Financing a car the right way—what you need to know

You’re shopping for a car. You’ve been searching online, checking Cars.com, TRED, maybe OfferUp and Craigslist… you’ve started to narrow it down. You’ve got a top make/model or two, and you know which colors you like, which options you have to have.

It’s all very exciting, as you get closer and closer to actually buying it and driving it home. But then, at some point, you have to come up with a way to pay for it. Maybe you have the cash sitting around and ready to go, but if you’re like most people, you’re going to need to finance at least part of the purchase price.

The world of used car finance can be intimidating. But if you come in armed with a few key pieces of information, you’ll know exactly how to finance a car wisely, and avoid mistakes that could end up costing you more.

  1. Make sure the car you’re interested in is eligible for financing, and which companies offer it.

Not all lenders offer financing for all cars. Each one has requirements about how old a used car can be; many will only provide a loan for a car that’s less than 10 years old. It’s also common for lenders to only finance cars with fewer than 100,000 miles. 

  1. Find a lender that will lend you money to buy from a private seller, or from the specific dealer(s) you’re planning to buy from.

If you get a bank loan, the bank will often cut a check—either to the dealer directly, or to you. In some cases that will be an advantage, but this option is usually  only available to borrowers with very good credit.

A lot of lenders who specialize in car loans only work with specific dealerships, so you’ll need to make sure that the car you want is at a dealer that works with your lender.

And some car marketplaces, like TRED, give you the best of both worlds; they offer financing through several lenders so you can get the best rate, and then you’re ready to buy your car from one of their trusted private sellers. So you can get your financing and a good deal on a car direct from its owner, all in one place.

Used car finance rates are generally a little higher than for new cars; there’s more risk for the lender when they finance a car that isn’t new and is subject to higher depreciation. But you should be able to save enough by buying a used car (as opposed to new) that the slightly higher rate won’t matter.

  1. Do your research

It’s important to know what’s available to you, based on your credit score, what part of the country you live in, and how much you’re looking to borrow. There are many websites to research your credit score (most auto lenders currently use FICO scores 8 and 9), and also tools like car payment calculators to plug in the interest rate you qualify for and estimate your monthly payment. Remember to add taxes at your local rate to your monthly payment, if the calculator hasn’t included them.

Be sure to get quotes from several different lenders. That way, you know the range you should expect, whether you bring your own financing or rely on a dealer. Do not walk into a car dealer and use their financing without doing your own research and having your own options—financing is an area where dealers can make some extra money, so they’re sometimes not motivated to get you the very best rate.

  1. Put as much down as you can

A good rule of thumb is to put 20% of the purchase price down. This can have a couple of advantages: it will lower your payments, and save you a lot of money over the term of the loan, and in some cases it can even help you get a lower interest rate.

It’s also a good idea to pay for any loan fees, added accessories, or other costs up front. It can be tempting to roll them into the loan, but sometimes they can end up adding a lot to your monthly payment.

Financing may not be the most fun part of the car buying experience, but it doesn’t have to be painful. Now that you know how to finance a car the smart way—by knowing your options and which lenders will work best for you—it can be an easy and painless process.

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