Financing a Used Car

kali9 / Getty Images

Buying a used car can save you thousands of dollars compared to the cost of a new model, but you’ll want to watch your wallet when it comes to financing your new ride. Financing a used car is often more expensive than getting a loan on a new car, and some used car dealers employ tactics that will make it very hard to get out from under the debt.

As soon as you drive a new car off of the lot, its value plummets. When you buy a used car, however, you won’t have that initial depreciation hit – the original owner will have already taken the loss in value. On the other hand, new car buyers have access to less expensive car loans and new car financing incentives.

An exception to that rule is certified used cars. Many lenders treat them as new cars when deciding on loan terms, and manufacturers frequently offer special financing deals and warranty on the low-mileage well-cared for vehicles. Of course, a certified used car normally carries a higher price tag than a similar non-certified used car.

When you’re buying a used car, negotiating a great price is only one way to get an awesome deal. Negotiating great financing will save you money every month you’re paying off the car.

Be Prepared

The best way to save on a used car loan comes from preparation. The process isn’t all that different from getting a loanon a new car, though the costs might be different. Because lending on a used car is inherently riskier for lenders, they tend to charge higher interest rates and don’t offer the same length of loans as they would on a new car.

That means that you should figure out how much caryou can afford, then visit lenders that you already have relationships with, such as your credit union or bank. Credit unions are member-owned cooperatives that can often offer better rates than banks.“You should definitely [be] thinking about financing well before you step foot into the dealership’s financing office,” says Chris Kukla, executive vice-president of the Center for Responsible Lending.

“Most credit unions will take you on, if you qualify for a loan,” says Kukla.

Barry Austin Photography / Getty Images

If you are getting rejected by your local lenders, the last place where you want to try to get financing is at a car dealer. While many will offer credit to anyone, regardless of credit history, that financing will likely come at a high cost, with an exorbitant interest rate or long loan terms. Financing is a huge profit center for car dealers, and they work to find loan deals that make them the most money, not offer you the best value.

In many cases, a car dealer will mark up the financing deals that they are able to get on your behalf. For example, a lender might offer the dealer a financing package at 6 percent, and the dealer would then offer it to you for 8 percent. In most states, according to Kukla, the dealer would not have to disclose that markup to you.

Repair Your Credit

A better plan is to take some time before you buy to repair your credit and make sure that there are no errors on your credit report that can ding your score. You’re entitled to one free credit report from each of the three major credit bureaus per year. You can get your credit score for free from a growing number of online sites, such as CreditKarma.com (although you do have to give up some private information to do so).

Factors that go into determining your credit score include how much you currently owe in debt and what other obligations you have compared to your income, how you do at paying your monthly bills on time, and whether you have defaulted on any previous obligations. If you have too much available credit on your credit cards, or you haven’t used credit before, your score will also be negatively impacted.

Not only can taking care of credit problems earn you an approval from your lender, but the better your credit score, the better the loan terms that you’re likely to be offered.

Time to Buy

When you have a credit offer in hand you’re in a much more powerful position when you do visit the dealer. If they want to extend their own financing offer, they will have to beat the one you have in hand.

But you’ll still have to be careful here, and remember that the most important number in the transaction is not the amount you pay each month.

Justin Sullivan / Staff / Getty Images

“Most people shop by monthly payment, and it is the absolutely worst way to do it,” says Kukla. “The things that you need to pay attention to are the total cost of the car, the total amount that you are financing, and the interest rate.”

Telling a seller the amount that you would like to pay each month is an open invitation to get a deal that could cost you thousands extra in the long run. By extending the loan terms out over a couple of extra years, an unscrupulous dealer can pack on things like extended warranties and gap insurance that you should either not buy, or buy elsewhere at lower prices.

Avoid Buy Here/Pay Here

There’s a type of used car dealer that you should avoid at all costs if want to protect your wallet. They’re called buy here/pay here dealers, and they often charge buyers with challenged credit interest rates that are significantly higher than market rates, on vehicles that are already overpriced compared to their values.

“Buy here/pay here works a lot different than a normal dealer,” Kulka says. “These deals are incredibly expensive. It’s possible that you would be able to buy a car for just the down payment that a buy here/pay here dealer would demand.”

If you absolutely need a car, but are in dire financial straits, Kukla suggests seeking local charity organizations that help those in need find basic transportation.

More Buying Tools From U.S. News & World Report

There are hundreds of car models on the market to choose from, but when you use our used car rankings you can pare that selection down to the cars that will best fit your wants and needs. If you are considering certified used cars, be sure to check out our used car deals page, where carmakers offer special financing deals on their gently used models.

For the best in new- and used-car buying advice, follow the experienced journalists and researchers of U.S. News & World Report on Twitter and Facebook.