How to Buy a Used Car

Check Your Credit Reports and Scores

If you're planning to get an auto loan to buy your used car, check your credit first. Start by getting your credit report from one of the three major credit bureaus (Experian, TransUnion or Equifax), checking it and correcting any errors that you find. You can also check your Experian credit score and take steps to improve your score if necessary. The better your credit score, the better terms you'll be able to get on an auto loan and the more leverage you'll have when negotiating with the dealer.

Know What You Can Afford

You probably have an idea of how much you want to spend on the car in total and what you'd like your monthly payments to be. Research average car loan interest rates and terms online to find terms that work for your financial situation. If you want to spend about $10,000 on the car and you can make a down payment of $2,000, you'll need a car loan of about $8,000. If you want to have payments of $300 a month or less, plug $8,000 into an auto loan calculator and see if that's realistic.

Then do some online research to get an idea of the price ranges for the vehicles you have in mind. You can check local dealers' stock, automotive classified ads, or Kelley Blue Book values to get estimates and see if your budget will cover the car you want.

Shop Around for Auto Loans

Financing your car through the dealer isn't always the best way to go; you can often get better terms and interest rates from a third-party lender. Before you actually start visiting dealerships, shop around for auto loans from banks, credit unions and online lenders. Also take time to learn more about how to get a car loan.

Getting preapproved for a car loan can give you more bargaining power at the dealership. It also gives you a firm budget to work with so you know exactly how much you can spend. Fill out a preliminary application with a lender; if you're preapproved, you'll get an offer of credit including the loan size, terms and interest rate the lender is willing to offer you. To be sure you receive the best terms, get preapproved by more than one lender. Just make sure to complete all the applications within about 14 days because each loan application counts as a separate hard inquiry into your credit history, and too many hard inquiries can hurt your credit scores. However, when you consolidate all your applications into a 14-day period, they're treated as one hard inquiry, limiting the impact on your credit score.

Get a Vehicle History Report

You've got your budget, you're preapproved for your car loan, and you think you've found your dream used car. Not so fast. Before you actually check out the car, get a vehicle history report to uncover any potentially costly or dangerous problems with the vehicle. You'll need the car's vehicle identification number (VIN), which you can get from the seller.

Here's what to look for in a vehicle history report:

• Accident history: This lists any major reported accidents involving the car. If the airbag has deployed or the car suffered structural damage, it's probably best to steer clear of the vehicle.
• Title status: Avoid cars with titles such as "junk," "fire damage," "flood damage," "rebuilt" or "lemon law buyback," all of which are self-explanatory. A "salvage title" indicates that an insurer deemed the car a total loss, but someone fixed it up and put it back on the road. Also avoid "police use" or "taxi use" titles, which indicate heavy usage. Look for a car with a clean title.
• Inspection and registration history: These indicate whether the car has been registered with state DMVs and gone through state-required inspections, such as smog checks. If a car has gone unregistered for long time periods, this may be a sign that it was stolen or totaled at some point.
• Odometer reading: Sometimes unscrupulous sellers turn back a car's odometer to make it look newer; the vehicle history report shows the true odometer reading.
• Ownership and sales information: How many times has the vehicle changed hands? One-owner vehicles tend to be better maintained than vehicles that have had several different owners. Be wary of cars that have had multiple owners in different states—this often indicates the car was totaled or flood-damaged and moved to a new state to wipe its title clean.
• Recalls: This indicates any recalls of the vehicle and whether the required repairs were made. An open recall isn't a deal-breaker; just make sure to get it taken care of.
• Liens: Outstanding liens on the vehicle will be listed. Look for a vehicle clear of liens.
• Maintenance: Sometimes vehicle history reports include maintenance; you can also ask if the seller has a maintenance record to show you.

Once the vehicle you're considering has passed the vehicle history test, look it over thoroughly and take it for a test drive. Then take it to an independent mechanic for a thorough inspection before making an offer.

Negotiate the Price and Make a Deal

Ready to start bargaining? It's much easier to haggle over the price of a used car than a new one, since there's no fixed MSRP. Use pricing from Kelley Blue Book or Edmunds' car appraisal tool to estimate the car's value. Simply input some basic information, such as the make, model, mileage and condition, to get an estimate. Subtract 10% to 20% from those prices and start by offering the seller that amount.

If you're already preapproved for a car loan or can pay in cash, use that as a bargaining chip. Did your mechanic find fixable problems with the car? Get an estimate of the repair costs and use that to bargain down the price of the car.

Things to Watch Out for When Buying a Used Car

The real cost of a used car is more than just your monthly payment. Remember to factor in expenses such as maintenance, gas and insurance, keeping in mind that an older car is more likely to need costly repairs than a new one.

Be wary of any dealership or seller that isn't completely honest with you. Sellers should be willing and happy to show you the vehicle's service reports, let you take it to your mechanic for inspection, and answer any questions. A seller that won't do these things probably has something to hide.

Finally, watch out for "buy here, pay here" (BHPH) auto dealerships. Traditional dealerships pass your purchase contract on to an auto lender that provides a loan. BHPH dealers finance your purchase themselves. Because their lending criteria are looser, BHPH dealers primarily appeal to people with bad credit who can't get auto loans anywhere else. That also means they charge very high interest rates—often up to the maximum your state allows—and may also pile on additional fees. If you're having trouble getting an auto loan, there are better ways to get a car with poor credit than a BHPH dealership.

Impacts to Your Credit

Like any other type of loan, a car loan can impact your credit either positively or negatively, depending on how you handle it. Your lender will alert the major credit bureaus of your new loan and report your payment history. Making your payments on time will help improve your credit score; missing a payment will hurt it. Miss too many payments, and you'll be back to taking the bus or bumming rides from friends when your used car gets repossessed.

Buying a used car can be a more affordable alternative to buying a new car. The key is to take your time. Assess your budget, arrange your financing and inspect the car thoroughly before you make an offer. By educating yourself and being prepared, you can find the car of your dreams at a price that won't drive you into the red.