5 Things to Consider When Financing a Used Car

by Lori Straus

Most people buy a used car because of the lower cost. Although used cars have almost the same financing options as new cars, there are a few minor differences. Below we’ll cover five things you should keep in mind if you’re planning to finance a used car.

Set Your Budget First

Remember that financing a used car involves more than just your monthly loan. Alongside determining how much you can actually afford each month for a vehicle, budget for insurance premiums, gas, and repairs. By setting your budget ahead of time, you’ll be prepared to look at a selection of cars that fit your needs and your financial situation.

Check Your Credit Score

A credit score signals to a lender how reliably you likely pay your bills. That’s why consumers who have low credit scores pay higher interest rates. If your credit score is poor, factor in a high amount of interest in your monthly car payments.

A Lease vs. a Loan

A lease is like a long-term rental agreement, which means you “borrow” the vehicle from the dealership for a few years. Although you can lease a used car, many dealerships don’t offer that option. It may also not be the best idea for you. Because used cars can eventually cost more in repairs, leasing a used vehicle means you’re paying high repair costs for a car that will never be yours.

On the other hand, if the used car you need financing for is only two or three years old, and your research indicates that the make and model are reliable, a lease can be a nice way of letting you drive a car while paying lower monthly costs. Although you can buy out the lease at the end of your agreement, if you return the car to the dealership instead, you won’t have to worry about selling your used vehicle.

Black woman holding keys to new car and smiling at cameraThe Length of Your Loan

No matter your situation when financing a used car, the shorter your loan, the better. Not only will you pay less interest in the end, but the car will be yours sooner.

If your interest rate is very high, your loan should not be longer than 36 months. (But 24 months is preferable.) If you’ve paid each instalment on time, that should raise your credit score, leaving you room for a newer vehicle and slightly lower interest rate.

What the Numbers Say

Registered dealers can only show you all-in pricing. This means that the only additional charges a dealer can ask you to pay is the registration fee and sales tax. (And the registration fee cannot be used as a catch-all for hidden fees.) This means you can start with the cost of the vehicle you want and use online calculators to help you guess at monthly figures.

Asian married couple at the meeting with financial advisorFor example, online calculators can help you decide if you should take out a loan on a vehicle or lease it or they can help you see how much money you’ll save with lower interest rates and shorter terms. Playing with the numbers will help you see the bigger picture.

So, take some time to figure out your financing options. That way, when you’re ready to finance a used vehicle, you’ll be better prepared when working with your dealer. There are many options out there to help you pay for your vehicle. Don’t be afraid to investigate the reputable ones.