Used Car Loans From Car Dealers
The used car dealership where you buy your car could also help you finance it. You'll find three types of used car financing at auto dealerships.
Dealer-arranged financing: When you apply for a used auto loan at the dealership, the dealer will submit your application to multiple lenders to see which offers you the best deal (this is called "rate shopping"). In many cases, however, the dealer will increase the interest rate so they can make some money for arranging the loan.
Captive financing: Car manufacturers often own financing companies that make loans on the manufacturer's new or certified pre-owned vehicles. Although captive financing companies sometimes offer good deals, loans may be limited to certain makes or models, and the best financing terms (such as 0% APR) are usually reserved for new vehicles.
Buy here, pay here financing: Some used car dealers offer in-house financing. These buy here, pay here (BHPH) dealerships cater to customers with poor credit or no credit history. More lenient standards make it easier to get approved even if you've had trouble getting a loan elsewhere. On the downside, BHPH lenders usually charge very high interest rates and fees and require larger down payments than traditional dealers.
Used Car Loans From Online Lenders
Online lenders work similarly to banks and credit unions, except that the loan application process takes place entirely online. Many online lenders specialize in certain types of loans, such as auto loans, or certain types of borrowers, such as people with fair to poor credit. You'll start by getting prequalified with the online lender; once you're prequalified, you can submit an official loan application.
Using an online lending platform to find a used car loan has some advantages. You can get prequalified quickly and compare loans from several online lenders much faster than you could with traditional banks. You can also get approved and receive your loan funds in just a few days. But there are disadvantages too. Online loans may not offer terms as good as your bank or credit union, and if you prefer talking to lenders face-to-face, an online lender isn't the best option for you.
What to Look for When Comparing Used Car Loans
When you're comparing used car loans, there are several factors you should consider to find the best loan.
Down payment: The larger the down payment you can make on the car, the less you'll need to borrow, and the less interest you'll pay over the term of the loan.
APR: The annual percentage rate (APR) of an auto loan incorporates both the interest rate and any loan fees the lender charges. Assuming the down payment and loan terms are equal, comparing APRs is a good way to weigh the relative cost of different loans.
Term: This refers to how many months it will take you to repay the loan. New car loan terms generally start at 36 months and go as long as 72 or even 84 months. Because used car loan amounts are typically smaller, the terms are usually shorter. Still, in 2019 the average used car loan term was about 65 months, according to Experian data. A longer term means a lower monthly payment, but also means you'll pay more in total interest over the life of the loan.
Monthly payment: This is the amount you agree to pay the lender each month until the loan is paid off. The payment is the same every month and includes both principal and interest.
Used car loans often have higher interest rates than new car loans. In the last quarter of 2019, the average interest rate for a new car loan was 5.76%; for a used car, it was 9.49%, according to Experian data. The older the car is, the higher the interest rate is likely to rise.
Taking a shorter loan term can somewhat offset the higher interest rate of used car loans, but it will cause your monthly payment to rise. For example, if you took out a 36-month used car loan at 9.49% APR, you'd pay $1,530.18 in total interest. If the same loan were stretched out to 60 months, however, you'd pay $2,598.18 in total interest. Choosing the shorter term would save you over $1,000.
Choosing the Right Used Car Loan
When you're looking for a used car loan, don't rush the process. Check your credit score before you apply for a loan and take steps to boost your score if necessary. Once your credit score is where you want it to be, shop around to see which lender offers the best interest rate, loan term and monthly payment for your needs. Buying a used car can be a smart way to save money—and taking a little time to find the most favorable loan terms can save you even more.