How to Finance a Used Car – Make the Right Choice
Posted Monday, May 15, 2023
Searching for the perfect car that checks all the boxes on your wishlist can be a thrilling experience. You will surely look at the features of each option that catches your eye, and picture yourself in it. Purchasing a used car might be the solution you need to find a model with exceptional features at a pocket-friendly price.
However, it is essential to remember that buying a car is a significant financial commitment that requires prior planning. Opting for car financing can be a great way to get the car of your dreams without having to pay the full price upfront. Keep reading to learn how to finance your vehicle, which lenders offer the best deals, and what mistakes to avoid so you don't pay more than you need to.
Check Your Credit Score
Before applying for a loan, it’s essential to review your credit score, a number ranging from 300 to 850, which determines your creditworthiness based on past credit behavior. The higher the score, the more confident lenders will be.
The importance of assessing your creditworthiness lies in the fact that it determines not only whether or not you qualify for a loan but also the interest rate, with those with higher credit scores often paying lower interest rates (around 5.53%), while those with lower scores may face higher rates (up to 16.85%).
If your credit score is on the lower side, it's wise to focus on improving it since it can result in thousands of dollars in savings. This can be done by paying your bills regularly and on time, and avoiding getting too close to your credit limit - it's generally advised that you only use 30% of your total credit limit. You can check your credit score at https://annualcreditreport.com/.
Plan Your Budget
After reviewing your credit score, the next step is to determine your budget for purchasing a car. This will allow you to search more efficiently within your price range. When planning your budget, remember to consider not only the down payment and monthly payments, but also for how long can you finance a used car, and the cost of dealer fees, taxes, registration fees, and future maintenance and fuel expenses.
Research Lenders
Now it is important that you know who the lenders are and which is the best option for you according to your particular case so that you can begin the process of financing a used car.
Credit Unions:
They usually offer lower interest rates than banks and have less rigid membership requirements. Credit unions also tend to have a closer relationship with their members, so you can receive more personalized service.
Banks:
Taking out a loan from your long-standing bank may be a wise decision to finance a used car, especially if you have a strong credit history. Besides, banks are reliable and well-regulated entities, giving you peace of mind regarding the safety of your funds.
Online Lenders:
One advantage of online lenders is that they do not need physical offices to operate, which allows them to offer favorable lending options with lower interest rates. Additionally, you can complete the entire loan application process from the comfort of your own home.
Dealerships:
One convenient option is to finance a used car directly through the dealership where you plan to purchase it. This can be an excellent choice if your credit score is not ideal, as dealerships can often offer financing options to individuals deemed high-risk by banks.
Get Pre-Approved
The next step is to get pre-approved car loans from potential lenders, such as banks, dealers, and credit unions. This way, you will know in advance what offers you will have in terms of loan maximums, interest rates, and other information that will be useful in determining what budget you have and what financing is best.
You can request several loan pre-approvals within a 14-day period, and it will only be considered as one hard inquiry on your credit report. On our website, you can get pre-qualified to get an idea of your creditworthiness and your ability to borrow without impacting your credit score.
Compare Car Financing Offers
Once you are pre-approved, you can compare car finance offers. To decide which offer is best, compare the total loan amount, the monthly payment, the interest rate, and the length of the loan. Also, think about the type of car you're looking for and how long you plan to own it.
Do the math and compare the total price you'd be paying when you've paid off the loan. Keep in mind that if the interest rate is high or if the loan term is too long, you will end up paying a higher price. Choose the lender that offers you the best terms.
Tips for Getting a Good Used Car Loan Deal:
- Don't rush the process; take the time to look at different lender options and compare offers.
- Consider the total amount of money you would pay for your used car, not just the monthly payments.
- Make a large down payment if possible. This will reduce the length of the loan and the amount of interest you will pay.
- Read the loan documents carefully. Check to see if there are any warranties, gap insurance, or products in the total bill that you don't understand. Make sure that in the final agreement, there are only the items you really want to buy.
- Remember that you have the option to refinance a used car loan as long as you have made your payments on time each month. You will have a better chance of getting a better deal if you renegotiate after one year of paying off the loan.
The Bottom Line
Financing a used car is an affordable and efficient way to get the car you want without hitting your wallet too hard. However, it’s crucial to examine different financing options and compare loan terms before making a final decision. If you have a less-than-perfect credit score, dealerships can help you find financing for your used car. At Lux Auto Centre, we provide several options that cater to your budget and financial situation, allowing you to get the car of your dreams.
