A Beginner’s Guide to Getting a Used Car Loan


Buying a used car offers several advantages over splurging on a new vehicle. Besides costing significantly less, used cars hold their value for longer. New cars depreciate by approximately 20% after just one year. Vehicles then lose their value by roughly 10% for the next four years before the depreciation rate slows. 

Used car sales accounted for almost 74% of all car sales in the United States in 2020. More than a third of used cars purchased in the U.S. are financed. Getting an auto loan is an excellent way to make a large purchase without taking on the entire financial burden upfront. 


Navigating the Process as a First Time Buyer

Juggling loan offers from multiple sources, determining the loan term, and researching interest rates can be overwhelming, and you may not know what steps to take to get the best deal.   

Our beginner’s guide to getting a used car loan takes you through every step of the process, helping you navigate auto loans with confidence. The first step is to understand what a car loan is and how it works. 


What is a Car Loan?

A car loan is a type of secured loan to help you buy a vehicle. A secured loan has collateral. For an auto loan, the vehicle is used as security for the institution providing the financing. The lender is considered the lienholder on the vehicle’s title, so they can seize the car if you default on your payments. 

Collateral is the main difference between car loans and other personal loans. Auto loans can only be used to purchase a vehicle. Standard personal loans are unsecured and can be used to pay for various products and services, from medical bills to vacations. 

Auto loans are paid back over an agreed period through fixed monthly installments. Car loans typically last between two and eight years. If you are on a tight budget, you may opt for a longer-term loan. These loans mean lower monthly payments, but you will pay more in interest charges, so you pay more for your vehicle over the life of the loan. Your interest rates may also be higher even if you have excellent credit. 

Short-term loans have higher monthly payments, but you pay less interest on your vehicle. 

Another advantage of a longer-term loan is that it gives you more buying power because you are spreading the cost of the vehicle over several years.    

Unfortunately, when financing a used vehicle over a longer term, your loan may last longer than the car. If your car breaks down and the cost of the repairs exceeds its value, you may be looking at financing another vehicle while paying off your original loan.  

The ideal financing term depends on what you can afford and how long you are comfortable making loan payments. Most financial experts recommend sticking to a 48-month or less loan term on a used vehicle. 


How to Get a Used Car Loan

Car loans are available from several financial institutions. The most popular financing sources include:


Bank loans

Banks are one of the most popular options for sourcing used car financing. However, banks have strict policies and terms regarding the interest rates they offer and the type of cars they are willing to finance. Older vehicles have lower resale values and more mechanical issues, so they won’t finance a car over a certain age or mileage.   

If you have an existing relationship with a bank, taking out a car loan from them may increase your chances of qualifying, especially if your credit score is only average. To help you qualify for an auto loan with a bank, consider putting down as much of a down payment as you can afford so you reduce their risk of lending money to you. 

Because banks are for-profit institutions, they typically have higher interest rates than credit unions and some other financing services despite their size and wealth. Although they may advertise competitive rates, these may only be available to preferred customers or applicants with excellent credit scores. 


Credit union loans

Unlike banks, credit unions are not-for-profit organizations. The ethos of most credit unions is to offer affordable financial services to their members. They typically provide lower rates and favorable terms for auto loan applicants. 

Credit unions are generally more flexible than banks and work with customers with less than stellar credit scores. Although a poor credit history is likely to result in higher interest rates, your credit union is more likely to get you behind the wheel of a car than a bank.   


Car dealership loan

The convenience of setting up your car loan through a car dealer can be tempting, but there are a few factors to consider before choosing this option.  

Most car dealerships use third-party financing companies for their auto loans. Research the finance company ahead of your agreement and look for red flags, like poor customer service, communication issues, or unusual policies. 

Many dealerships mark up or increase interest rates as a commission for organizing financing deals.


Online lenders

The emergence of online lenders has made getting a car loan convenient. There is a wide variety of lenders to choose from, and you can apply through an online application form at any time. Select lenders offer additional services like loan calculators and prequalification. This will help you get an idea of what your monthly car payments might be within minutes of making an inquiry. 

You can apply to several online lenders in a short period, limiting the negative impact on your credit score. Some online lenders offer competitive interest rates, helping you save money

Some online lenders may be more willing to work with used car shoppers with less than perfect credit, but interest rates will be steep. However, if you have excellent credit, you may get a better deal with an online lender than with a bank.  

Check for online reviews like Yelp, the Consumer Financial Protection Bureau, and Better Business Bureau before signing any documents, especially if you are unfamiliar with the company. 


The Importance of Your Credit Score

Your credit score is the most important factor in securing competitive rates on your car loan. Before making an official offer, your lender will pull your credit report to review your credit history and determine your interest rate. 

To avoid any surprises, check your credit score before applying. You are entitled to free  access to your credit report from all three major credit bureaus – Equifax, Experian, and TransUnion once a year. 

Look for potential errors or issues, such as incorrect personal information, accounts that don’t belong to you, inaccurate payment history, and closed accounts listed as open. Although inaccuracies are often due to administrative mistakes, they can suggest fraudulent activity or identity theft. 

Credit scores range from 300 to 850 points. A high score indicates that you have a good track record of credit and debt management. A lower score may signal you are a risk to lenders, resulting in high-interest rates on your auto loan. 

The FICO credit scoring model is one of the most widely used systems in the United States. According to Experian, FICO scores are weighted as follows: 

  • Very poor: 300 to 579
  • Fair: 580 to 669
  • Good: 670 to 739
  • Very good: 740 to 799
  • Exceptional: 800 to 850

Depending on your financial institution, the cost of the car, and the specifics of your auto loan proposal, the minimum credit score you need can vary. If you’re looking for ways to improve your credit score quickly, be sure to:

  • Pay all bills on time
  • Pay off existing debt
  • Reduce your credit utilization ratio (but keep credit accounts open)
  • Keep the debt on your credit cards to less than 30% of the available limit 
  • Consider increasing credit limits
  • Dispute credit report errors with the relevant bureaus
  • Avoid applying for credit unless you need it


Other Tips for Securing the Best Auto Loan

Lending institutions like banks and credit unions charge interest to compensate for their risk when lending money. To secure the best auto interest rate, try some of the following methods: 


Approach multiple lenders

While it’s important to avoid several hard inquiries on your credit report, shopping around is key to finding competitive interest rates. Consolidate applications to a one to two-week period to limit the impact on your credit score. 


Get pre-approval

Pre-approval is when the lender gives you an estimate of the loan amount and interest rate you might qualify for. This allows you to find the right car for your price range and gives you power with the seller. 


Make a sizeable down payment

By putting down more money or trading in another vehicle, you’ll reduce how much you have to borrow and qualify for a lower interest rate.  


Get a co-signer

If you have poor credit, no credit history, or want more negotiating power ask a creditworthy co-signer to apply for the loan with you.  


Shop for Your Car Loan With Confidence

Your financial situation, credit score, and the type, age, and mileage of the vehicle you are purchasing are all factors that determine which lender is best for you when you buy a new car.  

Don’t overlook any aspect of your loan agreement. Read the fine print and ensure you’re comfortable with the terms, repayment structure, and any additional charges. Make sure there are no pre-payment penalties in case you want to pay off your loan early. Some institutions, like credit unions, may even allow you to skip a payment if you fall on hard times.  

At Finance is us, our goal is to provide information and advice that helps consumers manage their finances effectively. Whether you’re buying your first car or considering avenues for investment, our educational blog can help you make informed decisions.


Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.

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