Are you considering financing a used car? This article explains used vehicle financing. Find out how to finance a used car.
You have three purchase options when you start your car shopping journey: financing, leasing, or paying cash. If you are purchasing a car but don’t want to pay the high sticker price or take on the depreciation of a new vehicle, you may consider used vehicle options. But now you are wondering if you can finance a used vehicle? The short answer is yes; you can finance used vehicles. However, you can’t finance all used vehicles. This article will explain how to finance a used car and what used cars are eligible for financing.
Yes, you can finance used cars. The general rule of thumb is that you can finance cars up to 10 years old. Therefore, you have lots of flexibility in your options and budget when considering financing a used vehicle. New vehicles tend to depreciate quickly, so many decide to lease new vehicles to avoid future depreciation. However, you may prefer to finance vehicles to have the option to pay off your loan eventually and have no monthly car payments. You can finance a lightly used vehicle and save on the new car sticker price, and avoid a portion of the depreciation.
VINN Tip: When shopping for a used vehicle, consider certified pre-owned vehicles (CPOs). CPOs are lightly used vehicles that are only a few years old, have low kilometres, and have gone through rigorous inspections. We recommend looking for CPOs when considering financing a used vehicle. You can usually receive better interest rates on CPOs and can be assured that you have a vehicle in excellent condition.
Choosing between financing and leasing is confusing. Learn more about financing vs. leasing here.
Financing terms will depend on the age of the used vehicle. You usually can only finance vehicles up to 10 years old. Cars are beginning to have longer lifespans, so dealerships and banks are willing to finance older cars. Kelly Blue Book reports that most people are driving older cars, with the average age of cars on the road at 12.1 years. The improving quality of vehicle manufacturing allows vehicles to have longer lifespans. This report is positive for consumers that are considering financing older cars. Even though you can finance older cars, there are restrictions on the finance terms available. The general rule is that the older the vehicle, the shorter the time available to finance it.
You have two options when you finance a car: direct lending and dealership financing. Your monthly payment will include your principal payment and interest payment.
Sometimes direct lending can be the better option because it allows you to have more transparency and control in the purchasing process. With direct lending, you know the terms of your loan while you are car shopping, which can help you make a better-informed decision for your budget.
Dealership financing will depend on the dealer’s relationship with banks and financing promotions. If the dealer has lots of relationships with different banks, they may be able to offer you multiple financing options. Also, some dealerships have financing promotions that can result in different terms, such as a shorter contract length.
Your interest rate for financing will depend on your credit score and if you decide to go with dealership financing or direct lending. However, the most crucial factor is your credit score. The higher the credit score, the better chances of receiving a lower interest rate. Before you start considering your financing options, you should check your credit score and history to see where you stand. You can receive your credit score and credit history report with Marble Financial.
The best formula for determining your monthly budget for financing a car is the 20/4/10 rule. With the 20/4/10 rule, you would have a 20% down payment, a car loan of four years, and spend no more than 10% of your monthly income on other car-related expenses. The 10% expenses include your loan payment, gas, car insurance, and maintenance.
Learn more about the other factors you should consider when buying a car here.
Yes, financing a used car can be good for building your credit. Your credit score is determined by how long you have had credit, carried balances on credit cards, if you regularly miss payments, amount of outstanding debt, being above or close to your credit limit, and records or indications of insolvency or bankruptcy. However, you build credit by showing your bank that you can make payments. Therefore, financing a car can act as a way to help build or strengthen your credit. But failure to keep up with monthly payments can negatively affect your credit score.
If you have bad or no credit, getting approved for auto loans can be more challenging. You may not be able to receive funding from your bank or credit union. However, some dealerships specialize in working with customers with bad credit histories. When considering financing a used car with bad credit, you will need to understand your budget to make sure that you can afford the monthly payments. As mentioned, making car payments can help to improve your credit. However, if you fail to make payments, your credit score will be negatively affected.
VINN Tip: If you don’t have much credit history and are working on building your credit, having a well-established co-signer such as a parent or grandparent can help you attain better interest rates.
We recommend going to the bank with which you do your daily banking. The bank you already hold accounts with will be willing to speak with you about your options for an auto loan. Taking out an auto loan will also help you build your relationship with your bank. An auto loan with your bank can help build your credit and act as a stepping stone towards your future financial milestones, such as taking out a mortgage.
At VINN, we work directly with you to guide you through the process of finding a new car. Our vehicle experts will work with you to ensure that you get the best value for the right car, and you can also browse our inventory.
Happy driving!
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