How to Get a Used Car Loan

Hands passing car key

Buying a used car offers many advantages, not least of which is a lower sticker price on your preferred model. From sidestepping steep depreciation to finding a reliable certified preowned model, purchasing a used car can save you some serious cash.

But even when you choose used, you might need a loan to pay for the vehicle, especially if it's a late-model car. Banks, credit unions, auto dealerships and online lenders all offer used car loans. To find the best loan for you, it's important to understand what each of these lenders has to offer.

Used Car Loans From a Bank or Credit Union

Before you start shopping for a used car, it's a good idea to get preapproved for an auto loan from a bank or credit union. If you know what kind of car you want, use online resources such as Edmunds or Kelley Blue Book to research average costs. With a price range in mind, you can tell the lender how much you want to borrow.

After the lender reviews your preliminary application, they'll tell you how much you can borrow and the interest rate they're likely to offer. This isn't a firm guarantee, but it gives you a good idea of how much a loan will cost you and makes it easier to negotiate with the dealer. A loan preapproval results in a soft inquiry on your credit report, which does not affect credit scores.

Banks may be the first place you think of for getting a used car loan. But if you belong to a credit union, are new to credit or have fair to poor credit, there could be advantages to applying for a loan at a credit union instead.

  • You may have a better chance of being approved for a loan. Credit unions are community-focused and smaller than many banks, so they take a more personal approach and are typically more understanding than banks if you have less-than-perfect credit or a limited credit history.
  • Credit unions often offer better interest rates than a bank or auto dealership. Because they're nonprofit organizations, credit unions can afford to make loans at lower rates than banks or dealerships, which need to make a profit.
  • You might find it easier to get a small loan. Banks and car dealerships typically have minimum loan amounts, but many credit unions don't—or if they do, the minimums are quite low.

To apply for a used car loan with a credit union, you'll need to be a member, which usually involves opening an account and making a deposit. Keep in mind that credit unions usually offer fewer conveniences than traditional banks; for example, you might have to make your loan payments by mail instead of online.

Both banks and credit unions may set maximum limits on the age or mileage of the car you're borrowing money to buy. This can be a problem if you're looking to finance an older used car.

Used Car Loans From Car Dealers

The used car dealership where you buy your car could also help you finance it. You'll find three types of used car financing at auto dealerships.

  1. Dealer-arranged financing: When you apply for a used auto loan at the dealership, the dealer will submit your application to multiple lenders to see which offers you the best deal (this is called "rate shopping"). In many cases, however, the dealer will increase the interest rate so they can make some money for arranging the loan.
  2. Captive financing: Car manufacturers often own financing companies that make loans on the manufacturer's new or certified pre-owned vehicles. Although captive financing companies sometimes offer good deals, loans may be limited to certain makes or models, and the best financing terms (such as 0% APR) are usually reserved for new vehicles.
  3. Buy here, pay here financing: Some used car dealers offer in-house financing. These buy here, pay here (BHPH) dealerships cater to customers with poor credit or no credit history. More lenient standards make it easier to get approved even if you've had trouble getting a loan elsewhere. On the downside, BHPH lenders usually charge very high interest rates and fees and require larger down payments than traditional dealers.

Used Car Loans From Online Lenders

Online lenders work similarly to banks and credit unions, except that the loan application process takes place entirely online. Many online lenders specialize in certain types of loans, such as auto loans, or certain types of borrowers, such as people with fair to poor credit. You'll start by getting prequalified with the online lender; once you're prequalified, you can submit an official loan application.

Using an online lending platform to find a used car loan has some advantages. You can get prequalified quickly and compare loans from several online lenders much faster than you could with traditional banks. You can also get approved and receive your loan funds in just a few days. But there are disadvantages too. Online loans may not offer terms as good as your bank or credit union, and if you prefer talking to lenders face-to-face, an online lender isn't the best option for you.

Shop Around for Used Car Loans

As with any other type of loan, you should shop around for used car loans to get the best rates and terms. It's worth the effort, because comparison shopping can save you thousands of dollars over the life of the loan.

Start by checking your credit score. A fair or poor credit score doesn't mean you can't get a loan—according to Experian data, in Q4 2019, the average credit score of people getting used car loans was 661. However, improving your score before you apply for a loan can help you qualify for a lower interest rate.

Will shopping around for used car loans and submitting multiple applications negatively affect your credit? Not if you handle it right. Most credit scoring models count multiple car loan inquiries as one inquiry as long as they are all made within a certain period of time—usually within 14 days, but sometimes longer depending on the scoring model. (Each inquiry will still show up separately on your credit report, however.) A hard inquiry can take a few points off your credit score, but the effect will disappear in about a year.

What to Look for When Comparing Used Car Loans

When you're comparing used car loans, there are several factors you should consider to find the best loan.

  • Down payment: The larger the down payment you can make on the car, the less you'll need to borrow, and the less interest you'll pay over the term of the loan.
  • APR: The annual percentage rate (APR) of an auto loan incorporates both the interest rate and any loan fees the lender charges. Assuming the down payment and loan terms are equal, comparing APRs is a good way to weigh the relative cost of different loans.
  • Term: This refers to how many months it will take you to repay the loan. New car loan terms generally start at 36 months and go as long as 72 or even 84 months. Because used car loan amounts are typically smaller, the terms are usually shorter. Still, in 2019 the average used car loan term was about 65 months, according to Experian data. A longer term means a lower monthly payment, but also means you'll pay more in total interest over the life of the loan.
  • Monthly payment: This is the amount you agree to pay the lender each month until the loan is paid off. The payment is the same every month and includes both principal and interest.

Used car loans often have higher interest rates than new car loans. In the last quarter of 2019, the average interest rate for a new car loan was 5.76%; for a used car, it was 9.49%, according to Experian data. The older the car is, the higher the interest rate is likely to rise.

Taking a shorter loan term can somewhat offset the higher interest rate of used car loans, but it will cause your monthly payment to rise. For example, if you took out a 36-month used car loan at 9.49% APR, you'd pay $1,530.18 in total interest. If the same loan were stretched out to 60 months, however, you'd pay $2,598.18 in total interest. Choosing the shorter term would save you over $1,000.

Choosing the Right Used Car Loan

When you're looking for a used car loan, don't rush the process. Check your credit score before you apply for a loan and take steps to boost your score if necessary. Once your credit score is where you want it to be, shop around to see which lender offers the best interest rate, loan term and monthly payment for your needs. Buying a used car can be a smart way to save money—and taking a little time to find the most favorable loan terms can save you even more.