signer, bringing someone you trust to help negotiate can help inspire confidence. Confidence, along with know-how, can also lead to favorable loan terms. If someone does co-sign for you, remember that they will be responsible should you default on your payments. Be sure that you can make payments before taking on a co-signer, otherwise you risk damaging your personal relationship with that individual.
Nonprime buyers can be more likely to see lending contracts with no essential services and goods. Other costs, such as car insurance, can also increase up for nonprime buyers. Don’t allow loans to be contingent on getting any extras, such as after-market services or extended warranties. You also don’t want the loan to be contingent on car insurance, even though you do need it. You are better off for shopping for that separately.
While it may be tougher to get a loan, there are options available for you and you can consider the refinance process later on after credit improves.
Should You Refinance Your Used Car Loan?
There can be a number of reasons why it makes sense for you to refinance your auto loan.
Your Credit Has Gotten Better
When you first got your car, maybe your credit wasn’t great. However, consistent and on-time payments improve your credit. So, if you were on-time every time, you may have a better credit score right now, so you can get a lower interest rate. This lowers your monthly payment and saves you money in interest over the life of the loan.
A Dealer Marked Up the Interest Rate
If you got your existing loan at the dealer then the car dealer may have increased the interest rate. So basically, you could have gotten a better deal elsewhere. This happens often when shoppers don’t check their credit score or what rate they qualify for before getting a car. There is a good chance you can undo this damage by refinancing.
You Aren’t Able to Keep Up with Payments
Maybe you bought your car for too much or overestimated your ability to pay off your current loan. You could also be suddenly facing an unexpected financial challenge. By refinancing, you are able to extend the length of the loan, which can lower payments. Don’t take this step too lightly. If you do extend the term of the loan then you pay more in interest. However, it could be better than damaging your credit by not keeping up with payments or facing repossession of your car.
Interest Rates Dropped
Interest rates can fall for a variety of different reasons, including regulatory changes, increased competition in the market, or changing economic climates. If rates are lower now then when you first got your loan, refinancing could help you save on interest and allow you to pay off your loan sooner.
Getting used car loans doesn’t have to be a complicated process. There are certain things you need to remember before you get used car loans. But the process can work just like other loans. Auto loan shopping is one of the most important things you can do in order to ensure you are getting a favorable rate and the best terms. There are many different options for where you should go for used car loans and there are even options for those with bad credit. There is also the possibility to refinance in the future.
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Kevin Strauss is a personal finance writer and homeowner based in the Los Angeles area. Being in one of the most expensive markets in the country, he’s learned to maximize resources to plan for both his monthly expenses and future financial needs. Kevin has a passion for helping those in a similar situation navigate the complex world of personal finance so they can pay down debt, plan for the future and live out their dreams. In addition to covering personal finance in depth on Loanry.com, Cashry.com, Debtry.com, Budgetry.com, Billry.com, Creditry.com and Taxry.com. Kevin shares his expertise with readers who want to create budget-friendly habits across the web.