Whether purchasing a brand-new car or a pre-owned vehicle that’s new to you, car buying can be exciting. It can also be costly if you opt for the wrong loan, which is why it’s important to understand how to finance a used car.
While used cars cost less than new ones, used-car loans usually carry a higher interest rate. In this article, we’ll explain how to finance a used car and give tips for finding the best auto loan rates.
Finding an auto loan before you visit a dealership will not only help you stick to a budget during the car-buying process, but it will also give you enough time to find financing options with the lowest annual percentage rate (APR).
How to Finance a Used Car
Most consumers can’t afford to pay cash for a vehicle, which is where used-car financing comes into play. According to Experian, more than half of used car buyers finance their car purchases. Dealerships offer vehicle financing, but you may be able to get a better rate from an independent lender. This is why it helps to understand how to finance a used car before visiting a dealership.
The first step to financing a used car is figuring out your credit score, otherwise known as your FICO score. You may be able to see your credit score by logging onto your bank’s website, but you can also request a free copy of your credit report once a year from a site like annualcreditreport.com.
Banks, credit unions, credit card companies and other lenders use this score to evaluate how dependably a borrower may repay a car loan. Too much debt, particularly on credit cards, can lower your score, which in turn leads to a higher interest rate, as lenders perceive someone with a lot of debt as more liable to default during the loan term.
If you have a low credit score, you can get approved for a better loan rate by having a co-signer with good credit. Only those with pristine credit history get the best auto loan rates.
If your credit report is in good shape, it’s time to consider where to shop for financing to get the best loan terms.
Auto financing involves borrowing the money needed for a car purchase from a bank, credit union or online lender. In return, the lender charges borrowers interest on the money lent. This means you’ll pay more for the car than the selling price. So it’s best to shop for the lowest interest rate on a loan, just like you shop for the lowest price on a car.
America’s biggest banks – such as Bank of America, Wells Fargo, Capital One and Chase – offer auto loans but usually have higher interest rates than other lenders, such as credit unions. Online lenders can be a good source as well, significantly undercutting the cost compared to bank loans.
Automakers also have lending divisions, such as Ford Motor Credit, that lend money for certified pre-owned cars sold through dealerships. Don’t overlook this option; their loan terms are competitive, and you might even find a special incentive not offered by other lenders.
If you’re buying a used car from a private party, you must agree to a price before applying for a loan. Once approved, the lender pays the seller for the car, and you repay the lender with interest over time. However, interest rates for private loans tend to be higher than other used-car loans, and not every lender offers them.
Is it a Good Idea to Finance a Used Car?
It’s always best to pay cash for a used car to avoid paying interest, and just under half of all used car buyers do, according to Experian. If you must finance your used-car purchase, it’s wise to skip longer-term loans and stick to shorter terms instead. Not only will you pay less for the car overall, but you also won’t owe more than it’s worth.
A common guideline is to make a 20% down payment, including trade-in. Opt for a four-year car loan that requires you to repay no more than 10% of your annual gross income each year of the loan. Sites such as Edmunds have car payment calculators to help with this, as well as the depreciation of the car you’re considering. Keep in mind that a car loses roughly half of its value in the first five years.
Remember also that it’s not a good idea to finance a used car if you can’t afford the monthly payments, as this can impact both your credit score and your ability to finance other items, such as a new home purchase, down the road.
Getting a Good Rate on Used-Car Financing
To find the best auto loan, it’s smart to consider average loan rates from credit unions and banks. These are the average APRs for new and used car loans in the U.S., according to the National Credit Union Administration:
|Loan Type||Loan Term||Credit Union National |
|Bank National |
|Used car loan||48 months||3.16%||5.16%|
|Used car loan||36 months||3.04%||5.10%|
|New car loan||60 months||3.09%||4.81%|
|New car loan||48 months||2.98%||4.70%|
As you can see, new car loans cost less in the long run than used-car loans. Also, choosing a credit union over a bank will likely lower your monthly payment, but choosing a longer loan term will increase it.
Keep in mind your monthly payment includes more than simply the purchase price and interest rate. The loan amount also includes any dealer and lender fees. To reduce your monthly payment, it’s smart to put down as large a payment as you can comfortably afford; this lessens the loan amount and, in turn, your monthly payments.
One last point. Be sure to get pre-qualified. This not only allows you to secure financing ahead of time, which helps you stick to your budget, but it also allows you to compare loan terms among various lenders to find the best rates.
Our Recommendations for Auto Loans
Now that you know how to finance a used car, you can start looking at lenders. As mentioned, comparing offers from multiple lenders is one of the best ways to get the lowest rates for your auto loan. Read on to learn more about two lenders we recommend: myAutoloan and Auto Credit Express.
MyAutoloan: Best Refinancing Loans
MyAutoLoan offers new car loans, used-car loans, auto loan refinancing and private party financing. In our research, we rate the online lender as one of the best, giving it a score of 9.3 out of 10.0. We rated the company especially highly for borrower experience, as it has great customer reviews and an easy-to-use website that features an interest rate chart, interest rate estimator and monthly payment calculator.
Auto Credit Express: Best for Poor Credit
For those with bad credit, the best lender to consider is Auto Credit Express, which specializes in this type of loan offer. Although the company has received a few bad customer reviews, overall, it’s a good place to start if you have little or no credit or have gone through bankruptcy. In addition, the company offers special rates to those who serve in the military. We give Auto Credit Express an overall score of 8.5 out of 10.0.