How to finance a used car

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The following tips will help you avoid common pitfalls and overpay when buying and financing a used car.

Check vehicle history. You don’t want to be held responsible for paying off a loan if there are significant problems with the car or the resale value drops due to hidden damage caused by an accident. Vehicle history reports may not show flooding, collisions, or other damage, so checking more than one for any car you’re seriously considering buying can help eliminate potential blind spots. CarFax reports cost just a few dollars and VINcheck is offered free by the National Insurance Crime Bureau. The National Motor Vehicle Title Information System also provides links to many approved vehicle history providers. And always have a vehicle inspected by a trusted mechanic before you buy it.

Check your credit score. Whether buying new or used, the best interest rates generally go to those with the best credit. Melinda Zabritski, senior director of automotive financial solutions at Experian, a credit reporting agency, says the average interest rate for a used car loan is 5.53% for someone with the credit score. the highest and 16.85% for a person with the lowest credit score. . The difference between these two could be a few thousand dollars over a traditional loan. It’s a good idea to periodically check your credit score to see if there are areas for improvement. You can do this using a number of free credit reporting services, such as annualcreditreport.com, Credit Karma or Experian. Zabritski says that in general, the best ways to keep your credit score in good shape are to pay your bills on time and keep your credit card balance as low as possible. Experian Boost is a free service that can help boost your credit score by including utility and other bills paid on time. (Learn how to fix your credit score.)

Get pre-approved. This is good advice for any car purchase, whether new or used, and is mandatory if you are financing the purchase of a used car from a private individual. Pre-approval also gives you a starting point and allows you to decline financing from a dealership if the terms are not favorable. Zabritski says not to worry about applying for multiple car loans. They may be excluded from your credit report anyway, and if not, they’re probably only counted as one request if they’re all made within the same 30-day period. Most dealerships offer financing through a third-party lender, and online providers like Carvana and Vroom also offer easy online financing and prequalification. But you can get a better rate from your own financial institution. Be sure to shop around to see who has the best rates.

Make a substantial down payment. Put in as much money as you can afford, says Bell. The more you pay up front, the less money you will lose in interest payments. For example, if you put $3,000 on a $29,000 car, you would pay a total of $32,341 on a 5.53% APR loan over 48 months (excluding sales tax, which varies widely by state to another and can add thousands to the price). If you deposit $5,000, you will save over $200 over the life of the loan. If you compare the interest your money would earn in a savings account, it’s probably less than what you’d save with a larger down payment.

Avoid long-term loans. A loan that lasts 60 months can keep your monthly payments low, but you’ll pay more in the long run and likely pay a higher rate too. Using Navy Federal Credit Union figures as an example, if you finance $23,000 at 5.44% over 36 months, the total amount you will pay will be approximately $31,280. Taking out a 60 month loan results in a higher rate of 5.74% and the total cost would be $32,812, over $1,500 more than the shorter term loan. The chances of you getting “upside down” or owing more on the car than it’s worth also increase with longer-term loans.

Avoid dealer add-ons. Once you’ve agreed on a price, chances are a dealer will try to pressure you into buying an extended warranty. (Some will tell you that getting a loan is necessary, which is rarely the case.) Make sure the original factory warranty has expired before you even consider extended warranty coverage (some cars pre-owned already have extended coverage and may not need more). As a general rule, CR does not recommend purchasing extended warranty coverage: it is often not worth it. Instead, keep a rainy day fund for car repairs. This money can even earn a little interest if it’s in the right type of account.

Consider potential maintenance costs. If you buy an older vehicle, you will certainly save money compared to the price of a new car. But do not forget the inevitable cost of possible repairs. Consumer Reports advises finding a recommended CR model known for its safety, reliability and strong fuel economy, which can help keep costs down. You can find them using our list of recommended used cars; The CR Used Car Marketplace shows owner satisfaction and reliability right in the listings. It’s always a good idea to come up with an approximate annual maintenance budget based on a car’s age and mileage using CR’s online car repair estimator. Then factor that into your monthly payment estimate to see how much money you’ll actually save buying used.

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