How to Finance a Used Car
Expert tips to help you save on interest, repair costs, and more
Buying a used car can be a lot less expensive than buying new, especially as used-car prices begin to ease. But those savings can quickly evaporate if you need to finance your purchase.
Get Preapproved
This is good advice for any car purchase, and it’s essential if you’re financing a used car bought from a private seller. Getting preapproved also gives you a baseline to start comparing rates and empowers you to decline a dealer’s financing if the terms aren’t favorable. Be sure to shop around. Online vendors like Carvana and Vroom offer online pre-qualification, but you may get a better rate from your own bank or credit union.
Tip: Don’t worry about making multiple inquiries for auto loans. They may be excluded from your credit report. If not, they’re likely to be counted as only one inquiry if they’re all made within the same 30-day period.
Avoid Long-Term Loans
A 60-month loan may keep monthly payments low, but you’ll pay more in interest over time and probably also pay a higher rate. Using recent Navy Federal Credit Union interest rates as an example, you could finance $23,000 at 5.44 percent over 36 months for a total of $24,980. A 60-month loan would incur a higher 5.74 percent rate and an overall payment $1,500 higher than the shorter-term loan.
Tip: Choose the shortest loan term you can afford. This will minimize interest payments and reduce the likelihood that you’ll find yourself “upside down,” or owing more on the loan than the car is worth.
Say No to Dealer Add-Ons
Once you’ve agreed on a price, the dealer may try to persuade you to buy an extended warranty. Don’t consider it before making sure the original factory warranty has expired. Some certified pre-owned (CPO) cars carry extended coverage and may not need more. Buying an extended warranty is usually not worth the money. Choosing a car known for reliability is a better investment.
Tip: Start a rainy day fund for maintenance. That money could earn a little interest if it’s in the right type of account, and you can apply what you don’t use to the purchase of your next car. (Learn more about avoiding dealer add-ons.)
Factor In Repair Costs
If you’re buying an older vehicle, you’ll definitely save money over the price of a new car. But don’t forget the inevitable cost of replacement tires or a brake job, depending on the model and its age and history.
Tip: Choosing a model from CR’s list of recommended used cars may help limit repair costs. Whichever car you choose, come up with a rough annual budget for upkeep by using our guidelines on car maintenance and our repair estimator. Add that to the estimated annual cost to finance the car to find out how much money you’ll actually save by buying used.
Editor’s Note: This article also appeared in the February 2023 issue of Consumer Reports magazine.
