Auto financing isn’t reserved just for buying new cars. While used cars typically have lower sticker prices than their new counterparts, they can still be an expensive purchase, especially if you buy a newer model. If you’re buying used and don’t have enough cash on hand or want to pay off your car over time, you can get an auto loan to help you afford it.
If you are looking to finance a used or pre-owned vehicle, here’s how to get a used car loan.
When to Get a Used Car Loan
Whether you’re buying new, used, from a dealership, or a private party, it can be a significant expense when you buy a car. Purchasing a used vehicle is smart to avoid the steep depreciation that happens as soon as you drive a new car off the lot, however, used and pre-owned vehicles are not necessarily a cheap purchase.
If you don’t have enough savings to buy the car outright and want to avoid taking out personal loans, getting a used auto loan is a smart way to enjoy your vehicle right away while paying off your car over time. Plus, if you have excellent credit or good credit, you can take advantage of auto financing with favorable loan terms and a low interest rate and monthly payment.
Understanding How Much Can You Afford
Before you begin shopping around for a used car loan, it’s important to determine how much you can afford on your new ride. Your car payment should not exceed more than 20% of your pay. 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 will improve your credit score and help you qualify for better financing and ensure that you can make your monthly payments over the long-term. Plus, when you’re making fewer debt payments, you may have more cash on hand to put toward a down payment.
Deciding on a Car
If you haven’t settled on an exact car make and model, consider making a list of your top three cars within your budget that check off all your boxes. If you’re looking to buy a car less than five years old, look into certified pre-owned vehicles with long-term warranties.
How to Get a Used Car Loan
Banks, credit unions, auto dealerships, and online lenders all offer used car loans with varying terms and conditions. Among all of these lenders, credit unions provide some of the best offerings.
Here’s what you can expect when applying through each lender, as well as some things to consider before deciding where to finance your used vehicle.
Getting a Used Car Loan From a Credit Union or Bank
Before you begin shopping for a used car, it’s best to get preapproved for a used car loan by a credit union or bank. After researching what kind of car you want and the average price, you’ll have a better sense of how much money you need to borrow. You can then indicate this amount to the lender when you apply for an auto loan.
Once the credit union or bank reviews your application, they will notify you of what loan amounts and interest rates you are eligible for. At some credit unions, you can get preapproved in as little as 20 minutes. While not set in stone, these 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 the dealer or a private seller.
While you may be inclined to get preapproved through a bank, you may have a better chance of loan preapproval if you belong to or join a credit union. Credit unions are typically smaller than banks, and because they’re member-owned, they have a greater focus on community and customer service.
If you don’t have great credit or lack an extensive credit history, credit unions may be more likely to give you loan preapproval. Credit unions offer better rates than traditional banks or dealerships. Because they operate as nonprofits, they provide lower fixed rates than for-profit banks such as Bank of America.
Once you’ve been preapproved 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, address, social security number, and employment information.
Getting a Used Car Loan From a Car Dealer
When you buy from a car dealership, it can also serve as a one-stop-shop for you to finance your purchase. However, you’re likely to spend more here, as the dealer will typically increase the interest rate to make a profit. When you finance through a dealer, you can expect three main types of financing: dealer-arrange, captive, and buy here, pay here (BHPH).
The dealer will submit your loan application to several lenders to rate shop for the best deal with dealer-arranged financing. Captive financing typically applies to new or certified pre-owned vehicles made available by financing companies owned by the car manufacturer. In this case, loans are usually limited to specifics makes, and you’re likely only to get the best terms and rates if you buy new.
Lastly, some dealerships offer BHPH, which is in-house financing that targets customers with poor credit or little credit history. If you’re having a hard time getting approved for a used car loan with other lenders, you may be more likely to get approval in this instance. However, you can expect higher interest rates and fees and will likely be required to put down a larger down payment than you would elsewhere.
Getting a Used Car Loan From Online Lenders
Online lenders follow processes similar to credit unions and banks but do everything online. For most online lenders, you will be prequalified before you apply for a loan. You may also find some that specialize in auto loans or offer financing for people with less than great credit. While the preapproval and approval process moves faster with online lenders, you may find they don’t offer as competitive rates and terms as would your local credit union or bank.
Shop Around for Used Car Loans
Before you get a used car loan from a lender, make sure you shop around for the best rates and terms. Taking time to find the best deal could save you thousands on interest or loan payments and help you take advantage of the best auto products and services available.
If you seek preapproval from multiple lenders within a short period, most credit scoring models will count these inquiries as just one inquiry, which 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 only be temporary.
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 offerings.
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 small interest payments over the life of the loan. For used cars, put down at least 10%. Of course, the more you can put down, the better.
Annual Percentage Rate (APR)
The APR of your car loan is the cost you pay each year to borrow money from the lender, including interest rate and lender fees. Comparing APRs is a reliable way to compare loans with similar terms.
Your auto loan’s term is the number of months it will take to repay the loan in full. Terms for used car loans tend to be shorter 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 of anywhere from 24 months to over 60 months. If you opt for a longer term, you can enjoy lower monthly payments but will likely pay more interest.
Your monthly car payment is the amount you agree to pay per month until the loan is paid in full. This is a fixed amount that includes principal and interest.
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 preapproved with multiple lenders, it’s time to apply for a used car loan. At T&I Credit Union, we offer fixed-rate auto loans with competitive APRs so you can afford the car you want. Call (248) 397-9571 to apply for a used car loan today.