How to Get a Used Car Loan

Auto financing isn’t reserved just for the purchase of new cars. While used cars typically have lower sticker prices than their new counterparts, they can still be expensive.

If you’re buying used and don’t have enough cash on hand or want to pay for your car over time, you can get an auto loan to help you afford it. Financing is available through online lenders, financial institutions, and even your local credit union.

Learn when a loan is needed and the steps you need to take when getting a used car loan.

When to Get a Used Car Loan

Buying a used car can help you save money. Purchasing a used vehicle helps you avoid the steep depreciation that happens as soon as you drive a new car off the lot. Plus, many dealerships offer certified pre-owned vehicles that are only a few years old and are still in excellent condition.

While they are a more affordable option than buying the model brand new, rising used car prices mean you may be unable to make a full cash payment. If you don’t have enough savings to buy the car outright and want to avoid taking out personal loans, getting an auto loan is a smart loan option.

Auto loans allow you to pay off your car over time. Financing a used car is similar to the steps you take with a new car but have a few key differences. The most critical factor in getting good auto loan offers is your credit report. Bad credit may result in a higher loan interest rate, while excellent credit means lower rates and a lower monthly minimum loan payment.

Understanding How Much Can You Afford

Before you begin shopping around for a used car loan, it’s essential to determine how much you can afford on your new ride. Your car payment should not exceed more than 20% of your take-home income. You should also account for other costs in your budget, including maintenance, car insurance, and gas.

If you have a high debt-to-income ratio, including credit card debt, try and pay off as much debt as possible before buying a car. Paying down your debts improves your credit score and helps you qualify for the lowest rates. Plus, when you’re making fewer debt payments, you may have more cash on hand to put toward a down payment.

Use an auto loan calculator to help you determine how much you can afford to pay for your used car. This tool also estimates your monthly car loan payment based on a number of factors include:

  • The price of the vehicle you’re interested in
  • The down payment you’re making
  • If any trade-in value is involved
  • Car sales tax in your area
  • The interest rate and length of your loan

Buyers who are unsure about the price of the car or want to know if they’re getting a good deal can check a car model’s value using Kelley Blue Book. It helps you find the estimated value of all vehicles, whether new or used.

Research Used Car Loan Lenders

Before getting a used car loan, make sure you shop around for the best rates and terms. Taking time to compare interest rates, the loan term, and the loan application process of different auto loan lenders can help you save thousands over the life of your loan.

Researching lenders helps you take advantage of rate discounts, automatic payment, and direct deposit options available.

To get pre-approved for an auto loan, lenders ask credit reporting agencies such as Equifax and Transunion for your credit score. Most credit scoring models count these inquiries as just one credit inquiry if you seek loan pre-approval from multiple lenders within a short period.

This means it won’t negatively impact your credit score. If one of your inquiries is constituted as a hard inquiry, your credit score may decrease by a few points, but the impact will be temporary, and it won’t lead to a poor credit score.

What to Consider When Comparing Used Car Loans

As with any type of loan, there are a number of considerations that should be made to take advantage of the best loan offers. Before you make your auto loan decision make sure you’re comparing:

Down Payment

The more money you can put down on your used car, the smaller the amount you will need to borrow from the lender. When you borrow less, you’ll enjoy smaller monthly payments over the life of the loan.

For used cars, it’s recommended you put down at least 10% of the car’s total value. Of course, the more you can put down, the less you need to finance. You can use car value information from Kelley Blue Book to help you determine your down payment.

Annual Percentage Rate (APR)

The APR of your car loan is the cost you pay each year to borrow money from the lender, including the interest rate and lender fees. Comparing APRs offered by different lenders is a reliable way to compare loans with similar terms.

The higher the APR, the more you’ll pay over the entire loan term. Determining rates by credit score is a common practice.

Borrowers with credit scores that are lower face a higher APR. This is because the credit scoring model shows a higher risk of defaulting on loans by borrowers with bad credit. While those with strong credit may have a more favorable APR. Current auto loan rates range from just under 2% to nearly 9%, depending on the lender.

