Car buying always looks like an intimidating process, especially if you don’t know much about cars. Even if the details of the cars themselves seem overwhelming, you can make the financial side of the process easier by making smart decisions about your used car loan.
The used car loan process is very similar to getting a new car loan. The biggest variables you’ll need to watch closely are the interest rate and the length of the loan. You can adjust these variables by being smart about where you apply for a loan and paying close attention to your credit score and down payment.
Non-Profit Loans Are Available
One major misconception customers have is the role of for-profit banks in the used car market. Although banks are an option for used car loans, they may charge more in interest or have hidden fees to maximize their profit.
Community-based credit unions are not-for-profit institutions that focus on serving their members. Since each credit union is controlled by an elected board made up of members, they can focus on serving the community with appropriate loan rates. They are governed by the National Credit Union Administration and subject to many of the same rules and regulations as banks.
Your Credit Score Affects Interest Rates
Your FICO scores and other details of your credit history directly affect your interest rates and terms offered by your financial institution. This is because lenders see bad credit as a sign that you’re less likely to make car payments on time.
If your credit score isn’t good enough to secure the car loan amount and terms you want, you can work with a credit union to determine additional options. Check your credit report ahead of time and talk to your credit union about a share secured loan, which allows you to take out a personal loan that you can quickly repay to build up your credit score.
A Larger Down Payment Helps
Financial institutions generally want you to be able to put down at least 10% of a car’s value as down payment and may look for 15% if you have bad credit. This shows that you have some financial stability and reduces the overall risk that the lender has to take.
However, an even larger down payment may help you secure a shorter loan term and better interest rates. Although it’s difficult to make larger down payments with new cars, it’s possible to cover a large percentage of a used car’s cost with your savings or a trade-in.
If you have extra money on hand, ask your credit union about different down payment scenarios and see if it makes sense to put down extra now to reduce your monthly payments later. While you shouldn’t rack up credit card debt or miss other payments to free up cash for a down payment, consider putting off other major purchases for a few months to save up money if needed.
Shorter Loans Cost Less Overall
Loan terms typically range from 36-84 months for new cars and up to 60 months for used cars. Shorter loans have slightly higher monthly payments than longer ones, which may appear to be more of a financial burden at first glance.
However, longer loan terms typically charge higher interest rates, which will cost you more money in the long run. If possible, always choose the shortest loan term you can afford. Talk to your credit union about different options and make sure you’ll be able to consistently afford your car payment each month without spending extra on interest.
Dealership Financing Isn’t Always the Best
Buying from a dealership instead of a private seller has its upsides, but access to dealer financing isn’t one of them. Even a 0% APR financing plan has hidden fees that make the dealership plenty of money in the end.
Dealer financing is a popular option because it’s easy for buyers to access, but you can and should arrange your own loan. You can work directly with a credit union that is member-controlled and has your best interests at heart instead of relying on the dealership to make a recommendation on which terms you should settle for.
Pre-Approval Streamlines the Process
Getting pre-approved for a loan is the best way to start the process because it gives you an immediate idea of what your loan could look like. An instant pre-approval online can spell out exactly what interest rate range you’ll qualify for and give you an estimate of what your monthly payments may look like depending on the price of the car and loan length.
This means you won’t waste as much time trying to do mental math as you browse cars at the dealership. Your credit union and dealership will still need to verify the car’s details, including checking its Kelley Blue Book value, but you can focus on learning more about each available car instead of worrying about finances.
In addition to saving you time at the dealership, pre-approval also may give you leverage in negotiations. Car sales staff know that a pre-approved buyer is serious about buying a car and will be backed by an outside financial institution instead of relying on dealer financing.
Your Hometown Credit Union
T&I Credit Union is proud to be a non-profit provider of financial products and services in the Detroit, Michigan area. As a credit union, we strive to provide the best vehicle loan, home loan, personal loan, and student loan rates in the area.
Our staff know the used car market’s ins and outs and can help you with any questions you have about your financial needs. We serve a seven-county area around Detroit and have a variety of online services to make your life easier. Call us today at (248) 397-9471 to learn more about membership.