Looking to buy a used car? Financing this type of purchase can be tricky, and can be quite costly if you don’t proceed correctly when it comes to your car loan. You need to know your options, as every financial situation is different so let’s review where your journey should start.
Be aware of your credit score
Lenders will surely check your credit history before deciding to give you a car loan. There are several scoring models used based on information from the three major credit reporting bureaus – Equifax, TransUnion, and Experian. You are classified in categories ranging from deep subprime at the low end to super-prime at the top, as per credit reports. Those at the lowest end may have a tough time securing a bad credit car loan due to poor credit score, unless you’re dealing with an experienced dealer, such as DriveNation, with in-house financing options. As for your credit score, you can get it from one or more of the credit bureaus listed above. At times, credit card issuers offer a peek at your credit score as one of the perks of having the card. Some financial websites can also generate your score, as can banks if you reach out for a personal loan or inquire about your best rate for financing.
Lenders want to be sure that you can repay the amount you wish to borrow, so they look at the amount of credit being used and compare it to the amount available. It is known as the utilization of credit, which shouldn’t be too high. The debt-to-income ratio is a vital aspect too before the loan application gets a green light, so they can be sure that monthly payments will be on time.
Conduct thorough research about lenders
Large National Banks
Large banks generally tend to have higher rates of interest and fees as compared to other lenders, though they might offer specials with lower interest rates, on occasion. If you have bad credit, the rigid lending policies of such banks can make it tough for the approval process to go through. Only those with a good credit rating should seek this option.
Credit unions are member-owned cooperatives that serve specific member groups or communities. They typically offer better deals than other lenders because their profits are returned to their member-owners through lower interest rates for loans and higher interest rates for savings accounts. If you have challenged credit, a small or midsize credit union may be a good option.
These are smaller financial institutions that have more geographically limited branch networks. They are more willing to listen to your personal story and make considerations, as compared to large national banks.
As is evident from the name, these banks operate entirely on the internet, so they avoid any brick-and-mortar related costly branch operations. They offer a streamlined loan application and approved processes that can be completed from the privacy of your home, along with more affordable auto loan rates and loan payments.
Finance companies only make loans and don’t offer many of the other products offered by many financial institutions, such as checking accounts. Instead, they borrow money from banks, which they then lend to you for your auto purchases. In fact, several finance companies cater to niche customers in the automotive market, such as those with poor credit.
Applying for a used car loan
In the same way you would finance a brand new vehicle, when buying used you have to complete a loan application before lenders consider the loan approval. It includes details such as the money you owe, monthly expenses, income, and of course, the amount of money you wish to borrow. Some lenders let you fill out the entire application online for convenience. While they might ask some personal questions on the application, they are limited by law as to what they can consider when making an auto loan decision.
It is necessary to furnish lenders with complete and honest information on the application. For instance, if you have any credit card debt pending, mention it clearly as there are high chances you will be caught. In case that happens, car financing is declined automatically. If the lender discovers that you provided false information after you already have the loan, they can immediately demand repayment of the total amount of the loan or declare you in default.
To explore your options to the fullest, you should apply at several lenders, so you get a choice of different loan offers. But it is imperative to make all applications within a short span of time, so credit reporting agencies view them as one inquiry and only ding your credit score a few points. If the applications are spread over numerous weeks, credit bureaus process them as multiple inquiries, so your score goes down a few points with each one.
Compare various used car financing offers
While applying for a used car loan, you generally focus on the monthly payment or interest rate, but those aren’t the only parameters for deciding if an offer is good or not. Choosing a car, or it’s financing, on the monthly payment alone is a potentially expensive car-buying mistake. Some lenders offer auto loans with variable rates, but it is advisable to opt for simpler fixed-rate loans.
Rather than looking at monthly payments, you should compare the total cost of the car, including a total of all payments that are due during the loan, the amount you need to pay upfront, including any fees. You can utilize a used car loan calculator (plenty available online), to know about monthly payments. A calculator can be used to compare offers too, so you can decide which one is best suited for you.
Exercise caution when going to just any used car dealer
Once you have a pre-approved auto loan in place, you can start looking at used car rankings and reviews, to search for a vehicle that meets your requirements and budget. Get a vehicle history report so you can be 100% sure the car hasn’t been in a major accident or has any title issues.
