The purchase of a used car can save you thousands of dollars, especially if you pay with cash; however, not everyone has enough cash on hand and needs help with financing. Financing a used car is a good idea. It is important to pay attention to the deal on the table. This is because financing can lead to spending more on your used car than you thought.
We will take you through some of the tips and tricks you should keep in mind as you prepare to finance a used car.
Pro Tip: Remember, negotiating a good price is the first step to saving you a lot of money on your car!
Prepare Yourself BEFORE You Sit Down to Talk Financing
You never want to head into a financing office to purchase a used car if you are not prepared. The reason is because you will be taken advantage of. It will be hard for you to be able to make the best decision simply off the top of your head. The more prepared and knowledgeable you are, the better.
This means you should sit down and determine what type of budget you must work with. Do not think about the price of the car at this moment. You want to focus on what monthly payment you can afford without any hardship.
Once you know what you can afford every month, learn more about your credit score. Your credit matters more than you think when it comes to a used car purchase. In fact, banks and financing companies can and will deny you a car loan if your credit is in the dumps. If your credit is not too bad, they may offer you a used car loan but at a hefty interest rate.
It would be wise for you to look at your credit score BEFORE you head into the dealer. Work on fixing your credit first if you find that it lower or not as high as you would like. There are several free credit monitoring sites online that allow you to track your credit score. They can also provide tips to help you repair your credit.
As you prepare to talk about financing, do avoid buy here, pay here unless you absolutely need it. These types of dealerships and car lots exist to help individuals with bad or no credit. Because of this, the loan terms are often extremely high as the dealer themselves offers the financing as opposed to a bank or financial institution. You may hear this term coined as in-house financing.
Dealer Vs. Bank Financing
When you are ready to finance a used car for sale, you will be presented with multiple financing options. Two of the most common options are dealer financing and bank financing.
Dealer financing can be lucrative for several reasons but there are some major drawbacks as well. This option will allow you to drive the used car home the SAME day where you may need to wait a couple days on an application to a bank. In addition, dealer financing allows you some play with your credit score and the terms to qualify are often not as strict as a bank’s.
The biggest problem with dealer financing is that there are often large fees attached to it. You may be charged a higher interest rate due to poor credit. Also, there may be a loan origination fee that you must pay.
Further Reading
- How to Buy a Used Car Safely: What the Experts Say
- Everything You Need to Know about Buying Used Cars
- Are Auction Cars Good to Buy?
Studies conducted have shown that subprime borrowers or those individuals with poor credit scores had an average interest rate of 15.24% for their loan. When working with a dealer who does financing, you may have an even higher interest rate.
Bank financing takes place when a bank or financial institution such as a credit union holds the loan for your used car. Working with a bank for financing can be difficult. It can be a hassle if you don’t have a good credit score or your credit history is considered poor.
There are advantages to obtaining bank financing over dealer financing. These are loan interest rate, discounts at credit unions, and lower down payment requirements.
Prior to financing your used car with a bank, do research the interest rates and try to receive a pre-approval first as this will speed up the process as the dealership. Should you not be able to receive a pre-approval, the dealership can help you find financing through a bank.
Did You Know? You Can Choose Your Loan Terms
Some consumers do not know this, but you can choose your loan terms for a used car. Of course, your lender or the institution who chooses to finance you does have say in it, you also have some wiggle room.
As you shop for used car financing, you will be able to decide how much money you want to put down for your car, the interest rate, and the term length.
Now, keep in mind, while you can decide on your interest rate, down payment, and term of the loan, the financing institution often has a variety of choices for you. For example, if one bank approves you for an interest rate of 3.5%, you likely cannot wiggle much around this. But if they approve you for a 60-month loan term, you may be able to ask for a 72-month loan term.
Take some time to learn about the loan terms and decide what works best for you first. Then find a bank that can work with you.
Close the Loan and Drive Your Used Car Home
If you are happy with the terms you have negotiated, and you are happy with the used car you chose, it is time to close the deal and drive your used car home with you.
Prior to leaving the dealership, do make sure you get a copy of the contract and never sign anything you are not comfortable with. Always ask questions for clarification and only sign the deal if you are happy with it.
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