The Complete Guide To Buying A Used Car: How To Finance A Used Vehicle
AAA
  1. The Complete Guide To Buying A Used Car: Introduction
  2. The Complete Guide To Buying A Used Car: What To Look For In A Used Car
  3. The Complete Guide To Buying A Used Car: The Inspection And Test Drive
  4. The Complete Guide To Buying A Used Car: How To Negotiate Prices
  5. The Complete Guide To Buying A Used Car: How To Finance A Used Vehicle
  6. The Complete Guide To Buying A Used Car: Conclusion

The Complete Guide To Buying A Used Car: How To Finance A Used Vehicle

After you've purchased a used vehicle, you're going to need to figure out a way to pay for it. For the many consumers who don't keep thousands of dollars in cash lying around, the solution to this quandary is financing. By taking out a loan for your used car, you'll be able to pay it off in monthly installments at the cost of about a thousand dollars or so in interest. This makes your bottom line more expensive, but it also allows you keep up with your bills while paying down your new ride. Here's how to secure financing for your vehicle.

Choose a Lender
If you purchased your car from a dealership, they will almost certainly offer you some sort of financing through one of their affiliates. As far as convenience goes, these dealer-sponsored loans can't be beaten. You can secure financing the same day that you purchase the car and drive home with full ownership of the vehicle. And since these loans are secured by the dealer and not the car owner, they make it possible for consumers who wouldn't normally be approved for a loan to get the financial green light.

SEE: The True Cost Of Owning A Car

This convenience comes at a cost, though. Dealer-sponsored loans tend to carry higher interest rates than their counterparts. Over the term of the loan, that can translate to hundreds of extra dollars added to your bottom line. Consequently, we highly recommend that consumers with good credit ratings find another lender to work with. The best interest rates are typically offered by your local banks and credit unions, so call around and set up appointments with their loan officers. Provide them with a copy of your credit score and your car's make, model and VIN number. Ask them to propose a loan and then compare your different offers so that you can select the cheapest one. Don't be afraid to tell the loan officers about their competition, either. Though the interest rates on used car loans tend to be higher than those carried by new car loans, it's not unheard of for a prime borrower to receive an interest rate as low as 3.9% with proper negotiating.

NOTE: Many dealerships require a letter of qualification from your lender before they'll let you drive off the lot. This letter, provided by your loan officer, proves that you're eligible for financing. It's a good idea to choose a lender and obtain one of these letters before you buy the car. That way you'll be able to drive your new ride home after you've signed all the paperwork.

Set the Terms of the Loan
Once you've chosen a lender, the two of you need to set the specific terms of your loan. This means establishing your down payment, the length of the loan and the size of your monthly payments. Let's start with the down payment.

SEE: 6 Ways To Cut The Cost Of Your Car Loan

Though down payments for used cars aren't as necessary as they are when buying a new car, it's still a good idea to make one. We recommend paying at least 10% of the sale price upfront, as this will help offset the amount the car will depreciate in your first year of ownership. This is just a recommended amount, though. In reality, the larger you can afford to make your down payment the better, because any money you put down now won't be subject to interest later.

Once you've made your down payment, it's time to move on to the length of the loan. This will also determine your monthly payments. Most auto loans must be paid off in either three or five years. If you can, aim for the three-year term. Though your monthly payments will be higher, you'll save a significant amount of money on interest in the long run – as long as you can afford it.

As a general rule, your monthly auto expenses – including fuel, insurance and loan payments – shouldn't exceed 20% of your disposable income. By disposable income, we mean the money that's left over after you pay all your other bills for the month. If you find that a three-year term would put your payments over this threshold, then we recommend taking the five-year term instead. The stability provided by lower payments will be more than worth the extra interest.

Sign It and Drive Away
After your officer puts the terms of your loan down on paper, the only thing left to do is inspect the contract and sign it. Read over the document and make sure it explicitly states the APR of your loan, the amount of money being financed, the payment total and the payment schedule. It should also include the finance charge – the total cost of the loan including interest, fees, and credit checks – and the total sales price, which is the sum of the total scheduled payments and the down payment. As soon as everything checks out and all the terms are what you agreed upon, put the pen to the paper and sign away. Then go for a victory drive, because you've just successfully financed your used vehicle.

The Complete Guide To Buying A Used Car: Conclusion

  1. The Complete Guide To Buying A Used Car: Introduction
  2. The Complete Guide To Buying A Used Car: What To Look For In A Used Car
  3. The Complete Guide To Buying A Used Car: The Inspection And Test Drive
  4. The Complete Guide To Buying A Used Car: How To Negotiate Prices
  5. The Complete Guide To Buying A Used Car: How To Finance A Used Vehicle
  6. The Complete Guide To Buying A Used Car: Conclusion
RELATED TERMS
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  2. Theta

    A measure of the rate of decline in the value of an option due ...
  3. Record Date

    The cut-off date established by a company in order to determine ...
  4. Supply

    A fundamental economic concept that describes the total amount ...
  5. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  6. Investment Banker

    Someone working at an institution raising capital for companies, ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  5. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  6. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!