How to Finance for a Used Car

image of a pink cadillac

Buying a used car is a great way to save lots of money. We’ve all heard that if you buy a new vehicle, the moment you drive it off the lot it takes a huge hit in value, sometimes depreciating as much as 20%! That is a pretty expensive luxury just to get that “new car smell.” I mean, wouldn’t you rather buy an air freshener for $0.25 and spend the thousands saved on something more interesting? That said, when shopping for your next used auto, if you are planning to finance, it is really important to get a feel for the right interest rates. If you don’t, you may find you are stuck with a loan agreement at a higher interest rate than you could have secured with just a little bit of homework. Let’s go through the basics of used car finance.

Any Car I Want?

The first thing to know is that not every used vehicle is a good candidate for financing in the eyes of banks. This rule usually applies to the age of a car: too old and you might not be in luck. True “Vintage” status cars, sure. But that 1978 Corolla beater? Maybe not so much. Even if it is a classic in your eyes, banks don’t want to take the risk financing something for more than it may be worth, or something that is well beyond warranty and has an uncertain life-span.

Secure a Good Interest Rate

But let’s say you have found something good that’s not too old. The next thing to consider is your interest rate. When you go to a used car dealership, they typically will have an in-house financing service for your convenience. But be warned: you will likely pay for that convenience. And an interest rate even 1% higher than you could have got if you just shopped around a bit can equate to hundreds of extra dollars spent on interest payments.

Do Some Research

So who or what determines your interest rate? Obviously your credit score is paramount. But you don’t have to take the dealer’s loan guy or gal’s word for it. You can (and should) look up in advance what a fair interest rate range will be given your credit score and income. This way, before ever stepping foot into a dealership and feeling under pressure to make a decision and sign for something, you can be armed with a good idea of what your rate should be. And Lastly, if possible, always finance direct through your bank. They will likely have the best rates by far.