According to Federal Reserve statistics from the 2010 Census, about 67% of American debt is tied up in non-revolving loans like student loans and auto loans. The average new car loan is about $27,600! That’s a pretty big chunk of change, which is why many Americans are finding it better to take out loans on used cars if they can’t keep their own running for longer.
If you’re one of the people going to find a used car instead of a new one, there are some things you need to know about financing your car. It can be a little more difficult to get a used car loan for a couple of reasons. For one thing, you may not want to go through a dealership, as you might with a new car, because you may want to buy a used car that doesn’t come off of a dealer’s lot. It’s not necessarily a great idea to get dealer financing in any case, even on a new car, but it is the simplest, least-hassle option.
Also, getting a used car loan can be a little tougher because banks need to be careful about the used cars they allow their customers to buy. If you can’t pay your loan, the bank needs to ensure that it can recoup at least some of its money on the loan by selling the car, so most banks won’t write a loan for cars that are past a certain age.
These top five tips will help you get the best financing possible for a used car:
Clean up your credit first
It takes a little time, but cleaning up your credit before applying for a car loan is a good idea. Even small mistakes can make a big difference, and you’ll get a much better loan deal if you have better credit even by a few points.
The quickest way to clean up your credit is to clear up any mistakes on your credit report that might be counting against you and to pay down revolving debt – like credit cards – so that you’re sitting with a 50% or less balance compared with your credit limit on all of your accounts. It’s worth taking a couple of months to do this before applying for a used car loan, since you can get a bigger loan and better rates with better credit!
Get pre-approval for a loan
Buying a used car is a little like buying a house. It’s a good idea to know how much you have available to spend before you go shopping. Otherwise you risk falling in love with a car you just can’t afford!
Check out three or four different lenders, and apply at roughly the same time. Why? Because every lender will inquire about your credit. If they do it within a few days, it will only count as one inquiry on your credit report. This is a good thing, since more inquiries on your credit report will actually knock your credit score down!
Once you’ve checked out a few different lenders, see who will give you the best deal. Remember, a slightly lower loan with a better interest rate may be in your interest, even if you have to settle for a car with a few more miles or a few less features! The better interest rate will save you a ton over time!
Avoid the dealership if possible
If you have good credit, you can get loan pre-approval from a bank, which allows you to shop with private individuals for your next car. This is much better because you’re probably going to get a lower price. Don’t worry about not getting a car that’s “certified pre-owned.” Just shell out a couple hundred bucks to take the car you’re interested in to a mechanic for an all-over systems check, and don’t buy if you’re at all uncomfortable with the seller. There are plenty of people out there trying to sell cars right now, so you’ve got lots of options to choose from.
Dealers will give you higher-rate financing, and even if it knocks a bit off the sticker tag, you’ll still pay more than if you bought from an individual. You do need good credit to get a bank loan, though, so if you need to buy a car before you can really clean up your credit, check with a dealer to see what kinds of deals you might be able to get.
Save up a down payment
If you can save up more than 10% down on your used car, you can probably get a car loan even if you don’t have excellent credit. Saving up 50% or more of the purchase price of your car will almost guarantee you a car loan with a decent rate unless your credit is just totally shot.
Again, taking the time to take this step will help you get a better rate on your car, so it can be worth your time to put down as much as you can on your new-to-you car.
Get a shorter-term loan
Your used car may not last as long as a newer model, and you’ll certainly take out less money than you would if you were buying a new car. For these reasons, it’s a good idea to look at shorter term loans, even if your monthly rate will be a little higher. Instead of a five or six year loan, look at two or three year options.
Asking for a shorter term loan will often get you a better interest rate, too, and you’ll be able to save a lot of money on interest this way. For instance, let’s say you’re looking at a $15,000 loan for a slightly used car. On a 5 year loan with 7% interest, you’ll pay $297.02 per month and will pay $2,821.08 in interest. Take that same interest rate and apply it to a 3 year loan, and here’s what you get: a $463.16 monthly payment and just $1,673.63 paid in interest over the life of the loan.
As you can see, waiting a bit longer to save up a larger down payment and clean up your credit can make a big difference in your ability to get the used car you want. It will help you get a better rate and make lower monthly payments, so you can afford more car. Even if you know you want a cheap car, taking a little extra time to save and pay down other debts can be good because you may have more room left in your budget than you think after car payments. Then, you can apply that extra money to save for a new car, so next time, you’ll have to finance even less. Don’t forget to read CreditDonkey’s review on Costco American Express card to see how the gas cash back can save you money at the fuel pump.