Financing a Used Vehicle

US News

New car shoppers are often lured to dealerships with impressive cash back rebates and low- or no-interest financing offers. While used cars generally cost less than new ones, they don’t usually carry the same financing incentives.

Used Car Financing and Your Credit Score

Your credit score will likely influence your ability to get an auto loan at a competitive interest rate more than anything else. While a variety of factors are at play when banks and credit unions consider your creditworthiness, the most important are your overall payment history, the amount of debt you currently carry and the length of your credit history. Additionally, lending institutions also consider the types of credit you use, as well as your income and previous car payment history.

If you have a good credit history, make your payments in a timely manner and have little debt, you’re more likely to find auto loans with competitive interest rates for your next used vehicle. To get a free copy of your credit report, visit AnnualCreditReport.com.

How Will You Finance?

While some used car shoppers are able to pay for their car in full, many car buyers will finance their purchase. Used vehicles can generally be financed through the dealer, a bank or a credit union. If you plan to buy your next used car from a private seller, be aware you will have to pay up front or come to the table with your own financing from your bank or credit union.

If you decide to buy your next used car at a dealership, you can still provide your own financing. Even if you don’t have an auto loan lined up and ready to go, it’s a good idea to research current interest rates before you go to the dealership. That way, you’ll know if the dealership is offering a good rate. However, if you walk into the dealership with pre-approved financing, it will probably simplify the negotiation process, since you won’t need to consider monthly payments and interest rates. This will allow you to focus on getting the best price possible.

Another benefit of walking in with your own used car financing is that the dealership might try to beat your loan with a better deal. If not, you’re already pre-approved through your bank or credit union, so there’s no pressure to qualify for a loan on the showroom floor.

Many manufacturers offer low interest rate incentives through their certified pre-owned programs. If you qualify, this is another way to save money on your used car financing.

Payments and Rates

If you decide to provide your own financing, it’s typically worth your while to join a credit union, since they frequently have lower interest rates than banks. Monthly payment estimates for a $20,000 car loan are in the table below. The examples of competitive bank and credit union interest rates are shown for 36-, 48- and 60-month auto loans, assuming no money down and no trade-in. Note that interest rates will vary depending on the lender, type of loan, vehicle model and year, down payment amount and your credit score.

Auto Loan Lengths, Rates and Payments

Length

APR

Type

Monthly Payment

36 months

1.9%

credit union

$572

2.9%

bank

$581

48 months

3%

credit union

$443

4%

bank

$452

60 months

4.5%

credit union

$373

4.9%

bank

$377

 

Model Year Affects the Rate

When it comes to financing a used vehicle, not all model years are considered equal. Banks and credit unions generally offer better rates to newer vehicles because they’re less of a risk to finance. As the car ages, its value depreciates. Because of this, auto loans on models four years old or less typically carry lower interest rates than loans for models older than four years. If you’re considering two cars at the same price point but with different model years, don’t be surprised if you find a better rate on the newer car.

The chart below compares examples of monthly payments on a 48-month loan with a principle amount of $20,000. As previously mentioned, interest rates will vary depending on the lender, type of loan, vehicle model and year, down payment amount and your credit score. As you can see, opting for the newer car will save you about $21 per month and about $992 over the course of the loan.

Year

Length

Type

Rate

Monthly Payment

2009 and newer

48 months

credit union

3.2%

$444

2008 and older

48 months

credit union

5.5%

$465

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