Tips for selecting and financing a used car

May 7th 2016

Image Courtesy of Daniel Oines via Flickr

Buying a used car is a smart decision, regardless of your income level. The lower costs, taxes and insurance that come with used car ownership are easier on the wallet. Selecting just one car can be daunting, though, and then there is the question of how to finance it. Below are some tips for selecting and financing a used car that's right for you.

Set your budget

List your income, assets, debts and expenses. The list you compile lets you know how much money you can afford to spend on a car per month. For a four-year loan, a general tip is to spend about $25 monthly for every $1,000 borrowed. By no means is this an ironclad rule because interest rates and down payment sizes affect a lot. If you calculate that you have $200 to spend monthly, you probably have the means to borrow about $8,000 for your used car. But remember that doesn’t include costs such as insurance, gas and repairs. For additional budget questions, this online calculatorcan help.

Put aside money for a down payment

You save more money in the long run when you put down as much money as possible. Plus, you own the car faster, and most dealerships require a down payment anyway. If your current car is running decently, think about holding off on a purchase to save for a bigger down payment down the line.

Get financing in advance

Whether your intention is to buy from a dealership, used car lot or a private party, you're better off getting financing in advance. Why? The following reasons apply:
  • Less pressure at a dealership or sales lot if you decide to buy a car there
  • Dealership or sales lot discussions are easier
  • No dependency on a dealership for financing
  • More likely to follow your budget
  • Often necessary (or paying in full) for private sales
  • Peace of mind
  • Planning is more realistic

If your income is low

The last two points above, peace of mind and realistic planning, deserve expansion, especially if your income is low. It would be painful to find the car of your dreams and a rejected loan application stops you from getting it. With some pre-planning, you'll have a better chance of securing the car you want.
Prearranging your financing lets you know if you can afford a car through traditional means, such as a bank. If you can't get a loan, there are other financing opportunities you might want to pursue. Some methods are:
  • Ask friends or family to co-sign. Explain to your potential co-signer why you can afford the car, but that the bank won’t recognize your means (for example, you work freelance or have been working part-time and are now full-time, or you got a raise). Then draw up a payment plan and agreement.
  • Work on building your credit score. If you can wait three months to a year, your credit score may have improved and you'll be better qualified for car ownership. A boost of just 50 points could get you into a new tier for car lenders and save you $50 a month. Plus, the time you'll spend boosting your credit score allows you to save more for a down payment.
  • Take this time to save more for a down payment. The more cash you put down, the less strict income and credit restrictions are.

Clarify what you’re looking for

Do you want a used car for only a year or two? Do you need the car to last longer? How important are car make and prestige to you? For instance, a used Toyota Camry tends to cost more than a Nissan Altima, although their performances are comparable. Select three to five cars that meet your budget and needs. The tools below can help you figure out if you can afford a certain car.

More ways to search for a used car

Buying from a private owner

If you see an ad or "for sale" sign from a private owner, call or e-mail the seller before you check out the vehicle if possible. During this conversation, ask any questions you have and double check information that is important to you. Be sure to wait to talk price until after you’ve seen the car, and to set up a test drive during daylight hours. Drive at least 30 minutes and on as many road types (street, highway, back road) as you can.  If you usually drive on one type of road, spend the most time on it. Note how the car feels, the ease of driving, visibility and responsiveness of controls.
If you’re interested in buying, don’t hesitate to negotiate. Many sellers are happy to get a car off their hands as soon as possible. Start with a low offer and know how high you’re willing to go. Walk away if necessary.
Knowing what options are out there, preparing a budget, researching vehicles you like, and setting up a long, daytime test drive are all steps to consider when buying and financing a used car. With a little planning and resolve, you can find the used car of your dreams.  

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