10 Tips for Financing a Used Car

Dealerships often advertise their low-interest rates for pre-owned cars, and many people assume everyone will qualify for those. Unfortunately for some, the fine print makes it clear that those rates are only for qualified borrowers. Knowing your credit score can help you determine whether you might qualify. If you don't, you have time to research alternative financing options or reconsider your car budget, so you don't find yourself put on the spot at the dealership. It's a good idea to review your entire credit report while you're at it since sometimes reports can have errors that make your credit score lower than it should be.

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If you're young and have no credit or if you have made a few credit mistakes, it's worth talking to friends and family to see if someone is willing to co-sign your loan. Lenders are hesitant to finance cars for people they perceive as high-risk, so you may have a hard time getting a loan without a co-signer. Even if you qualify, you're likely to pay high-interest rates that make your car significantly more expensive in the long run.

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Seeing that low monthly payment might initially seem like a good thing, but low payments usually mean you'll be paying off your loan for a long time. It's usually a better idea to select a higher monthly payment that gets your car paid off faster. Otherwise, you'll find yourself spending a lot of money in interest even if you have a good rate.

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It's a good idea to get a least three or four quotes before you settle on a lender. Going through the dealership is often the most convenient route, and sometimes they can offer excellent rates, but they may not be the best deal, and obviously are not an option if you're buying your used car through a private seller. Try to get your quotes before you head out for a test drive.

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When you're getting ready to buy a car, it's important to sit down and write out a detailed budget that includes your car payments. Have an absolute maximum price for both total cost and monthly payments firm in your mind before you head down to the dealership. While most car lots and dealerships are moving away from high-pressure tactics and hidden prices in favor of more consumer-friendly methods, it's still easy to get caught up in the excitement of buying a new car and find yourself opting for upgrades you really can't afford.

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Many dealerships offer deals that include low or no initial down payment, which can seem like a tempting way to save money upfront. However, remember that you'll be paying interest on the loan. Most experts recommend putting at least 20 percent of the car's total purchase price as a down payment. If you're able to spend more than that, that's even better. Putting at least 20 percent down can also influence your interest rates since some lenders are hesitant to finance cars for people who can't afford that and may charge more to compensate for the risk.

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Nobody plans to default on a car loan, but sometimes circumstances change, and you may find yourself unable to keep up with the monthly payments. You probably already know that the lender can repossess your car if that happens, but what most people don't realize is that some loans also let them sue you for the balance of the loan if your car isn't worth enough to cover it. Since cars depreciate every year, this is a real possibility. Non-recourse loans only allow the lender to repossess the vehicle, even if it isn't worth as much as the loan balance. If you can't qualify for a non-recourse loan, be sure to get gap insurance to cover the difference between your car's actual value and how much you owe on it.

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Researching companies and lenders online is an important first step, but sometimes untrustworthy companies can have slick but misleading marketing. When you talk to the agent in person or on the phone, pay attention to how you feel. Does he take his time, explain things clearly, and encourage questions? Or does he rush you, apply pressure tactics and avoid giving clear answers? If you feel like something shady is going on, trust your gut and look for another lender. Be sure to read the entire contract thoroughly before you sign it, too, especially if the terms seem too good to be true.

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Whether you buy a new or pre-owned car, the purchase price is only part of the story. You also have to pay for sales tax, registration fees, and optional items such as warranties. While most lenders are willing to roll those costs into your loan, it's generally a better idea to pay them with cash. Not only will it save you money by letting you pay less interest, but it also ensures that your loan remains close to your car's actual value. This helps in case something goes wrong, and you need to sell your car or settle with an insurance company.

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This one seems like a no-brainer, but it's surprisingly easy to forget your payments or make a late payment from time to time. However, most car loans pack on expensive fees and penalties if you do. Chronic late payments can even cause your interest rate to increase. Most states allow lenders to repossess cars immediately if you don't make your payment, which can cost you hundreds of dollars in fees and expenses. Consider setting up automatic payments to make sure your payments are made every month without a hitch.

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