My first car was a used car. The person who used it before me was my father. He gave it to me as a gift when I learned how to drive. He also got a new car so the arrangement worked out well for both of us. His new one was a lot nicer, as it turned out. Understandable.
Because my car was a gift, however, I never had to take out a loan to finance it. For this I am very grateful. Thanks, Dad! But if I had needed a loan, I certainly would have wanted to know how to get the best used car loan rate possible to fund my “new” used car.
If you ever happen to be in the market for a used car, I am going to let you in on the secrets of how to get yourself the best interest rate possible. The savings over time can be substantial. Then you can spend the cash on other things. Like a pair of fuzzy dice to hang from your rearview mirror. Oh, yeah!
The Used: When You Decide To Buy A Pre-Owned Car
Because you are a rational, not crazy person, with your second-hand car purchase you still want first-rate financing. Now, despite the sterling reputation that all used car salespeople have as always being the most upright of citizens, it is in theory possible that they may try to squeeze a little more money out of you than they have to. They can do this by giving you a more expensive loan than necessary.
Don’t let that happen. Here are the ways you can prevent it from occurring:
1. Determine Your Budget.
Consider your current financial standing. Are you paying all of your bills on time? Do you have extra money to save or invest, or perhaps pay down debt, at the end of the month?
Make sure that whatever you spend on your used car is going to fit in comfortably within your overall budget. This includes what it will cost you to finance the car as well.
A good rule of thumb is to not spend more than 50% of your monthly income on debt. That includes your mortgage, credit card debt, and now whatever you are going to pay for your auto loan.
A helpful tool in determining how to budget for your car payment is our car loan calculator. I like it because I’ve been told since the time I was in first grade that I am not good at math. While I disagree, especially when I use my fingers to count stuff, I still like the assistance of a helpful financial calculator like this one.
The calculator can help you determine whether, for instance, you are better off taking a shorter or longer term loan. The longer the life of the loan, the less you will pay per month, so if money is tight, a 5-year loan may be better than a 3-year loan. If, however, you have the cash, consider taking the shorter loan in order to pay it off quicker.
Oh, also, you have to face reality. That gently used Maserati you love may not be in the budget. Consumer Reports has a handy article on how to figure out how much car you can afford.
2. Understand Your Credit Situation
Have a good general grip on your current credit situation. Because this is going to mostly determine what you pay for your car loan. So you should know the numbers.
Make sure to obtain a free copy of your credit report so that you can look at all of your credit information. Know your scores and if you have the time, try to increase the them.
Get familiar with the way the organizations that may finance your car will look at your total credit picture.
Also, keep in mind the kinds of numbers that creditors are going to look at when it comes to extending you a loan. These factors include your
- Payment-To-Income Ratio
- Debt-To-Income Ratio
- Turkey-Slice-to-Cheese-Slice ratio
I was just checking to see if you were paying attention. Also, apparently I am hungry for some cheese.
3. Shop Around.
In the age of the world wide internets, comparison shopping is easier than ever. We do it with everything: bottles of wine, gym memberships, baby clothes, streaming music services. Did I say bottles of wine already? Well hey, saving $4 on my favorite dry cabernet with notes of plum and coriander is a game changer in how well my week is going. So it’s worth the emphasis.
You’re most likely going to comparison shop when it comes to the price of the used car you want as well. So why not also do it with the car’s loan? The simple answer is: you absolutely should.
See what’s out there. Check in with dealers and indirect lenders through those dealers. Then also look at various banks and credit unions – whoever is in the business of offering you an auto loan.
There are even apps and websites that help you accomplish this more easily by taking a lot of the work out of it for you. So, now you have no excuse. Technology is your friend. Just use it.
4. Get Pre-Approved for Financing
When you’ve found the used car of your dreams, make sure to get pre-approved for your financing. This gives you a solid place to start when you are negotiating the terms of your loan.
When the lender starts throwing out numbers, you’ll be ready with a credit offer already in hand. Now you can use this offer as a negotiating tool.
“Sure, I’ll take a loan with you instead of my pre-approved offer, if you beat this offer I already have in my hand.” Chances are, because they want your business, they just might go for it. And if not, you already have a solid offer in hand from someone else.
5. Apply For All Your Loans Within A Two-Week Period
You may already know that when you apply for a loan, it will generate a hard inquiry on your credit report that will affect your credit score.
The more hard inquiries you generate, the lower your credit score is going to be. So quite literally, the very act of asking for a loan itself makes the loan more expensive for you. Oh, the harsh irony!
The best strategy for dealing with this is to apply for all of your loans within a two-week window. That’s because when you do this, all of the inquiries combined will only count as one hard inquiry.
This will keep your score from being lowered too much and will help you get a better interest rate. Absolutely worth it.
Then, Drive away happy with your “new” used car. And feel great about your financing. That’s a win-win strategy.
Get more tips to save you money and love your used car-buying experience by downloading out free guide to Car Loans by clicking the big orange button below. Inside you'll also find a Budgeting Worksheet, a Used Car Test Drive Worksheet, and tons of information that will come in handy.