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A great way to save money when buying a car is to purchase a used vehicle instead of a new one. The moment you drive a new car off a dealer's lot, it starts to depreciate rapidly. That means it’s worth less than what you paid for it. You can save thousands of dollars by letting someone else absorb the steep depreciation of the first few years of ownership. Buying the right car with good predicted reliability and low ownership costs can also save you money over the years.

Getting a good deal on a pre-owned car takes more work than buying a new vehicle, and there's more long-term risk to your wallet since most used cars aren’t covered by factory warranties. In this article, we'll help you through the steps that you should take to find the right car, get affordable financing, pay a fair amount, and minimize the risk of getting an unreliable vehicle.

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Here are the steps you’ll should take to buy a used car:

  1. Setting Your Used Car Budget
  2. Finding the Right Used Car
  3. The Certified Pre-Owned Car Option
  4. Used Car Financing
  5. Deciding Where to Buy a Used Car
  6. Researching, Test Driving, and Inspecting a Used Car
  7. Making a Deal and Completing the Paperwork
  8. Add-Ons, Warranties, and Insurance

 

Setting a Budget for a Used Car

Deciding on how much money to spend for a pre-owned car, truck, or SUV is more complicated than just looking for a vehicle with an affordable monthly payment. You need to look at the whole price of the car, including the cost of financing the purchase, plus consider the odds that it will require expensive repairs in the future.

The older a car is, the lower its price will usually be. But, unfortunately, the older the vehicle is, the more likely it is to need costly repairs. The trick is to find the right balance between the two. A great deal won't seem so great when you're waiting for a tow truck instead of heading to work or school.

Fortunately, there are many online resources to learn about a car’s reliability, repair costs, and frequent problems. Our used car reviews show you a vehicle’s predicted reliability rating from J.D. Power, any certified pre-owned warranty coverage available, and approximate costs for common repairs. There are dedicated user websites for many vehicles, such as Odyclub.com for the Honda Odyssey, and they can give you an idea of the issues that other owners are seeing on their aging cars.

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You’ll also want to consider the cost of car insurance for used cars and look at the coverage levels that you will need. Our guide to car insurance will help you with those decisions.

Finding the Right Used Car

Getting behind the wheel of the right used car is more challenging than buying a new car. When you buy new, you just have to find a vehicle that fits your needs and budget. Buying used adds additional steps to the mix, such as finding a car with low mileage, lack of significant crash damage, and a history of regular services. You need to learn much more about a three-year-old, 36,000-mile used car than you do about a brand-new car with 10 miles on the odometer.

Our used car rankings and reviews are a great place to start your search. We look at the consensus opinions of America's top automotive experts and blend them with quantifiable data on safety, reliability, and total cost of ownership to create a score for nearly every vehicle you can buy dating back over a decade. Those scores are used to compare vehicles against competitors in their respective classes.  

Choosing a used car to focus your search on can be daunting. Do you prefer an older, more luxurious model or a newer model without as many features for the same price? It's important that you honestly evaluate why you drive, where your drive, and how you drive so that you can find the vehicle that fits both your needs and budget. While that Mazda Miata may be in your dreams, it can’t carry the kids to soccer practice every day. On the flip-side, opting for a Chevy Suburban for your daily commute into the city probably isn’t the best choice either.  Be sure to evaluate the fuel economy of your options as well as the level of safety equipment that you’ll be comfortable with.

Buying a used car is a great way to get options that are costly on new vehicles for a fraction of the price. Higher trim levels and option packages don't command nearly the same prices on used cars as they do on new cars. Using our used car rankings, you can compare cars you are considering both on their overall scores and on individual factors that car buyers tell us are critical to their buying decisions, such as performance, reliability, and safety.

When you start to narrow your search, you don't have to start driving to car lots all over town. There are more than a million vehicles in our used car listings for you to browse.

The Certified Used Car Option

Manufacturer-certified pre-owned cars (CPO cars) blend the affordability of used vehicles with the security of a manufacturer-backed warranty. They're typically low-mileage cars that have been properly serviced for the few years they have been in service. Often, they are vehicles that were returned to the dealer at the end of a lease, used as dealership service loaners, or driven by dealership or manufacturer staffs.

Certified used cars receive a thorough inspection and some refurbishment before they receive certified status. Unlike most used vehicles that are sold as-is with no warranty, CPO cars typically come with extensions to the manufacturer's warranty. Many CPO programs also provide extras, such as roadside assistance and trip interruption coverage. The best CPO programs have a combination of good warranty coverage and nice perks. Automakers regularly offer special used car financing deals with low interest rates on CPO cars.  

