One of the biggest choices you’ll be faced with when buying a used car is deciding how you’re going to finance it. If you don’t have the cash on hand to buy a car outright, then you’ll need to look into alternative financing options. Luckily, there are a wealth of loan options available, so you don’t need to break the bank to enjoy your new set of wheels. Here are our top six tips for financing a used car so you can start shopping with confidence.
Review your credit score & current debt
Before you purchase your next used car, it's important to understand where your credit currently stands.
Your credit score is one of the most important aspects that lenders will take into account when assessing your loan. The higher your credit score, the better your loan terms and lower interest rates you'll be able to obtain. Your credit score may also influence the kinds of car loans you qualify for. If you don't have a good credit rating, however, it's important to know that there are still options available. Getting a used car loan with a bad credit history is still possible, but you'll have to work a little bit harder for it.
If you’d like to check your credit score online for free, you can do so through Get Credit Score. For a more detailed look into your credit history, and to understand why your credit score is what it is, you can access this through Equifax.
Get pre-approved for a loan before shopping for a vehicle
The main benefits of getting pre-approval are that you’ll have a set budget in mind when shopping for your new car and the entire purchase process will be sped up. The financial checks will be done before you purchase the car, allowing you to shop with confidence and ease.
Although pre-approved car loans aren't as prevalent as standard auto loans, CARS24’s finance partner Driva can connect you with multiple vehicle financing choices from their panel of over 30 lenders.
Driva eliminates the time and aggravation of the pre-approval procedure, allowing you to focus more on which quality used car you'll buy (the fun part!). Even if you're not sure of the exact price of the car you want to buy, we can still assist you in obtaining pre-approval and then changing the overall loan amount and vehicle type before your loan closes. It's important to note that your auto loan pre-approval period cannot be longer than 90 days.
Keep the loan term short
Short term car loans are a great option for drivers who are looking to get a vehicle quickly and save money overall. There are several benefits to getting a short-term car loan, including:
Lower interest rates
One of the biggest benefits of a shorter loan term is that you’ll likely be able to access lower interest rates. This is because your lender will view you as less likely to default on the loan, and therefore as a less risky customer.
Having a lower interest rate means that you’ll pay less over the life of the loan than if you had taken out a longer-term loan. This is because you’ll be paying interest and fees for a shorter time.
Get out of debt faster
Another related benefit is that by paying off your car loan over 2 or 3 years, you’ll be debt-free much quicker than if you’d taken out a long term loan, for example for 6 or 7 years.
While this does mean that your financial commitment will be higher in the short term, you’ll be able to pay back the loan quicker and will be debt-free sooner. Once your short term car loan is paid off, you’ll be able to access your money in a way that you simply wouldn’t be able to with a long term car loan. So get planning how you’ll spend or save it!
You’re able to avoid owing more than the car is worth
With a long term loan, you might have concerns that the amount you owe is more than the car is worth. However, with a short term loan, you can feel pretty confident that you owe less money to your lender than the value of your car.
No matter the length of your loan term, it’s worth keeping an eye on the value of your vehicle because you always want to be in a position where you’re paying back your debt faster than the rate at which your car is depreciating.
You’ll pay less in fees
Finally, with a short term loan, you’ll be able to make some considerable savings in lender fees than with a long term loan because you’ll be paying these fees for less time. Lender fees can include monthly fees, early repayment fees and other administrative charges.
Put down a deposit
If you can afford it, consider putting a down payment on your vehicle loan. This will lower the amount you have to pay back in interest as well as help you avoid owing more than the car is worth due to depreciation. A deposit of around 20% may be a good place to start for many drivers. So, if you were purchasing an automobile worth $20,000 then you would need to have a down payment of around $4,000.
If you’re not in the financial position to put down a large deposit, even putting a small deposit down can help you save money overall. A deposit of any size will help to lower the amount of interest you'll pay over time and may even get you a lower interest rate from your lending institution.
Compare finance from a range of lenders
It’s important to take the time to compare all of your finance options to ensure that you’re getting the best possible loan option. With Driva, you can compare all of your personalised loan options (and car loan refinancing options) in one place, so you can be confident you’re getting the best rate from a panel of more than 30 lenders.
If you’re applying for used car finance directly with a lender, there’s a good chance that they’ll run a hard credit check on your file, which will record an enquiry on your credit file (and this can negatively impact your credit score). If you assess your options with Driva, we’ll run a soft credit check, which lets us access the same rate that lenders use to price your loan without affecting your credit score in any way.
When you’re comparing finance options, you’ll probably come across the terms APR (Annual Percentage Rate) and comparison rate. The lender quoted APR is the base interest rate, but it doesn’t include any fees you’ll need to pay on the loan so it can be a bit misleading. Comparison rates include nearly all the fees you’ll be charged (excluding things like stamp duty), so it’s a more accurate indication of what your loan will cost you.
Consider a green car (discounted rates available)
Finally, if you’re looking to buy a more environmentally friendly car, like an electric or hybrid vehicle, you might be able to access a lower rate with a green car loan. Some lenders offer an incentive in the form of a discounted rate for drivers who purchase a green car. To qualify as a green car, your new set of wheels will have to be either an electric or hybrid vehicle and must emit significantly lower than average CO2 emissions (compared with other vehicles of its size).
For further information and to compare a range of environmentally friendly vehicles you can check out the Australian Government’s Green Vehicle Guide.
To start your application for a green car loan, you’ll need to provide a few key documents like your driver’s license, two recent payslips, and a recent bank statement. Depending on the lender you’ve decided to go with, getting approved normally takes between 2 hours and 2 days.
So there you have it, our six tips for getting the best deal on financing a used car. With so many different types of lenders on the market, and the ability to compare all your finance options online, there’s never been an easier time to get a car loan. Make sure you take the time to assess all your options and ensure you’re getting the most competitive rate with a loan that works for you.