What is The Best Way to Finance a Used Car?
Used cars are significantly cheaper than buying new ones. While the price difference saves you thousands of dollars, incorrectly financing a pre-owned vehicle can become more expensive in the long run. Fortunately, with the proper preparation and enough knowledge, you can get a great deal for your newly acquired pre-owned ride.
But what is the best way to finance a used car? This blog discusses various options you can consider and shares important things to remember before you finalize a transaction.
What is the Best Way to Finance a Used Car?
There are different ways to finance a preowned car. Each method will depend on your preference and financial situation.
Dealership Financing
One of the best ways to finance a used car is through a dealership. This saves time and effort, as most dealerships are a one-stop shop. You can secure your financing and purchase a car all in one place, which is convenient.
These dealerships partner with various banks and credit unions that offer financing services. In return, they increase the interest rate to profit from each transaction. Because of this, you typically pay more if you finance a car through a dealership. You’re basically paying the additional premium for convenience.
Meanwhile, other dealerships offer a buy-here-pay-here option to provide private loans without undergoing a bank or credit union service. However, it is a costly method and is often only availed by those who can’t secure financing.
Online Lender
Another convenient option to get a vehicle financed is through an online lender. They are available 24/7 and provide the quickest approval. However, the experience differs from talking to an actual person because everything is done online. You might not get the full responses you’re looking for, as its responses are often automated. Moreover, you might feel less secure in transacting an auto loan.
If you’re interested in an online lender, you can expect higher interest rates than working with banks or credit unions because you’re paying for fast approval and round-the-clock responses and services.
Bank & Credit Union Financing
Coordinating with a bank or credit union and getting their financial services is also a great way to get funding for a used car. They have the most competitive rates and terms of all the options mentioned.
These two services provide many financing options you can maximize to finance a pre-owned vehicle. The main difference between the two is that banks typically aim for profit, while credit unions are nonprofit organizations that distribute financial gain among their members.
There are multiple bank branches and ATMs nationwide, so getting help from a bank will go by like a breeze. Moreover, the mobile apps and online technology of banks are more advanced, ensuring every transaction is smooth and hassle-free.
Meanwhile, credit units often have lower fees and better interest rates. You can also expect flexibility with the type of vehicle you prefer, whether you’re looking for one with high miles or lesser pre-owned years. Another benefit of credit union financing services is their excellent customer service, which is important as you’ll most likely have a long-term loan, depending on your terms and conditions.
5 Things to Remember When Financing a Used Car
Know your credit score.
The best interest rates go to people with excellent credit, regardless of whether you’re buying a used or new vehicle. Interest rates can go as low as 5.5% and skyrocket to over 16%. You can expect to shell out a couple of thousand dollars throughout your loan.
It’s best to know your credit score before approaching any financial institution for a loan to set your expectations accordingly. Moreover, it can show you any areas that need improvement. You can check your card or online loan statement, use a credit score service, or visit a free credit scoring site to monitor your monthly fees.
Check the vehicle history.
Always ask the car’s previous owner about its entire history, including any repairs, component replacements, and records of accidents. You wouldn’t want to file and pay off a loan only to find significant problems with the ride or that its resale value has decreased significantly.
A comprehensive vehicle report includes damage caused by floods, collisions, engine failures, cosmetic defects, and the like. We recommend asking a trusted mechanic to inspect your desired vehicle before you buy it.
Get pre-approved.
One of the most important things to remember when financing a used car is to get pre-approved before anything else. This is great advice for new and used vehicles, as it gives you a baseline from which to start. You get an idea of what the financial institution is willing to offer you, including the max loan amount, interest rate, and duration.
Another reason to get pre-approved is it empowers you to negotiate better terms or decline what is offered to you if it isn’t as favorable as you want it to be. Think of it as canvassing around to find the best rates for you.
If you plan to apply at a bank or credit union, it will count as one hard hit on your record if rendered within the same 30-day period. You can make multiple inquiries for auto loans as they may be excluded from your credit report.
Make a sizable downpayment.
Always review your monthly payments, interest rate, loan terms, and overall budget before finalizing your transaction. Always remember that a bigger upfront payment means fewer monthly dues and generally lower interest rates and sales taxes. Take note that these rates can still vary per state.
Get an overview of your monthly payment with different interest rates for different periods. Doing so lets you see the difference between shorter terms and bigger down payments.
Avoid long-term loans and dealer add-ons.
While a long loan period means lower monthly dues, it doesn’t entirely mean you’ll be paying a lesser loan-to-value ratio or the value of the car in proportion to how much you’re paying for it. You wouldn’t want to end up owing the car more than it’s worth.
You should also avoid add-ons recommended by dealers, even if they pressure you into getting an extended warranty for your purchase. Chances are the vehicle you plan to buy already has some extended coverage. If not, you can always save up for a rainy day in case of unexpected repairs and maintenance.
Be an Expert at Financing a Used Car
Financing a used car can be daunting, especially with various financing options and complicated loan terms. Equip yourself with knowledge on how to get the best deals, avoid common pitfalls, and pay for the vehicle for what it’s worth.
Visit the VIP Automotive blog to learn more about financing used cars and other used and pre-owned vehicle content.