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Used Car Financing Guide


Buying a used car means you’ll probably need financing to cover the cost. This guide will help you through the process of choosing and applying for a used auto loan.

Choosing A Used Auto Loan Over A New Auto Loan

Many buyers opt for used cars because new cars have a higher up-front cost. Also, new cars tend to depreciate, or drop in value, much faster than used cars. 

The lower up-front cost for used cars means you won’t have to borrow as much, making monthly payments lower and loan terms shorter. In the end, you’ll pay off your used auto loan faster with less financial strain.

Opting for a used car also means it will depreciate at a slower rate than a new car which tends to lose value very quickly in the first year. That means you’ll have less chance of going upside down on the loan. 

The downside of a used auto loan is they typically represent a little more risk to the lender. As such, they’ll have higher interest rates than new car loans. That cost may be offset by the shorter loan term and lower payments, but it is still a consideration when choosing used.

Preparing To Apply For A Used Auto Loan

Before shopping for a used auto loan, you’ll need to get some information together. 

Important information you’ll need includes:

  • Monthly earnings
  • Credit score
  • Current expenses

This information will give you a sense of how much you’d be able to afford. Take a look at your budget by subtracting expenses from your monthly earnings to figure out how much you can pay each month on a used auto loan. Your credit score will help you determine if you may qualify for better loan terms.

It may be more difficult to obtain used car financing if your credit score is below 600. If that is the case, there are a few ways you can improve your credit, but it will take some time. If you’re right on the edge of having good credit (generally 670 and up), it may be worthwhile to work on improving your credit score. 

Some ways to do this include:

  • Reduce balances on higher-interest credit cards
  • Make bill payments on time
  • Avoid closing unused credit accounts
  • Dispute inaccuracies on credit reports

Finally, if you have other debts, paying those off can free up some space in your budget for car payments.

Choosing A Lender For Used Car Financing

Once your budget is figured out and you know approximately how much you can afford to borrow, it’s time to start considering lenders. Here are a few common options to find used car financing.


Both large chains and community banks provide used car financing, but they may not be as flexible or affordable as other options. 

Large national banks tend to have the highest rates when it comes to their financing, meaning you’ll probably want to shop around for a different option.

Credit unions

Credit unions are more locally concentrated. It’s easy to become a member, so you can benefit from lower rates and more flexible terms than if you went with a large banking institution.

Finance companies

Finance companies don’t provide the same range of services as banks and credit unions. 

Instead, they only offer financing services. Often, they cater to specific groups of people, such as those with subpar credit.

Comparing Used Car Financing Options

It’s typically best to get offers from multiple lenders so that you can go for the best one. Talk with each lender and get pre-approved so you know exactly what you qualify for. 

When comparing used car financing options from multiple institutions, you’ll have to consider the factors described below.

Interest rate

Used auto loans typically have higher interest rates than new car loans, but you can still shop around for a more favorable rate. 

The interest rate you pay will depend on your credit score. The higher your score, the better your rate.

Loan term

The next factor to consider is the loan term. 

Used auto loans generally range between 12 to 72 months. The length you opt for will ultimately depend on your needs and preferences. A longer loan means your monthly payments will be lower, but it also means more interest will accrue. 

Monthly payments

Monthly payments are based on the loan term, the loan amount, and the interest rate. 

A shorter term and a higher rate will mean higher monthly payments. A lower rate and a longer loan term will alleviate the burden of higher payments. 

Additional factors

Additional factors to consider include extras your lender may offer.  

For instance, some credit unions allow the option to skip an occasional payment. You’ll also want to look out for prepayment penalties. It’s a healthy financial practice to pay off your loan as quickly as possible, so try to avoid used auto loans that penalize you for doing so.

The Used Auto Loan Application Process

Once you’ve pinpointed the used auto loan that will work best for you, it’s time to start the application process. 

To do this, you’ll need the following documents:

  • A form of ID, such as a drivers’ license
  • Proof of insurance
  • Proof of income, such as pay stubs and bank statements
  • Proof of residence

You may also want a bit of money saved up for a down payment.

Once you have your documentation together, it’s time to talk to your lender. They’ll walk you through the paperwork and process involved in applying for a used auto loan.

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