How to Get a Loan for a Used Car
On the surface, shopping for a used car loan looks just like shopping for a new car loan: you need to review your credit and budget before you apply for a loan, and then compare offers from multiple lenders to find the best deal.
But there are some key differences between how to get a loan for a used car and a new car that every buyer should know about. For example, you’ll need to find out whether the lender offers financing for older vehicles and private sales, and you’ll have to put in some extra work to make sure you find a quality car.
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How to finance a used car
Before you start shopping for a used car loan, follow these steps to improve your chances of qualifying for a loan and finding the best terms available:
Check your credit score
Credit scores play a huge role in your ability to qualify for a loan. The higher your scores, the more likely you are to get approved. Plus, improving your scores can mean saving a ton of money on financing.
For example, increasing your credit score by 100 points could mean cutting your annual percentage rate (APR) from 15.37% to 7.53%, potentially saving you thousands of dollars in interest charges and significantly reducing your monthly payments.
Unlike credit reports, access to your credit scores isn’t always free. You’re most likely to get a peek at your credit scores in the following ways:
- Complimentary scores provided by one of your creditors
- Free credit monitoring services
- FICO’s credit score estimator (for a reliable estimate of your score range)
Determine your budget
Buying and owning a car can cause major changes in your budget. Before taking on this new responsibility, look over your income and expenses to determine what you can truly afford.
Be sure to consider both the up-front costs (like your down payment and sales tax) and these recurring expenses:
- Registration
- Monthly car loan payment
- Insurance premiums
- Maintenance and repairs
- Gas
- Parking and tolls
Some people use the 20/4/10 rule to calculate how much car they can afford. According to the rule, a loan is affordable if you have enough cash to afford a 20% down payment, you can pay the loan back within four years and you’ll spend 10% or less of your monthly take-home pay on vehicle-related expenses.
Research the car’s value
Some used cars are priced more fairly than others. For example, dealers tend to mark up the sticker price on their cars, but a private owner may overestimate the value of their beloved vehicle.
To get a fair price, you’ll have to research the market value of a car before shopping. Once you’ve reviewed industry guides like Edmunds or Kelley Blue Book (KBB), you’ll have a point of reference for the fair market price, and you can use the information to help you narrow down your search and negotiate a good deal.
You should also look at the vehicle history report (VHR), get a VIN check and have the car inspected by a mechanic to determine the true value of any car you’re seriously considering buying.
Get preapproved
It can be surprisingly easy to shop around and compare auto loan offers. You can find the best used car loan rates available to you by applying for preapproval through multiple lenders and then comparing the offers you receive. You can also take the offers to the dealership to help you negotiate better terms.
By filling out a single form with LendingTree, you may receive up to five auto loan offers from auto lenders.
Learn more about how to buy a car.
Tips for success
Finding a reliable used car at a great price takes some work. If you’re not sure how to go about it, add these tips to your loan-shopping and car-buying checklist:
Review the vehicle history report
A VHR is a report that shows you the full history of the car. VHR’s include records of past sales, accidents, regular maintenance, repair history and more.
Some dealers provide complimentary VHRs, but you can search the National Motor Vehicle Title Information System (NMVTIS) to find reputable companies that sell these reports as well.
Get an independent inspection
The best way to find out whether a used car has any hidden defects is by getting an inspection from a mechanic who isn’t affiliated with the seller.
Used car inspections can be a bit pricey, running anywhere from $100 to $300 or more, but an independent inspection may save you money in the long run. The mechanic can check for expensive problems like flood damage, worn-out brakes or non-functioning heating and electric systems.
Negotiate your trade-in
If you trade in your vehicle, the dealer will appraise the car’s value. But don’t take their appraisal at face value.
Dealerships often offer bottom-dollar for trade-ins, so just like with the sticker price of the new car, you should be prepared to negotiate. If you’ve done your research on the market value of your car, you can use the information to help you advocate for a higher price. Alternatively, you could sell the vehicle yourself and skip the trade-in process.
Consider a certified pre-owned vehicle
Buying a certified pre-owned vehicle (CPO) can reduce the risks involved with buying used, since CPOs are heavily vetted before sale.
Dealers typically require thorough inspections before certifying a CPO, and the cars must have limited mileage and minimal wear-and-tear. Dealers often include one or more warranties on their CPOs and may also provide complimentary VHRs.
Where to find used car financing
Like snowflakes, every lender is unique. Some types of lenders are known for having higher fees, stricter eligibility requirements and more. Here’s an overview of the main auto financing options and what makes them different:
- Banks and credit unions: Your credit union is likely the most cost effective and flexible lender to work with, commonly offering hard-to-beat loan rates. Plus, many credit unions and banks offer relationship discounts for existing customers.
- Online lenders: Online lenders tend to offer low rates since they have fewer overhead costs to cover. Just make sure to compare fees, check out customer reviews and make sure the lender offers loans in your state.
- Auto manufacturers: Auto manufacturer financing varies by dealership, but the dealer may have great incentives on their CPOs.
- Dealerships: Dealerships can be the most convenient way to get auto financing, since you can shop for a car and get your loan all in one place. But the downside is that dealerships often have the highest markups on financing.
Private-party auto loans
Not all lenders offer private-party auto loans, since the sellers aren’t vetted like dealerships are. If approved, your loan may be more costly than a loan for a dealership purchase, but the higher loan cost may be offset by savings on the price of the vehicle. If you plan to buy a car from a private seller, be sure to look for a lender who finances private purchases.
How to get your best used car loan rate
Getting a good rate on a used car loan doesn’t happen by accident. Sure, you can visit any car dealership and potentially walk away with a loan and a car. But with some planning and legwork, you can improve your loan application, negotiate better terms and walk away with a reliable ride at a better price.
The key to getting the best deal is to prepare before you start shopping. Your biggest opportunities to save money will come from:
Improving your credit before applying
Comparing offers from multiple lenders
Researching car values so you can negotiate a fair price
Increasing your down payment
Applying with a cosigner
Frequently asked questions
Each lender has its own credit score requirements, so even if you have poor credit, you can potentially find a lender that offers bad-credit car loans. Just be cautious: Lenders who specialize in working with low-credit or no-credit borrowers can sometimes offer high-risk and even predatory loans.
If your credit history is stellar, you may be able to qualify for a lower interest rate or even a 0% APR incentive at a dealership, but for most buyers, a bank loan will be the more affordable option. The only way to know for sure is to apply with multiple lenders and compare your options.
Getting a used car loan can take a bit of work, since most lenders have restrictions on mileage and the age of the car, and some lenders may not allow private-party purchases. On the other hand, you may have an easier time getting approved for a used car loan if the loan amount is small compared to a new car loan.
There are many red flags to look out for when you buy a used car from a private seller or a dealership. Common red flags include pressure to act fast or to sign paperwork, pressure to include add-ons in your financing, a seller who refuses to let you inspect the car or pull a VHR and paperwork that shows an incorrect VIN.