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You'll want to make sure any certified used car that you are considering is genuinely a manufacturer-certified vehicle. Some dealers will call a portion of their used cars "certified," but unless it has been inspected to manufacturer standards and receives their stamp of approval and warranty, you won't receive the benefits that the automaker offers. You'll only find a brand's certified models on their franchised dealer lots. If you see a Lexus marked certified on a Ford dealer's lot, for example, it's not a factory-certified pre-owned car. With most factory CPO programs, you'll be able to get warranty coverage at any of the carmaker's franchised car lots.

The bad news about CPO cars is they’re more expensive than equivalent non-factory certified pre-owned vehicles. You’ll want to balance the higher price with the chance that you’ll have a higher total cost of ownership with a non-certified model. The predicted reliability rating in our used car reviews can give you some insight as to a car’s future repair needs. You can also compare the additional cost and benefits of a CPO car to those of an extended warranty to see which is the better long-term deal.

Financing a Used Car

Unless you have the cash on hand to buy a used car outright, you’ll need to take out a used-car loan to get the money to make the purchase. While many consumers don’t even think about financing until they are sitting in the finance office at the dealership, it’s critical that you get a pre-approved financing deal in place before you start shopping for a car.

While shopping and applying for used car financing is similar to getting a new-car loan, there are some differences. Lenders see used car loans as riskier than new car loans so you can expect to pay a higher interest rate. The increased risk stems from the fact that you're more likely to have major repair costs as a car ages, which may compromise your ability to pay the monthly payments down the road. The value of the car is also more unpredictable as it ages, making it more difficult for a lender to value their collateral, your used car.

Depending on the used car that you choose, some lenders will price the loan like new-car financing. If you find a car with very low miles or being sold as a certified used car, there’s a good chance that the lender will treat it as a new car.

The following steps will help you get the best deal on your pre-owned vehicle financing:

Preparation

By getting all of your financing ducks in a row well before you start car shopping, you’ll be prepared with a pre-approved deal in place before you get near a car dealer or start talking with private-party sellers. The first step is to look at your credit score and the credit reports that it is based on.

Your credit score is one of the primary criteria used by lenders to determine whether they will make you a loan and what interest they will charge. If you have a low score, you'll likely have to pay a higher rate, accept a shorter loan term, or put more money down than someone with a high score would. If your score is excellent, you'll qualify for the best interest rates, longest loan terms, and be able to take advantage of automaker-subsidized financing offers on certified pre-owned cars.

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By looking at your credit score early, you'll have time to correct any errors and see where your credit is weak so you can start on the path to improving it. The most critical information in your credit report is your history of making on-time payments and the amount of outstanding debt you have.

Where to Shop for a Loan

There are many places to get used-car financing, and you should seek offers from several before deciding on which car loan is right for you. Some lenders have special programs for current customers, first-time car buyers, or buyers with damaged credit. Taking advantage of these special programs can save you money and hassle.

Large National Banks

With thousands of locations across the country, America’s biggest banks offer a vast array of auto lending options and services both in their brick and mortar locations and online. Though you might also find loan occasional loan specials, their interest rates tend to be higher than some other lenders and their rigid lending policies not amenable to customers with bruised credit.

Credit Unions

Credit Unions differ from other financial institutions in that they are owned by their members, rather than by shareholders. Because they return their profits to their members with higher savings interest rates and lower loan interest rates, they tend to be less expensive places to get used car financing than other financial institutions.

You have to be a member of a credit union to get a loan from one. Not everyone can join every credit union. The industry's federal regulator, the National Credit Union Administration, has a credit union locator at MyCreditUnion.gov that you can use to find an institution that you can join. You’ll find credit unions ranging in size from tiny, one-person operations to massive operations rivaling the reach of national banks.

Community Banks

With smaller geographic footprints and branch networks than national banks, community banks offer many of the same auto lending services, but are likely to do so with more of a personal touch. If you have special lending needs or bruised credit, a smaller institution such as a community bank or a midsize credit union might be the right place to make a more personal connection to a lender willing to hear your financial story.

Online Banks

A newer contender in the car loan marketplace is the online bank. They forgo traditional brick-and-mortar locations and instead offer completely online loan processes. If you don’t need a lot of hand-holding, the streamlined loan processes of online lenders can have you set up with a pre-approved loan faster than most other lenders. Plus, you can do it from your couch while you’re eating pizza.

Financing Companies

Financing companies are similar to banks, except that lending money is their only business. They don't take deposits; instead, they borrow money from other financial institutions and use it to make consumer loans. Many finance companies cater to certain types of borrowers, such as those with poor credit.

Many automakers have their own finance companies, such as Ford Motor Credit or Honda Financial Services. They finance loans and leases for customers getting cars at their franchised dealerships and are the lenders that manufacturers use to provide their special new car financing deals and certified used car financing offers.  

