You have found the right pre-owned (used) car. It is the perfect size for you and your family. In addition, it has the features you love, and the mileage is good.
Approximately 55 percent of used car buyers take out a car loan to pay for their vehicles, according to the credit company Experian. Although the price of purchasing a used car may save you thousands of dollars compared to buying a new vehicle, it may cost more to finance a used vehicle.
Financing a pre-owned car via a loan is an excellent way to pay for a vehicle conveniently through monthly payments. Often the process is complicated and confusing. Luckily, in this article, we have put together several steps you need to take to get a pre-owned car loan.
1. Check Your Credit Score
Lenders check your credit history before determining whether to lend you a car loan or not. A credit score is a snapshot of your credit history. A credit score is a number between three hundred and eighty-five hundred. Additionally, it is generated from the data in your credit reports. Sometimes, it is called a FICO score, but this is only one of many scoring models used. Most customers currently have several credit scores based on details from the three main credit reporting bureaus (Equifax, TransUnion, and Experian). The scores derived from the different models are typically relatively similar to each other.
With your credit score in hand, a prospective lender will classify you from deep subprime (starting at 300) to superprime (ending at 850). It would be hard for borrowers at the lowest end of the scale to get an auto loan, while those at the top will have lenders falling over each other trying to lend money. Most banks, personal finance services, and credit card issuers offer free online credit scores and report information.
If you notice mistakes or signs of fraud when you look at your credit report, resolve these issues before you apply for a used car loan. If your credit score is poor, and you do not really need a car right away, consider taking a few months to boost your credit before you apply. Keeping payments on time and paying down the balance on credit cards will help to raise your credit so that you can apply for a better loan.
Using the credit score below, you can see the average interest rates for used cars:
2. Research Lenders
After checking your credit score, it is time to look at auto loans and lenders. Mostly, buyers would want to shop at lenders outside of the dealership and have a pre-approved loan in place before walking through the door of the dealership. By doing this helps you to concentrate on the purchasing price of the car, rather than juggling the mashup of the amount of the car, the funding, and any trade-in you are selling.
However, there are plenty of places where you can pre-qualify for funding outside of an auto dealer. Besides, several financial institutions have special programs for clients with poor credit and first-time car buyers. They include:
i) Large National Banks
America’s largest banks, such as Bank of America, Wells Fargo, and Capital One, have vast car lending operations with a wide variety of facilities and services. Big banks appear to have higher interest rates than other lenders, but they offer lower interest rates on occasion. In case you have a bad credit, the strict lending policies of various big banks could make it hard to get reasonable auto loan rates.
ii) Local community banks
Local community banks are similar to a smaller credit union. They are financial institutions with more geographically restricted branch networks. Community banks are more flexible than massive national institutions. Therefore they are more willing to listen to your personal story.
iii) Credit Unions
Credit unions are cooperatives owned by members that serve certain communities. Usually, they offer better offers than other lenders as their earnings are returned to their member-owners. Not everybody can join a credit union, but most people can find a community credit union that they can enter using credit union locator. Before you can apply for a loan, you will need to become a cooperative member by buying a stock share for around $5 – $25.
Credit unions vary in scale from small, single-employee operations to massive operations that exceed several national banks in scale. A small to mid-size credit union could be an excellent choice if you have disputed credit. Throughout the loan cycle, you are more likely to be able to establish a personal link and clarify your financial condition.
iv) Online Lenders
Online banks like Ally Bank operate entirely online, without expensive brick-and-mortar branch operations. Since their presence is entirely digital, many online lenders provide streamlined loan application and approval processes that you can complete without leaving your couch.
3. Apply for a Used Car Loan
First, compare quotes from various lenders. Also, consider your own bank or credit union because they may offer better rates for being a customer. It’s essential that you send absolute and truthful information about the application to prospective lenders. If you are caught during the loan cycle being less than honest, they would definitely refuse your car financing. When the lender learns that you provided false information after you already have the loan, they can immediately request the full amount of the loan to be repaid or declare you in default.
4. Get Preapproved for an Auto Loan
You need to give some personal information to lenders, including your Social Security number, income and other debt description, to get pre-approval for a loan. It is necessary to apply within two weeks to all pre-approval lenders you are considering, as several hard credit inquiries within a short time are grouped together and counted as only one inquiry.
When you are ready to purchase your car, there are some benefits of being pre-approved for an auto loan. It improves and simplifies the dealership’s bargaining power by allowing you to haggle just about the car’s price, not the monthly payment. For pre-qualification, the results would only be as valid as the personal details you give. Which means the final rate could be substantially higher than the initial offer. And in both instances (pre-approval and pre-qualification), your final rate will slightly adjust depending on the car you pick.
5. Use Your Loan Offer to Set Your Budget
The maximum amount you can borrow will be specified in your pre-approval deals, but it is not the price of the car you will purchase. To pay taxes and fees, you would need an extra 10 per cent. Calculate your loan using an auto loan calculator. Put in your current car down payment, trade-in value and loan terms to find the correct monthly payment that suits your budget.
If that cost is too much for your needs, note that the bid for pre-approval is just a limit — you can borrow even less if you want. It is much more important to be able to make your loan payments comfortably, even if the bank says you can afford more.
6. Find Your Car
Do some homework on any car that you are considering. This could involve reading vehicle records and title ownership reports, test driving and asking about past inspections. A report on vehicle history contains information on the past of a vehicle, such as injuries, open repairs, service history, title history and damages.
When you purchase your car from a private seller, you’ll want to make sure there’s a clear description for the seller. That ensures no creditors or other third parties are entitled to the car.
7. Finalize your Loan
Discuss the particulars of the loan with your bank, such as the amount you are eligible for, the interest rate, the processing charge, the period you want and your EMIs. When you intend to prepay or foreclose the loan in full or in part, ask the bank about advance payment charges.
8. Get the Right Auto Insurance
Some lenders want you to carry collision and comprehensive insurance with ample coverage so that the lender can be reimbursed if you wreck the car or it is stolen. The security a lender needs is different from the car insurance that you are legally obliged to bring with you.
9. Make Payments on Time
When you take out a loan, you sign a contract promising to repay by making monthly payments. That will protect your good credit and help you to build up equity in your car. Failure to do so would open you up to significant dings on your credit report, default loan and car repossession.
Buying a used car can take some time, but it can pay off doing your research and comparing options. If you have trouble locating a right used car within your budget, consider waiting until you make a more significant down payment. Also, taking steps to build your credit could assist you to qualify for a lower interest rate on your loan, which could reduce your monthly payment.