Financing a used car can be difficult at times, but not if you are prepared before you engage with a seller. Here are the 5 most important tips to obtain financing for a used car.

How to Finance a Used Car From a Private Seller

Are you looking to borrow money for a new car or vehicle? Well, you may need a loan and if you do, these tips are sure to help. Depending on your financial situation, you may want to consider financing a used car versus obtaining a lease.

I obtained financing for my old 2011 Volkswagen and I wish I knew these key tips to obtain financing for a used car when I purchased the vehicle.

I feel like I got ripped off! This is one of my learning mistakes documented in my early retirement blog.

You’d never want to end up being car poor and not have the flexibility of doing other things like traveling and investing.

However, I did obtain a short term on the financing and paid off my loan a couple of years early! You can use these creative ways to prepay your debt similar to the strategies used for student loans.

Please keep in mind this isn’t an article about financing a used car versus leasing. This can be covered separately.

Why you should buy a used car from a private seller

Buying a car from a private seller can prove profitable. By purchasing a car from a private seller over a dealership, you can get a much lower price. The price can be so low that sometimes you can use the car for a few years and still end up making money on it. However, buying from a private seller comes with hassles. You must be able to put up their requests, changing the title and most importantly, obtain financing for the purchase.

Buying from a private seller can seem like a long process, but with collaboration and some helpful tips, you’ll be driving away in no time.

5 Most Important Tips for Financing a Used Car

Financing a used car doesn’t need to be stressful. Make the process fun by using these tips to understand the auto loan financing process and be prepared before buying your car.

1. Understand Your Credit Before You Go To The Dealership

Before you get a car loan, you need to take the time to check and track your credit report and score.  It is important to note that, unlike credit cards and mortgages, you can generally get a car loan even when you have bad credit but you will pay a lot more.  The reason for this is that it is relatively easy for the banks to repossess your car if you do not pay them.

However, if you have shaky credit, you might be excited to just be able to get a loan and are not going to be asking if there are any lower rates available.

Dealers will know this and they are making a lot of money based on this.  Fortunately, there are free tools you can use to understand your credit score.  Once you know what your credit score is, you will be able to figure out if you qualify for the best loan rates.

Dealerships often advertise very good interest rates on new cars such as 2.9% or 1.9% or even 0%.  What they will generally leave for the fine print is the fact that these rates are only available to buyers with the best credit.  This will generally be a FICO score of 750 or higher.

If you have a credit score in the low 700s, you will still get a fairly good interest rate, but will not qualify for the best promotions.  After this, the rates will rise very quickly.  If you have a below average credit score of 650 or less, you will often be presented with car loan rates of 10% or more.

The lower your credit rate, the more important it is to shop around and ensure that you are getting the best rate you possibly can.  You will generally have to pay more than someone with good credit, but you do not have to pay the first rate that you are offered.

Here are a few tips on how to build your credit score faster.

2. Get Financing Quotes Before You Go

This could be one of the most important points for financing a used car. If you have excellent credit and you know it, you will generally be able to get the best rates from the dealership.  Dealerships will serve as the broker for multiple lenders.  However, you might wonder what happens when you do not have the best credit.

In these cases, you should try online lenders.  You can complete a credit application and will be presented with the interest rate along with the maximum amount you can spend on the car.

The best thing about this option is that you do not have to use the loan if the dealer provides a better deal.  What this does offer you is an idea of the interest rate that needs to be beaten.

Most of the time, credit unions and local banks will offer those with average credit the most competitive interest rates on used and new car loans.

You might even be able to pre-arrange your financing which can be used as a bargaining chip with the dealership’s finance and insurance manager.  This could help you get an even lower interest rate. Being smarter is a great way to get financing for a used car.

3. Keep The Auto Loan Term As Short As Possible

What you want is a shorter loan term with lower interest rates, but this will have a higher monthly payment.  When you enter a dealership and state that you want to finance your car, savvy car salespeople will try and negotiate with you based on the monthly payments.  They are not going to use the overall purchase price of the car.

When they do this, the salesperson will show you lower and lower payments which are achieved by extending the term of the loan and not reducing the price of the vehicle.

The payment could go from $470 to $350 suddenly, but you are not paying less for the car.  In fact, you will generally pay more as you are charged more interest.

The longer you take to repay the loan, the more interest you are going to be paying.  However, this is not all that you need to know.  There are times when the banks will charge higher interest rates for longer loans and this will increase the overall cost of your credit.

It can be very tempting to stretch out the car loan for 5 or 6 years to get the lowest monthly payment.  However, this means that you pay a lot more in interest and for the car in general. This is not the best outcome if you want to prepay your financing for a used car.

4. Put Down 20% Upfront

While you want to have a short loan term, you also need to avoid a situation where you owe more on the car than it is actually worth.  This can be done by putting money down.

This might seem like common sense, but there are a lot of dealerships that do not require this for buyers who have good credit.

Being able to drive off in a new car that you have not had to put any money down on can be tempting, but it will be risky.  If you find yourself in a position where you need to sell your new car, you might not be able to if you owe more on the loan than the car is actually worth.

A larger down payment on the vehicle will ensure that this does not happen.  You can use your previous car as the means to get a loan and nowadays can even do so with an online title loan with no store visit required – it’s easy and fast and can work well in this instance.

If you have 20% down upfront and a short-term, you can clear your debt much faster.

5. Pay For Fees, Taxes And Extras With Cash

You should not finance any miscellaneous expenses related to the purchase with the loan.  This will include the sales tax, documentation fees, registration fees and any of the extras that you choose such as an extended warranty.

Dealers will often be happy to roll this into the loan, but this will increase the amount of your loan and not the value of the car. You should do what you can to pay for all of this upfront. This is usually a hidden point in financing for a used car.

Conclusion on How to Finance a Used Car from a Private Seller

The way to obtain financing for a used car is to take a prepared approach and avoid showing up empty-handed at the sales table. There is nothing worse than showing up unprepared. I always wrestle with the idea of leasing a car versus financing. I think at the end of the day you should just pay for a car in cash with what you can afford.

If you want the best outcome for your financial future, you need to consider these tips for financing a used car before you get to the dealership. I’ve seen far too many people show up to a dealership just to look at cars and then get sucked into buying one on the spot! Don’t do it.

The cup of coffee is likely tricking you into buying a used car immediately. Here are a few ways to obtain financing for a roof replacement.

Are you going to obtain financing for a used car? Do you know how to finance a used car from a private seller? Please let us know in the comments below. I’d love to hear from you!

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• Guide to repaying your student loans

Millionaire Mob is an early retirement blog focused on passive income, personal finance, dividend growth investing and travel hacking. With both a million rewards points and a million dollar net worth you can live a happier lifestyle.

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