Getting a used car loan is something that many Americans find to be both worrisome and unsettling. Common fears are due to the simple fact that most people simply do not understand how used car loans work. Why does a bank refuse to offer extended car loans on cars that are a few years old? Why will some older cars, that may have very few miles on them, not be eligible to receive a car loan at all? What is a 'down payment'?
Well, we'll go through and show you just how easy it can be to understand used car loans as we break down how they're made available and what you need to do to get them.
To begin with, in order to decide how you get a used car loan, you will need to decide if you're going to buy your used car from a private party or from a dealership.
If you wish to buy a used car from a private party, you will first approach a bank (or credit union) and you will explain that you wish to buy a used car from a private party. The bank will review your credit history-called a 'credit check'-and then tell you if you are eligible to receive a used car loan from their institution. If you are eligible, then they will have certain requirements for you to receive the loan from them. One common requirement is that the vehicle you wish to buy must be no older than a certain age. The reason a bank cares about this is due to the fact that, if you do not make regular payments on your used car loan, they will take back the car. They will then sell the car to make up for the loss they have received due to the fact that you didn't pay-or 'defaulted'-on the loan. If the car is so old that it doesn't have any value, then the bank loses all the money that they originally loaned you. For this same reason, banks will usually require you to haggle with the private seller so that you buy it at a certain percentage below what the posted value-known as the 'blue book value'-of the car actually is.
In addition to these rules, the bank will charge you a percentage per year for the loan. This percentage-known as 'interest rate'-is to make up for the fact that the bank can't use the money which it has given you for your used car loan until it is paid back. How high your interest rate is is determined by how good your credit is as determined by the credit check the bank did. If you've paid off many things with credit in the past and done so when you agreed to, then you will get a lower interest rate because the bank thinks that there is a much less chance you will default on the loan. If you have had problems paying bills and credit cards in the past, then you will have a higher interest rate, because the bank thinks that there is a greater chance that you will default on the loan.
Once you have your used car loan from the bank, you need only go out and find a private seller who will sell you the used car you want. The advantage to getting a used car loan for purchasing a car from a private seller is the fact that you will often get a better price than if you went to a dealership and most private sellers won't require you to pay part of the cost of the used car out of your own pocket-known as a "down payment."
If you choose to go to a dealership instead, you will often times find it quicker to get a loan. This is due to the fact that the dealership often has a number of different banks that work directly with them, so that the dealer can go through and try to find out how many different banks are willing to give you a car loan. Due to the number of banks that a dealership works with to get you a used car loan, you can often times get longer or shorter terms on paying off your car than if you go to a bank yourself. However, your interest rate will often times not be as low with a dealership, because most dealerships will mark up-or 'increase'-the interest rate that the bank is willing to offer you so that the dealership gets a portion of what you are paying the bank each month. In addition, prices will usually not be as low with a dealership, due to the amount they have to charge extra to pay their operating costs, and you will often times have to make a down payment out of your own pocket of between 10-30% of the total value of the car.
While there are drastic differences between used car loans when buying from private parties and used car loans when buying from dealerships, one thing is true with both types of used car loans: the faster you pay off your car, the less interest you have to pay. Because interest is assessed every month, if you pay off a 24 month loan in only 16 months, you save that extra percentage you would have paid for those last 8 months. This is the reason why people like to take as little time as possible to pay off loans. However, it's better to choose a longer used car loan that you can reasonably pay off sooner, rather than choose one that's too short and risk not being able to make the minimal monthly payments.
