A lot of people simply show up at a dealership and then worry about financing once they’ve picked out the car they want. Dealerships offer financing options and a lot of people opt for that because of the convenience. However, there are actually several different options for getting loans that might actually help you get a better rate.
You should also put some thought into how you’re going to secure financing before beginning to shop for a car. This will give you a better idea of what to expect and what kind of vehicle you can afford.
Here’s everything you need to know about getting used car financing.
Know Your Credit Score
Before looking into used car financing it’s a good idea to know your credit score. Services like Equifax and TransUnion can provide this for you.
The reason it’s nice to know your credit score beforehand is simply so you know what kind of loan you’re likely to get. You don’t want to pick out a car you’re super happy with, only to find out you can’t afford it because the interest rate on your loan is higher than you thought.
Knowing your credit score helps you be more realistic with your budget and just makes you better prepared when you begin to shop for a vehicle.
Know Your Budget
Once you have an idea about what kind of used car financing you’re going to get, the next step is to decide on your budget. You’ll need to decide how much you can afford each month for a car payment.
Most experts agree that your car payment shouldn’t exceed 15% of your gross monthly income. That means if you have a gross income of $3000 per month your car payment shouldn’t be any more than $450.
There are three things that factor into your monthly car payment. The first is your interest rate. The lower your interest rate is the lower your loan payment is going to be. The second is the term of your loan. The longer the term the less the monthly payment will be, but it will also take you longer to pay it off. Finally, there’s the cost of the car itself. The more expensive the car the more you’ll have to pay each month.
One way to reduce your monthly payment is to use a down payment. If you’re able to pay for part of the vehicle up front you’ll reduce the size of the loan you need, which will decrease your payments.
Most car dealerships have a credit calculator on their website to help give you an idea of what your monthly payment will be on a vehicle. It won’t be exact since everyone’s credit score is different, but it will give you a rough idea of what cars fit into your price range.
Securing Used Car Financing
As mentioned earlier, most people get used car financing through a dealership. While this isn’t necessarily a bad choice you should explore all of your options in order to make sure you get the best rate.
When it comes to used car financing there are three options to choose from:
Banks
Most people think of banks when it comes to mortgages or personal loans, but banks offer car loans as well.
There are a few advantages to getting a car loan at a bank. First, you can secure your loan before you even begin shopping for a car. This way, you know exactly how much you can afford when you go to pick out a vehicle and how much your monthly payments will be.
There’s also a much more low-pressure atmosphere at a bank. Let’s face it, car dealerships can be a bit pushy. If you go to a bank there won’t be any pressure to commit to anything right away. You can see what kind of loan they can offer you and take your time to think about it.
The main reason not to go to a bank is they only have access to one lender: Themselves. Other lenders might be willing to offer you a better rate, but a bank won’t be able to tell you that. So, in order to get the best rates from a bank, you’ll have to take the time to talk to several different ones to see what everyone is willing to offer.
Car Dealerships
By far the most common option people choose for used car financing is car dealerships. This is mainly because of the convenience factor. People can buy their vehicle and get a loan all in the same place.
Unlike banks, car dealerships also have access to multiple lenders. That means you’ll likely get a better rate than if you went to a bank, simply because you’ll have more options to choose from.
The one negative about getting a car loan from a dealership is that they can be pushy. Often times they won’t be concerned about what you can and can’t afford. They may try to pressure you into accepting a loan that’s over your budget in order to get a sale, so be wary of that.
Finance Companies
One option people rarely think of when looking for used car financing is finance companies. These businesses are specifically designed to help people secure financing for a variety of products.