11 Smart Tips for Financing a Used Car

January 14th, 2020 by

Young couple buying a car

Sometimes buying a used car can be a wiser choice compared to a new one. Not only do you end saving a lot in terms of money, but the value you can get out of your purchase can often nearly equal that of a new car. Unfortunately, financing a used car isn’t as easy as financing a new one. However, there is no need to worry, as the experts at PA Auto Sales have got you covered. Avoid getting your head stuck in debt or paying more than you have to by taking note of these smart tips for financing a used car.

Tip 1: Know Your Credit Score

Before heading over to a car dealership, make sure that you’re aware of your credit score. If you have a bad credit score, you are likely to be charged a higher interest rate. It is often a wiser financial decision to first improve your credit health before taking a car loan, as not only will you end up paying far lesser in the long run, but also would be incurred with a might lighter burden of debt.

Furthermore, by knowing your credit score (and hence the interest rates you qualify for) you can save yourself from a bad deal at a dealership who may be offering you at a higher interest rate.

  • Pro Tip: If you are young or suffering from a dismal credit score, you can still get a better deal with lower interest rates by getting a co-signer with a good credit history.

Tip 2: Plan Your Timing

Markets go through natural cycles of boom and bust and this has a huge impact on the interest rates. If demands are low, lenders would be willing to lower their interest rates as a means to attract more customers. Therefore, it pays to do a little research and plan your timing. Get quotes from different times of the year as well. You would want to seal the deal with as low an interest rate as possible.

Tip 3: Get as Many Quotes as You can

Usually, the interest rates on loans for a used car are often slightly higher compared to those for a new one. However, this doesn’t always have to be the case. You will find many borrowing agencies and banks that offer very competitive interest rates for used car loans.

Get quotes from as many as you can and compare the amounts they are willing to loan, their interest rates, and the duration. You want to make sure you’re getting the best deal possible before you commit to such a large financial undertaking.

  • Pro Tip: Provided you can afford it, always go for a shorter-term loan. While the monthly payments would be higher, paying off the loan faster means you pay less interest over time. This way, not only will you end up saving more money in the long run but also be able to resell  the car at a good price as its value would not have depreciated too much by then. With used cars, the ideal term is usually 3 years.

Tip 4: Apply for a Non-Recourse Loan

A non-recourse loan is a type of debt in which you place collateral (in this car, your car) to secure it. In case you default, the lenders can seize the collateral but cannot demand any additional compensation. Since cars can end up being worth less than your outstanding loan debt, applying for a non-recourse loan protect you from incurring a deficit.

Tip 5: Get Your loan Pre-Approved

Many dealership insiders recommend that you get a loan pre-approved before you head over to the dealership. This way, you would not be tempted to purchase a car that may be outside your budget.

A pre-approved loan can also be a good bargaining chip at the car dealer when shopping for used cars. Your dealer may be enticed to offer you a better deal with lower interest rates than your finance company or even lower the price tag.

Tip 6: Make a Large Down Payment

Saving up and making even a 20% down payment can result in huge savings on your repayments. Not only does it cut off the amount you have to pay back but it also can significantly reduce the interest rate on the loan.

Tip 7: Play it Safe with Choosing a Borrowing Agency

Sure, getting the best deal is important. But it is even more vital that you are getting what you expect and do not end up agreeing to out ridiculous commitments that were included in the fine.

If a loan scheme sounds too good to be true, then it probably is. Financial contracts can be notoriously difficult to read. If you are unsure about a lending agency or feel uneasy signing their loan contract, it may be a wiser choice to avoid them. Do your research, ask questions, and stick to companies that are reputable and honest.

Tip 8: Take Care During Negotiations

Remember, you’re playing against the pros when trying to negotiate the price of the car you want to buy. You might think you struck a good bargain by having the price cut but may end paying more as the loan you agreed to charged a higher interest rate or settled for an unfair trade-in.

Play your cards right while negotiating. Keep it simple and systematic. Once you have settled on a price, then opt for a trade-in and use the internet to your advantage to know the real worth of your trade-in.

Tip 9: Don’t Buy the Most Expensive Car

The rule of thumb is that your monthly car expenses should equal roughly 20% of your take-home pay. Deducting additional car expenses such as insurance, gas, and repairs, your monthly repayment amount should translate to 10-15% of your take-home pay. If the car of your choice isn’t fitting in your budget, it would be better to choose a different, more affordable one.

Tip 10: Pay the Fees and Taxes in Cash

While it would be tempting to roll up all the additional fees and taxes on to your auto loan, increasing the amount you have to pay back with interest simply not a wise decision. Avoid overburdening yourself with a larger debt, and pay these miscellaneous costs upfront with cash.

Tip 11: Avoid late payments

Late payments usually come with substantial fees and penalties. Not only would this mean higher costs for you, but it will risk negatively impacting your credit score. If possible, try to make all your repayment on time.

Concluding Note

Opting for a used car nowadays can be a sound financial decision. For a fraction of the price of a new one, you are getting a car that is almost as good. Of course, some makes and models are more reliable than others and thus tend to be better choices in the used car market. By implementing these smart tips for financing a used car, you will save even more and get a far superior deal.

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