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Buying a used car can save you a significant chunk of change compared to a brand-new vehicle. But even used cars often require financing. The average used car cost $26,533 as of October 2023, according to Kelley Blue Book data. To get a loan for a used car, check your credit score, set a budget and compare offers from various lenders to find the best loan.
Can You Get a Car Loan for a Used Car?
It's possible to finance a used car. However, there may be fewer loan options than for new cars, and interest rates on used car loans are generally higher. Some lenders won't finance used cars over a certain age or mileage limit, however, so financing a classic car or one with tons of miles may not be an option. You may also choose to finance a used car if you can't afford to pay cash for the vehicle you want.
Where to Get a Used Car Loan
When looking for a used car loan, financing options include banks, credit unions, auto dealerships and online lenders.
Banks and Credit Unions
Credit unions and banks are the most common sources of used car loans, according to Experian's most recent State of the Automotive Finance Market. Because they're not-for-profit cooperatives, credit unions often offer lower interest rates than banks or auto dealers do. You'll need to be a member of the credit union to apply for a used car loan. Joining typically involves opening and funding an account, but there may be other requirements too.
Auto Dealers
Auto dealerships that sell used cars typically offer financing, which may be:
- Dealer-arranged financing: The dealer submits your loan application to several lenders to shop for the best rate. Dealership finance departments may increase that rate a bit to make some profit on the loan.
- Captive financing: The car manufacturer's own financing company may offer loans on certified pre-owned vehicles.
- Buy here, pay here financing: Some dealerships offer in-house buy here, pay here financing designed for customers with poor credit or limited credit histories. It's typically easy to get approved for these loans even if you've been turned down elsewhere. However, these loans generally come with extremely high interest rates and fees and require larger down payments than traditional auto dealers.
Online Lenders
Online lenders work like banks and credit unions, but the loan application process takes place entirely online. You can find online lenders that specialize in auto loans or in lending to people with poor to fair credit. Getting prequalified or approved and receiving your funds is usually faster than at traditional lenders; however, online lenders may charge higher interest rates.
How to Apply for a Used Car Loan
To apply for a used car loan, follow these steps.
- Check your credit score. It's free to check your credit report and FICO® Score☉ with Experian. For credit scoring models (such as FICO) that use a 300 to 850 range, a score of 670 or above is considered good. A fair or poor credit score won't necessarily keep you from getting a loan, but improving your credit could help you land a lower-interest loan. Catching up on late payments, paying bills on time and reducing your credit card balances can all help increase your credit score.
- Determine your budget. Check average used car prices at dealer websites or auto-industry sites like Kelley Blue Book and Edmunds to determine a price range for the used car you want. Aim to make a down payment of at least 10%—preferably more: The bigger your down payment, the less you'll need to borrow. Review your budget (or make one) and figure out the monthly car payment you can afford.
- Research lenders and get preapproved. Shop around for used car loans by getting preapproval from three to five lenders. Submit all your applications within a 14-day period and credit scoring models typically combine them into one hard inquiry, minimizing any negative impact on your credit score. Preapproval will give you a ballpark idea of the loan amount, interest rate and terms available to you.
- Compare loan offers. When weighing loan offers, compare the annual percentage rate (APR), which includes interest and fees to show you the total cost of borrowing. You can use Experian's car payment calculator to estimate how different loan amounts and terms affect your monthly payment and the total amount of interest each loan will cost. A shorter loan term often means a lower interest rate, although it will increase your monthly payment.
- Apply for your best offer. Preapproval isn't the same as final loan approval, so you'll need to complete an official loan application to finance your car.
Frequently Asked Questions
There's no specific credit score you need for a used car loan; you can find loan options even with fair or poor credit. However, a good or excellent credit score may help you get more favorable loan terms. According to Experian's latest Automotive Finance Market Report, in Q3 2023, the average credit score of drivers approved for a used car loan was 690, or within the "good" range.
It's usually harder to get a loan for a used car than a new car. Used car loans are riskier for lenders because a used car's value is harder to assess than that of a new car. As a result, you'll generally find fewer loan options and higher interest rates when trying to finance a used car.
You can use a personal loan to buy a new car, but it's typically not the best option. Auto loans usually have lower APRs than personal loans because the car acts as collateral, reducing the lender's risk. According to Experian data, the average used car loan APR is 11.35%. In comparison, the average APR for a 24-month personal loan is 12.17%, reports the Federal Reserve. In addition, terms for personal loans are generally shorter than those for auto loans—typically 12 to 60 months.
However, using a personal loan could make sense if you're buying a used car from a private party and can find terms comparable to a bank or credit union's used car loan. If the vehicle is too old to qualify for a car loan but you don't have the cash to purchase it outright, you could use a personal loan to pay the car's owner, then pay off the car over time.
Financing a used car can help you build credit if you make your loan payments on time and ultimately repay the loan. Applying for a used car loan may ding your credit score a bit when the lender performs a hard inquiry into your credit, but the effect will be temporary. The appearance of the new loan in your credit report could also have a short-term negative effect, but that should go away once you've built up a solid payment history. Getting a used car loan could hurt your credit, however, if you're late with payments, become delinquent on your loan or have your car repossessed. Consider setting up autopayments to keep your loan on schedule.
The Bottom Line
Used car loans typically cost more in interest than new car loans, but a good credit score can help you qualify for better interest rates, lowering your loan costs. Consider signing up for Experian Boost®ø, a free feature that gives you credit for making on-time utility, rent, phone, insurance and streaming service payments. Because payment history is the single biggest factor in your credit score, paying these and other bills on time can help pave the way to the used (but new-to-you) car of your dreams.