Car Dealerships   

Most car dealerships don’t make car loans. Though it might seem like they do, they more typically act as brokers for other lenders, including banks, credit unions, and financing companies. They usually make a profit on financing by marking up the interest rate on the loan. In most states, they don’t have to disclose the amount of markup that they are charging on the loan.

While you may choose one of the financing offers that you'll be presented with at a car dealer, it's vital that you have at least one other offer. Without one, the dealer won't have any incentive to offer you a great deal to earn your financing business.

Applying for Used Car Financing

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Auto lenders will have an application, either on paper or online, that will need to be filled out and signed. It will ask for personal information including your social security number, income, monthly obligations, work history, housing expenses, credit card debt, and more. It’s imperative that you answer the questions honestly and completely. Otherwise, you risk being turned down for the loan or having the lender demand immediate repayment of the entire loan if the misinformation is discovered later.

Lenders then use the information you give them plus the data in your credit report to build a complete picture that predicts the chance that you will be able to pay back the loan. The information that lenders can use for a loan decision is limited by law, but you may be asked for some demographic information for regulatory reporting purposes.

Just as you should shop at more than one dealership for a used car, you should apply at multiple lenders to get the best financing deal. You'll need to do so in a relatively short period of time, though, in order to avoid affecting your score too much. When a lender pulls a credit report, it lowers your credit score by a few points. However, the credit bureaus will see multiple requests over a short time as just one inquiry.

If you apply before you chose a vehicle, your approval will likely be conditional and have a cap on the amount that they are willing to lend you. At this point, you can compare loans based on the interest rate you’re being offered, the length of loan that the lender will extend to you, and how much of a down payment is required. It’s OK to have multiple approvals, as you can choose the best option once you know the price of the pre-owned car you’re buying.

While you need to have a monthly payment that fits into your budget, it's important to look at more than just the payment when comparing cars and financing offers. Instead, look at the total cost of the vehicle including financing. You can do that by multiplying the monthly payment by the number of months in the loan term, then adding your down payment and the value of your trade-in, if you have one.

You can find the monthly payment by plugging the vehicle price, the interest rate, and the length of the financing into a car loan calculator.

For example, let’s say you're buying a used SUV with payments of $350 for 60 months, and you're putting down $5,000 and trading in a vehicle with a $3,000 trade-in value. You would multiply $350 by 60, then add $5,000 and $3,000 to that amount. In this case, the total cost of the used SUV would be $29,000.

The Importance of a Down Payment

While you may be able to buy a used car with no down payment, putting some money down is a good idea for several reasons. First, it reduces the amount you need to borrow, which lowers your monthly payments, shortens the length of the loan, or both. Second, it lowers your loan-to-value (LTV) ratio, which makes lenders more likely to offer you great loan rates.

Finally, a substantial down payment makes it less likely that you will ever owe more than the car is worth, which is also called having negative equity or being underwater on your loan. If the car is totaled or stolen when you have negative equity, you’ll have to pay your lender the difference between the loan balance and the amount you get from the insurance company.

Short Loans Are Better Than Long Loans

While you may be offered a six-, seven-, or even eight-year loan for a used car, it’s a bad idea to extend your payments out any longer than five years. Longer loans typically have higher interest rates, since they are considered riskier to lenders. You’ll also face a higher probability that you’ll still be making car payments when your vehicle is out of warranty because of its age or mileage. You don’t want to be making car payments when your vehicle is more likely to need costly maintenance and repairs.

With higher interest rates and longer financing, you’ll end up paying significantly more interest over the life of the loan. You will also face a higher probability of being underwater on your financing. If you still owe a significant amount on the car you're driving when it becomes too expensive to maintain, it makes buying your next vehicle much harder.

Where Can You Buy a Used Car?

There are many places you can purchase a used car, and each has its benefits and drawbacks in terms of service and price. Just as you want to know everything about the car that you are trying to buy, you should strive to know as much as possible about the person or business selling the vehicle. Check the company out with your local Better Business Bureau or other consumer protection agency before agreeing to a used car purchase.

Franchised New Car Dealers

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Buying a used car at a franchised new-car dealer likely won’t get you the best price, as you have to help pay for the dealer’s overhead, salesperson’s commissions, and other administrative fees. However, it will get you a buying process that’s more seamless, with the experience to handle the most complex paperwork, plus access to multiple lending sources if you don’t have a pre-approved financing deal you want to use.  

New-car dealers are also the only place where you will find factory-certified pre-owned cars from their respective brands.