As a buyer, you need to keep the purchase price of the car, your trade-in, and financing separate. On the price, focus on how much you want to spend or think you can afford. As for a trade-in, remember you can sell it yourself to a private party or to another dealer. Lastly as for financing, you are more likely to get a good deal on a used car loan if you make a significant down payment. It reduces loan amounts, so monthly payments are low, while the loan terms can also become shorter. It lowers your loan-to-value (LTV) ratio, which shows how much the car is worth in proportion to how much you owe on it. The lower your LTV, the better deal you are bound to get.
Before you sign the papers, check each loan and car purchase document carefully – they should reflect exactly what has been discussed, sans any errors or blank spots. Look over the interest rate and loan amount. If there are discrepancies, politely request that they are completed before you sign. Put your signature on the papers, only when you are satisfied with the whole deal.
Are there any red flags?
Don’t stretch out loans
You might come across a dealership that proclaims they will finance anyone, regardless of their credit score. However, the loan terms might be less than ideal! For instance, if your payments are stretched out over six years or more, or you have to pay three times the ongoing interest rate, it simply doesn’t make sense to take the deal.
Some lenders might loan you money for six, seven, or even eight years or longer. It might seem a lucrative financing option as it results in a lower monthly payment, but it is an incredibly risky financial move. Long car loans have higher interest rates, so they eventually cost you much more. Even if you qualify for long-term financing, you risk having the car’s depreciation outpace the rate that you pay it back, leading to a situation where you owe more than the vehicle is worth.
When you have a long car loan on used vehicles, there is a risk when your car requires costly repairs, so you are saddled with car payments, along with an expensive repair bill. Even if you put little mileage on the car, it will most likely be out of warranty while you continue to make payments.
Never finance the fees and extras
Rolling any fees and costly add-ons into your financing might be easy, but it is a terrible idea. It can cause the loan to exceed the value of your car, which spells financial trouble if anything happens to the vehicle. Additionally, it conceals the actual cost of items being included. For instance, if the dealer tells you about the paint protection package costing only $15 a month, they don’t want you to realize that over a period of 6 years, it will go up to $1080.
Steer clear of yo-yo financing
Many buyers get caught within this trap. Dealers let you take the car home without signing the final financing paperwork. Some days later, you get a call from them to inform you that the financing has fallen through so you have to come back to sign new papers. Usually, the new auto loan offer will make the car cost much more than the agreement you negotiated earlier. If you do get a call from a dealership that asks you to come back for signing new papers, start getting in touch with local lenders. Getting an affordable financing deal from an outside lender can foil the yo-yo financing scam. In case that isn’t possible, ask the dealer to undo the transaction. Don’t get suckered into a loan you can’t afford.
How to refinance your used car loan?
Buyers have often chosen to refinance their auto loan to lower interest rates or change the length of its term – it can save some money. If you feel that your original lender hasn’t given you a good deal, you can shop for a car loan refinance almost immediately, so long as your initial financing doesn’t have any prepayment penalties built into it.
For those who had bad credit when you initially took out the auto loan, but have been paying regularly for a year so, you are in a great position for refinancing. Not only has your credit score improved, but a sizeable portion of the loan has been paid off so your LTV should be lower (as long as your payments outpaced the rate that the vehicle depreciated).
Get the right auto insurance
Most lenders will require you to carry collision and comprehensive insurance with sufficient coverage so that the lender can be repaid if you wreck the car or it is stolen. The protection required by a lender differs from the car insurance you are legally needed to carry. State-mandated insurance protects the people or property you might injure or damage with your vehicle. Lenders might mandate gap insurance in order to protect their financial interest in the car, even if you have negative equity.
Why does used car financing cost more?
When you start shopping around for used car financing, you will notice that it comes with typically higher interest rates and shorter loan terms as compared to new car loans. There are restrictions on the age and value of vehicles financed as well. This happens due to the risk associated with the loan. Lenders feel the risk factor is substantially increased when they lend money on used cars – the chance of not being repaid is priced into the loans by charging higher interest rates. The shorter terms and other restrictions lower the likelihood that the lender will take a major loss if the loan is not repaid as agreed.
Bottom line, if you are looking for a wonderful deal on a used car, DriveNation is exactly where you should be. We have car dealerships in Prince Albert, Regina, and North & South Saskatoon, where there is a wide range of vehicles to match all kinds of requirements and preferences. Our sole objective is to make car financing all the more convenient for you. So give us a shout to book a test drive or start your journey by pre-arranging your financing with a credit application now at https://www.drivenation.ca/financial-services/apply/.