Getting a used car is a smart move. Cars are built to last longer you can get a much better deal than at a dealership.
When you buy a new car, you can lose about 20% of the value in depreciation in the first 12 months. Most of that is lost when you drive the car off the lot.
A used car is a smart financial choice, but how can you finance the purchase? The average used car is more than $20,000 and monthly payments have soared.
Keep reading to learn how to finance a used car.
Check Your Credit
No matter how you plan to finance your car purchase, you need to check your credit score. That will determine where you stand and let you know what type of financing you can qualify for.
The better your credit score, the better your interest rate will be. That will turn into a lower monthly payment and less money you’re paying the bank.
If you have a poor credit score, you may want to hold off on getting a car because you’ll pay a lot more in interest. Instead, take a few months to raise your score and get a better loan.
Raising Your Credit Score
Are you in a situation where your credit score can use a boost? In order to understand where to focus your energies, you want to know how credit scores work.
There are three credit reporting agencies – TransUnion, Experian, and Equifax. They all have information about your credit history that appears on each credit report. They’re pretty similar in general.
Your credit score is comprised of the information pulled from these reporting agencies. There are several types of scoring agencies, but the most popular one is the FICO score.
FICO takes information and weighs it in order of importance. For example, your credit utilization rate and payment history make up a large portion of your credit score.
Other factors include the types of credit you have, how many credit inquiries you’ve had, bankruptcies, or accounts in collections.
How can you raise your credit score? Start by making all of your payments on time. The next step is to lower your credit utilization rate. You’ll also want to review your report to check for any errors. Get any errors corrected on your report as soon as possible.
How Much Can You Afford?
Let’s have an honest conversation about your finances. You don’t want to get stuck with a used car that you really can’t afford. That’s why it’s important to take a hard look at your budget to figure out your expenses.
You may have a monthly payment amount in mind. Did you consider maintenance costs, insurance, and fuel costs? They will have as much of an impact on your budget as the loan payment.
Doing this step early on will make car shopping much easier because you won’t waste time looking at cars that are over your budget.
Auto Loans
There are a lot of car finance options. Among the most common is to get an auto loan. It’s an installment loan that lumps your principal and interest together into one fixed monthly payment.
Where you can get tripped up are in the interest rates and the length of the loan. You may want to extend the life of the loan to get lower monthly payments.
The problem with that is that you could have a loan that lasts much longer than the life of the car.
Where to Get Auto Loans
It seems that you can get car loans from anywhere. You want to be careful about where you get your auto loans.
You want to start by checking with your bank and apply with credit unions or community banks. There are also online lenders that offer loans for favorable rates.
Dealers also offer financing for auto loans. This is a very convenient way to get your used car and take care of financing in one shot. The issue here is that you are probably not getting the best deal.
Dealers have to make money somehow on the deal. They’re often the middlemen in this type of arrangement. They can add to the amount of the loan to turn a profit, which can turn into a more expensive loan for you.
Shop Around for Auto Financing
Don’t be afraid to shop around for auto financing. You want to be sure that when you shop around, you get general terms of the loan through a soft credit check.
Soft credit checks won’t show up on your credit report. They don’t have an impact on your credit score at all.
When you narrow down your options to one lender, then submit a formal application for approval. At that point, a hard credit check will happen. That credit check will appear on the credit report and cause your score to drop a few points.
Pre-Approval Before Shopping
Do you want to know how to finance a used car and get a good deal on it? Walk in with a pre-approval letter from the lender. It’s just as good as walking into a dealership with a briefcase of cash.
It means that you’re serious about making a purchase and you have an amount to spend on a used car. You also have power over the dealership because they know that if you walk out the door without buying, you aren’t likely to come back.
This gives you a lot of flexibility to negotiate a great deal for your used car.
How to Finance a Used Car the Smart Way
You just learned the top tips on how to finance a used car. You have to start with your budget and credit score to know what kind of deal you can get.
Take your time and shop around with different lenders before deciding on a loan. You’re going to be stuck with it for years to come.
Do you want more financial tips? Head over to the Lifestyle section of this site for more helpful articles.