Used Car Superstores

Relatively new on the scene are used car superstores with massive inventories to draw on, a refined sales process, access to lenders, and branded add-ons such as extended warranties that can be used at any of their locations. Like new-car dealers, you probably won’t get the best price at a used car mega-store, but you’ll likely feel a sense of security from dealing with a large, established enterprise.  

Independent Used Car Dealers

Locally owned independent used-car dealers are smaller businesses that buy and sell used cars, with much of their inventory typically coming from wholesale auto auctions. They’ll usually have less overhead than new car franchises, and most don’t have service departments.

While many independent used car dealers have been around for a long time and have solid reputations, you should always check with your local consumer advocates to learn more about the business before you buy from them. Though they’re not always 100 percent accurate, reviews on sites such as Yelp.com can illuminate issues with companies.

Buy Here Pay Here Dealers

A subset of smaller used car dealers are called “buy here pay here” dealerships. You get your financing directly from the dealer and have to make your payments at their location. Often the dealerships of last resort for used car buyers with bad credit, buy here pay here dealers frequently charge several times the rate of interest that a buyer with good credit qualifies for.

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Some buy here pay here businesses make more money off the financing of the vehicle than the purchase price and have reputations for aggressively pursuing payment or repossession if you are even a day late with your payments.

Most consumer advocates recommend avoiding these types of dealers at all costs. If your credit situation is so weak that you have no other car-buying alternative to this type of dealership, you likely should not be trying to buy a car.  

Private-Party Sellers

Buying a used car from an individual or business that is not in the business of selling cars is called a private-party sale. Because the transaction is performed without the overhead of a dealership, a private-party sale offers sellers the best chance to get the most money out of their vehicle, while giving the buyer an excellent opportunity to get a better price than they would at a dealership.

The money savings doesn’t come without a bit of work, however. You’ll have to do all of the sales, title, registration, and other DMV paperwork yourself. It is rare that a private-party sale will be anything other than an as-is transaction, with no recourse if the car breaks down even five minutes after you buy it.

Private-party sales are generally unregulated, meaning the consumer protection laws that you enjoy when buying from a licensed car dealer don’t apply to the transaction. Many private-party sellers will have emotional attachments to the cars that they are selling, and they'll price them high. You'll need to be a disciplined negotiator to bring them down to the price you want to pay.

Be cautious of illegally operating, unlicensed dealers trying to act as private-party sellers. These “curbstoners” may have several vehicles available at once, won’t be able to talk about the history of the car with authority, or may seem too knowledgeable about car sales. A quick internet search of the seller’s phone number or email address that shows multiple cars for sale is an easy way to identify an illegal car dealer. If you see several listings with the photos taken in the same place, it’s also a tipoff. Likewise, if the seller answers the phone with “which car are you calling about?” it’s another indication of a curbstoner.

Researching, Test Driving, and Inspecting a Used Car

When you have finished doing the research about the kind of vehicle you want and its financing, it’s finally time to start looking at specific cars. You’ll want to find out everything you can about a car’s history, take a thorough test drive, and get an inspection to make sure that it is mechanically sound.

Getting a Vehicle History Report

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Before you consider buying a used car, you'll want to obtain and study its vehicle history report from a company like Carfax or AutoCheck. Some dealers will show you the reports for free, but if you order them yourself, pricing starts at about $25 for a single report. Both firms offer discounts for multiple reports, and it’s a good idea to take advantage of that plan if you’re looking at several vehicles.

You’ll need to get the vehicle identification number (VIN) from the seller so that you can run the report.

What does a vehicle history report tell you? Quite a lot, actually. It can raise red flags that will save you the time and trouble of test driving and further inspecting any vehicles on your shopping list.

Accidents: A vehicle history report will show any major reported accidents that the vehicle has been in, using data from DMVs, insurance companies, police agencies, and others. In many cases, the deployment of airbags and any significant structural damage will be noted. Not every accident will be shown by a vehicle history report, so it does not preclude a later inspection of the vehicle.

Just because a vehicle has been in an accident, you should not strike it from your shopping list. You’ll want to get any repairs thoroughly inspected, though, and use the fact that the car has been in an accident as a way to negotiate a significant price reduction.

Other Damage: A comprehensive report will also list fire or flood damage. Either should disqualify a vehicle from further consideration as they can lead to hidden damage that makes the car unsafe or unreliable.  

If the vehicle was stolen and recovered, it should be noted on the report. If a long time passed between the theft and the vehicle recovery, you probably want to take the car off your consideration list.

Title Status: If there are any issues with a vehicle’s title, it will be shown on the Carfax or AutoCheck report. Pay particular attention to titles that have been moved from state to state or are “branded.” Common title brands include salvage, junk, rebuilt, police use, taxi use, hail damage, fire damage, flood damage, and lemon law buyback. Any bran