What to Know About Financing a Used Car
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What do you do if you're in need of a car, but your budget doesn't allow for a brand-new model? Don't worry — there are plenty of great options on the used car lots. But when it comes to shopping and paying for a used car, it's important to have a game plan.
Do your homework
There are a few key steps you need to take if you plan to finance a used car, especially if your credit scores are less than perfect. Credit scores are three-digit numbers generated from the information on your credit reports and are used by lenders to determine your trustworthiness as a borrower, as well as the interest rate you pay on your loan. The lower your credit scores, the higher your interest rate and the more money you'll pay over time.
The first step is to calculate your budget. What can you afford to pay on a monthly basis toward an auto loan? Don't forget to take into account additional expenses such as fuel and car insurance. These costs depend on a number of factors, such as gas mileage, the age of the car and your driving history. Because the car will be used, you will also likely have to pay more for maintenance than you would for a new car.
Be realistic about what you expect to pay each month, including any extra costs. Then, do extensive research to determine what used cars are within your budget.
Check your credit standing
After you have determined your budget, the next step is to check your credit scores and order copies of your credit reports. Your credit scores can help you get a better understanding of whether lenders are likely to approve you for a loan and under what terms. It's also important to examine your credit reports for errors or anything problematic that you've forgotten about.
You're entitled to receive one free credit report from each of the nationwide consumer reporting agencies (Equifax, Experian and Transunion) per year from annualcreditreport.com. However, in response to the Coronavirus/Covid-19 pandemic, all three nationwide credit bureaus are offering free weekly online credit reports via annualcreditreport.com through April 2021.
You can also create a myEquifax account to get six free Equifax credit reports each year. In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores you'll come across. You may see others from your bank or if you apply for credit or a loan.
Talk to potential lenders
The third step is to talk to lenders. Financing options include going to your bank or credit union or working directly with the dealership. If you have good credit scores, you may qualify for low interest rates, and financing should be a relatively simple process.
Finally, if you are offered a higher interest rate than you planned to pay, think about buying a less expensive car. Avoid the trap of just looking at the monthly payment and ignoring high interest rates that can cost you big in the long term. If your credit scores are very low and prohibit you from securing a reasonable rate, consider holding off on financing a car until you improve your credit history. You could also save up for a large down payment, which will make you a less risky borrower and could, therefore, make it easier to get a favorable interest rate.
While negotiating with a used car dealer can be a daunting process, the more educated you are beforehand, the better off you'll be. Doing your homework and learning your financing options means that you could still buy that used car without breaking your budget.