Used Car Loans
A common misconception about auto loans is that they are only available when purchasing a brand new vehicle from a dealership. However, car loans are not exclusive to new car purchases. Used car auto loans are readily available for drivers who are looking to purchase used vehicles.
New vs. Used Car Loans
The biggest difference you'll find when comparing a used car loan to a new car auto loan is the difference in the loan amount. Simply put, you are going to be taking out a much lower loan for a used car than you would for a new car.
Additionally, interest rates for used car loans are higher than those for new cars. This is directly related to the value of your used car.
Another common difference between new and used car loans is the lack of specials offered with used car loans. While you may see new cars offered with zero money down and no monthly payments for an extended amount of time, you are not likely to see the same special offers applied to used car loans.
Keep in mind, however, that even after all the specials offered with a new car, the base of your used auto loan is likely to remain lower than that of a new car loan.
Getting a Used Car Loan
A lot of people think it's hard to get a loan for a used car. However, the process of getting a car loan is not that different for a new versus a used car.
Expect to provide the following for your used car loan application:
- Your name and address.
- Date of birth.
- Social Security number.
- Proof of employment.
Potential used car lenders will use this information to run a credit check on you.
The ability to get a used auto loan is based on the lender's assessment of whether they think they are going to get their money back, plus the interest.
Lenders have different formulas for determining who to lend to, how much to lend, and the interest rate of the loan. The common elements, like your credit score or how much cash you will put down at closing, are two of many variables they consider. One of the most important variables the lender looks at is the car itself.
How Car Value Affects Your Loan
For any car loan, a lender must determine the loan value of a car. This is very important to a lender because for a secured loan, the car is serving as collateral. Lenders want to make sure they do not over-value the car, as they would end up losing money in the event the is repossessed.
Because it is much more difficult to predict what is going to happen to the value of a used car, lenders will charge a higher interest rate to help cover the unknown potential risk.
As the value of the car gets lower, one or both of the following are going to happen:
- It's going to be harder to get a loan.
- The interest rate is going to be higher.
Where to Get a Used Car Loan
Most organizations that offer loans for new cars also offer loans for used cars. When shopping for a used car loan, look at the following potential providers:
- Credit unions.
- Some insurance companies.
Since loans for used cars often carry a higher interest rate than for new cars, it's especially important to shop around to make sure you are getting the best rate you can.