Financing a used car through a loan is an excellent way to conveniently pay for a car through monthly payments. However, the process is sometimes complicated and confusing. Follow these steps and tips to get the best loan for your used car.
One of the most common ways to pay for a used car is through a loan. If the buyer does not have the cash to pay up front, a loan is the best option most of the time. Basically, a loan involves paying a set amount of money each month that eventually adds up to the total price of the car. This allows the customer to take time in purchasing a vehicle and save money for other needs. Loans are available through dealerships, banks, credit unions or online lenders.
Before walking into the dealership or bank empty handed, take some time to prepare for the loan process. To start with, obtain a credit score copy. This is possible through some online sources for free or a small payment. Alternatively, your bank should provide a credit score free of charge. Credit scores above 680 lead to the most favourable interest rates on loans. Investigate competitive interest rates for your credit score. In addition to credit score, gather other financial paperwork such as bank statements. Finally, write out the details of the car intended for purchase. This provides the lender with a quick baseline for reasonable terms. With paperwork in hand, you are ready to move on to pre-approval or negotiation.
Pre-approval is not an essential step in the car loan process, but it is a very helpful one. The idea is to get signed off on a hypothetical loan beforehand by a lender other than the dealership. This allows the buyer to come in with a competitive loan that the dealer has to match or beat. To get pre-approved, take the necessary documents to a bank or online lender. Work out the details including interest rate and total spendable amount of money. The higher the credit score, the better these terms will be. Make sure to study the requirements of the pre-approval in regards to used cars. Many lenders will only approve loans for franchise dealerships and only for cars under a certain mileage. Discuss the types of cars and places of intended purchase with the lender.
Benefits of Pre-ApprovalDespite the extra work involved, getting pre-approved has plenty of benefits. Most importantly, it gives the buyer a sense of what interest rates to expect from loans before actually purchasing a car. This makes negotiation much simpler and reduces the chance of being taken advantage of by a dealership's sometimes higher rates. Pre-approval also provides the buyer with a budget they know they can keep to. They understand the limits of their financial situation, and they won't overspend when the time comes to buy.
Loans From a Dealer
Pre-approved or not, enter negotiations with dealers with a general sense of reasonable terms. If possible, bring a down payment of at least 10 per cent of the car's total price. Dealers benefit from cash in hand, so a sizable down payment makes a loan more likely. Also consider bringing in someone with a higher credit score as a co-signer of the loan. This increases the chance of receiving a loan and can lead to lower interest rates as well. Overall, negotiate with a somewhat flexible end goal in mind and prepare to leave if those terms are not met.
Loans from Banks or Online Lenders
Loans from outside lenders often have more competitive rates. Start the process by shopping around. Compare interest rates and terms between different banks and online lenders. Many sources do not lend money for cars older than approximately 5 years or cars with especially high mileage. Decide on a lender and show up prepared with all the necessary materials. After completing negotiations, be sure to pick up a pre-qualification letter. Bring the letter to the dealer to prove the loan acceptance. While it is unlikely to be a better rate, ask the dealer for their loan terms and compare to the outside loan before making the final purchase.
If a car is older or a buyer's credit score is especially low and no financing loans are available through a bank or dealership, a personal loan is a good last resort. Get a personal loan through a bank or private lender. These loans are general funds rather than specific to a car payment, and they usually have high interest rates. Only take a personal loan if you know you can pay it off in full including the interest.
Financing through a loan is one of the best ways to pay for a used car, but it is sometimes a long and complicated process. Before heading into the dealer, take time to understand the intricacies and benefits of various types of loans. If you go into the situation prepared and confident, a favourable loan and a new car can be easy to get.