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Used Auto Loan

Get tips on how to get the best used auto loan.

The Federal Trade Commission notes that a used auto loan usually comes with a higher annual percentage rate than a new auto loan. [©Jupiter Images, 2009]
©Jupiter Images, 2009
The Federal Trade Commission notes that a used auto loan usually comes with a higher annual percentage rate than a new auto loan.

A consumer has two options when buying a used car: pay the entire price upfront with cash or obtain a used auto loan. Paying for a used automobile with cash is not possible for many purchasers. By understanding how a used auto loan works, savvy consumers can secure better financing.

Shop Around for the Best APR

The Federal Trade Commission (FTC) notes that a used auto loan usually comes with a higher annual percentage rate (APR) than a new auto loan. APR is basically the yearly cost the consumer pays for the used auto loan. APR can contain fees, and different lending institutions sometimes calculate APR differently. However, APR remains the best way for a consumer to assess the used auto loan's real cost and compare that cost among lenders. Three primary factors determine the payment for a used car loan: the purchase price of the car, the length of the loan, and APR. The financing source and consumer's credit score affect the APR. Loan lengths are likely to be shorter for a used auto loan than for a new auto loan, which increases the importance of obtaining a low APR.

The FTC suggests avoiding any used auto loan advertised to people with poor credit or to first-time purchasers. These loans often require higher payments up front. Such loans also often come with much higher APRs. According to The Washington D.C. Department of Consumer and Regulatory Affairs' Office of Consumer Protection, consumers seeking a used auto loan should pay closest attention to APR and the required down payment. Consumers are not obligated to accept the dealer's suggested APR. In most cases, consumers benefit from shopping around to obtain a pre-approved used auto loan before they ever walk inside the dealership. However, the consumer can also obtain financing through a dealer and may be able to negotiate with the dealer by asking him or her to beat the other rate.

The Indiana Department of Financial Institutions provides a detailed lesson in used car buying that can be helpful to consumers in all states. Consumers should study all details in the used auto loan carefully, paying special attention to pre-payment and default provisions. Federal law mandates that financing terms in a used auto loan be disclosed to the consumer. Creditors must disclose such things as APR, the overall number of payments, the schedule for payments and the "total sales price," which is the amount of all future payments added to the down payment. Consumers should research different sources for a used auto loan.

Used Auto Loan Options

Consumers have many options when obtaining a used auto loan, but some options are more desirable for consumers than others. Financing options for a used auto loan include:

  • banks
  • credit unions
  • online lenders
  • dealership-arranged financing
  • other independent finance companies

Obtaining a used auto loan from a dealership can cost more money than obtaining the loan from a bank or credit union. The dealership option is usually best only for individuals with poor credit or who want the convenience. Consumers are not required to choose the loan from the dealership, nor do they have to allow the dealership to handle the paperwork for their outside loan, which often comes at an extra, and sometimes hidden, cost to the purchaser. Used car dealers call the used auto loans that they finance a "retail installment sales contract." They will sell it to a bank or credit union and take a portion of the interest rate, giving them an incentive to lock the consumer into a higher APR.

According to Consumer Reports, banks are conservative lenders and are more likely to deal with purchasers who have good credit. However, they may also offer the most competitive used auto loan rates to those who qualify. Credit unions are likely to grant a used auto loan to their members; in fact, some people join credit unions just for the competitive used auto loan rates. Other finance companies and special lending companies cost consumers the most money, but they may be the only option for people without good credit scores. Consumer Reports suggests that online lending is an option but cautions consumers to check into privacy guidelines first to ensure that their personal information will not be shared. Used car leasing is not as common as new car leasing but can also be a financing option in some cases.

Ask for the Buy Rate

The lowest APR that a purchaser qualifies for is called the "buy rate," but dealerships will often quote a higher rate to the purchaser than the buy rate. Consumers in all states should request the "buy rate" in writing from the dealer if considering dealership financing. Consumers should begin by seeking a pre-approved used auto loan from a credit union, bank, online lender or other independent source because this will increase the chance that they will stick to a budgeted amount. Most importantly, it gives the purchaser more control in the overall process. Consumers should start by researching the car's price online, through credible independent sites that present information such as the retail blue book value of the vehicle.

Consumers Beware

Consumers should be wary of any used auto loan advertised as a "zero percent" opportunity. Dealers often get back the cost simply by increasing the car's price. According to the Arizona Attorney General and other authorities, consumers should also not take cars home before a used car loan is approved. Dealerships sometimes allow this practice because it locks the consumer into a higher APR, or the consumer can lose his or her down payment if the financing falls through. It's also best to negotiate the car price before settling on the number of monthly payments. The Federal Citizen Information Center offers a list of Web sites where consumers can research used car purchases. Researching the car's real market value and APR options will place the consumer in the most advantageous position when seeking a used auto loan.

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