Loan Term

Your auto loan’s term is the number of months it takes to repay the loan in full. Used car loans tend to have shorter terms than new car loans since the borrower is taking out a smaller loan than they would for a brand new vehicle.

Depending on how much money you put down on your car, you could have a payback schedule as short as 12 to 24 months. Longer terms, such as a 72-month car loan, are also available. If you opt for a longer term, you can enjoy lower monthly payments but will likely pay more interest.

Monthly Payment

Your monthly car payment is the amount you agree to pay monthly until the loan is paid in full. This is a fixed amount that includes principal and interest.

Type of Financing

Car loans are typically secured loans, also called collateral loans. In this type of loan, the vehicle is used as collateral. Collateral loan rates generally are lower than rates for an unsecured loan. This type of financing is available for used car purchases, including lease buyout loans from dealers.

Large banks such as Bank of America, local and national credit unions, a network of dealerships, and online lending platforms such as Capital One all offer used car loans with varying terms and conditions. Comparing rates and terms between lenders puts you in a stronger negotiating position.

Among all of these lenders, credit unions provide the lowest interest rates for auto loans and may offer a shorter loan term or better monthly auto loan payments.

Getting a Used Car Loan From a Credit Union

Credit unions are member-owned; they have a greater focus on community and customer service. National credit unions, such as Navy Federal Credit Union, allow people to join no matter where they live. Local credit unions are community-based and typically restrict their membership to those residing in the area.

Credit unions can be more lenient of your credit history in their loan decision. While most lenders calculate rates by your credit profile only, credit unions consider more financial and personal factors when determining auto loan rates and terms.

Credit unions work with borrowers throughout the credit spectrum. Borrowers with less-than-perfect credit scores, poor credit, or those with little credit history will benefit from getting their auto loan through a credit union.

Credit unions have a lower minimum credit score needed for loan approval. Since they operate as nonprofits, they can offer better rates than for-profit banks like Bank of America or independent dealers.

The Car Loan Process at Credit Unions

Getting pre-approved for the loan is part of the car buying process. Knowing what you can afford to purchase saves time and ensures your financing is in place. After researching what kind of car you want and the average price of a used car, you’ll have a better sense of how much money you need to borrow.

You can then indicate this amount to the lender when applying for an auto loan. The pre-approval process involved getting credit approval and learning the financing terms of your auto loan. Along with checking your credit file, the credit union may need information on your monthly income and expenses for pre-approval.

Some credit unions require you to apply for pre-approval in person, while others have online application options.

To get pre-approved for an auto loan, you’ll have to fill out and submit a loan application. Once the credit union reviews your application, they will notify you of what interest rates and loan terms you’re eligible for. At some credit unions, you can get pre-approved in as little as 20 minutes.

While not set in stone, pre-approval loan numbers can provide you with a clearer picture of how much you qualify for and make it easier to negotiate on the vehicle’s price when you’re ready to buy from a car-buying service, dealer, or a private seller.

Once you’ve been pre-approved and know which car you want, you’ll need to supply important information about your vehicle, including the make, model, miles, and value. You should also be prepared to share personal information with your lender, including:

  • Your name and address,
  • Your social security number
  • Your employment and monthly income information
  • Any previous car ownership and title history
  • Car insurance information

Once you are approved and sign your loan agreement, you’ll be able to finalize the purchase of your car. You’ll have to make a payment each month to the credit union to repay your auto loan. Some credit unions allow you to sign up for automatic payments, so you won’t forget to pay. Making your loan payment on time and not missing payments helps improve your credit score.

Apply for a Used Car Loan Today

Once you’ve determined how much you can afford, what type of car you are most interested in, and have been pre-approved with multiple lenders, it’s time to apply for a used car loan. While you may be tempted by the ease of application with online lenders or the dealership’s auto lenders, you’ll achieve the best terms with a loan through your local credit union.

At T&I Credit Union, we offer fixed rate auto loans with competitive rates so you can afford the car you want. Our credit union offers 61-84 month car loan terms for car model years 2015 to present and 60-month terms for older vehicle age. You can even apply online from the comfort of your home any time of the day. Call us or visit our website to apply for a used car loan today.

About Tammy Newcomb

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