Used Car Financing: 5 Steps to Secure the Best Rate
Used Car Financing: 5 Steps to Secure the Best Rate
Used car loans often come with higher interest rates - averaging 11.74% compared to 6.61% for new cars. With loan amounts typically around $26,091 and monthly payments averaging $520, securing a good deal can save you thousands over time. Here's how to do it:
5 Key Steps to Save on Your Loan:
- Check Your Credit Score: A higher score means lower rates. Aim for 661+ for better terms.
- Research Lenders: Compare banks, credit unions (lowest rates at 5.51%), and online lenders.
- Get Pre-Approved: Apply to several lenders within 14-30 days to find the best offer.
- Set Loan Terms: Choose shorter terms (36-48 months) and aim for a 20% down payment.
- Review the Final Agreement: Watch for hidden fees like origination or prepayment penalties.
Quick Comparison: APR by Credit Score Range
| Credit Score Range | Average APR (60-month term) |
|---|---|
| 781-850 (Excellent) | 5.59% |
| 661-780 (Good) | 7.84% |
| 601-660 (Fair) | 11.69% |
| 501-600 (Poor) | 17.99% |
| 300-500 (Very Poor) | 21.17% |
Pro Tip: Pre-approval and comparing multiple offers can save you up to $1,500 over the loan term. Follow these steps to confidently secure a loan that fits your budget.
How to Get the Best Auto Loan Rates
Step 1: Check Your Credit Score
Your credit score has a direct effect on the loan rates you can secure. To get started, visit AnnualCreditReport.com to access free weekly credit reports from Experian, TransUnion, and Equifax [4]. When reviewing your report, pay attention to:
- Personal information accuracy
- Correct account balances and payment history
- Unfamiliar accounts that might suggest identity theft
- Negative items that are outdated and should no longer appear
Fix Credit Issues
If you find errors or issues on your credit report, address them immediately. Since payment history makes up 35% of your FICO score [4], focus on these key actions to improve your credit:
- Pay all current loans and credit card bills on time
- Lower credit card balances to below 30% of your available credit
- Keep older accounts open to maintain a longer credit history
- Avoid taking on new credit cards or loans
- Dispute any inaccuracies through the official credit bureau channels
Credit Score and Interest Rate Links
Your credit score plays a crucial role in determining the interest rate you'll receive. Here's a breakdown of average rates for used car loans based on credit score ranges:
| Credit Score Range | Average APR (60-month term) |
|---|---|
| 781-850 (Excellent) | 5.59% |
| 661-780 (Good) | 7.84% |
| 601-660 (Fair) | 11.69% |
| 501-600 (Poor) | 17.99% |
| 300-500 (Very Poor) | 21.17% |
Data as of February 2024 [8]
If you need a quick way to boost your credit score before applying for a loan, consider using Experian Boost. This tool lets you add utility and streaming service payments to your credit report [4]. However, keep in mind that meaningful improvements usually take 3-6 months of consistent positive financial behavior. Once your credit is in better shape, you'll be ready to start comparing lender offers.
Step 2: Research Lenders
After improving your credit, the next step is finding the right lender to secure the best rates for your used car loan. Here's a breakdown of your options:
Banks, Credit Unions, and Online Lenders
Different lenders bring different perks to the table. Credit unions often offer the lowest rates, averaging 5.51% for used car loans, compared to banks at 7.43% and captive lenders at 9.33% [1]. Here's a quick comparison to help you decide:
| Lender Type | Average APR | Benefits | Drawbacks |
|---|---|---|---|
| Credit Unions | 5.51% | Lower rates, flexible terms | Membership requirements |
| Banks | 7.43% | Discounts for loyal customers, in-person help | Stricter qualifications |
| Online Lenders | Varies | Quick approvals, easy process | Limited personal support |
Evaluate Loan Offers
After narrowing down your choices, take a closer look at their loan offers. Pay attention to these factors:
- APR vs. Interest Rate: The APR reflects the total cost of the loan, including fees, making it a better measure than just the interest rate.
- Loan Terms: Longer terms (typically around 67 months) mean smaller monthly payments but higher overall interest costs [1].
- Down Payment: A down payment of around 20% can reduce your interest rate by 1-2 percentage points compared to lower down payments [5]. This strategy aligns with setting up favorable loan terms (discussed in Step 4).
Premium Autos Inc Financing Options
While dealership financing is often pricier, some dealers, like Premium Autos Inc, provide programs worth considering alongside external lenders. Here’s what they offer:
- Traditional Financing: Partnered with banks to offer competitive rates, often with discounts for existing customers.
- Special Programs: Options designed for first-time buyers or those with less-than-perfect credit.
- EV/Hybrid Loans: Reduced rates specifically for electric and hybrid vehicles.
Taking the time to research lenders now will give you the upper hand when it’s time to secure pre-approvals and negotiate the final deal.
Step 3: Get Pre-Approved
Getting pre-approved for a used car loan gives you a clear budget and strengthens your position when negotiating. It also helps you shop with confidence, setting you up for smoother discussions in Step 4.
Submit Applications to Multiple Lenders
To secure the best loan rate, apply to several lenders within a 14-30 day period. Why? Because credit bureaus count multiple applications within this window as a single inquiry [9][3]. Aim for 3-5 applications across banks, credit unions, and online lenders to compare your options effectively.
Most pre-approvals involve soft credit checks, which won't impact your credit score [10]. This means you can shop around without worrying about score changes.
Gather the Necessary Documents
Having the right documents ready can make the pre-approval process quicker and easier. Here's what you'll typically need:
- Proof of Income: Recent pay stubs or W-2 forms
- Residence Verification: A utility bill or lease agreement
- Identity Documents: Your driver's license and Social Security number
- Financial Details: Recent bank statements
- Employment Information: Contact details for your current employer
Use Pre-Approvals to Your Advantage
Pre-approval can save you money - buyers with pre-approvals save an average of $1,500 over their loan term [6]. Use your strongest pre-approval offer as leverage during negotiations. Here are some tips for getting the most out of your pre-approval:
- Avoid revealing your maximum budget upfront.
- If the dealer can't beat your rate, fall back on your pre-approval.
- Look at the total loan cost (APR + fees), not just the monthly payment.
Make sure to time your loan applications within 30-60 days of your planned purchase to keep your offers valid [2].
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Step 4: Set Loan Terms
Once you've got your pre-approval offers from Step 3, it's time to structure your loan terms to save money. With the average used car loan amount hitting $28,750 in Q3 2023 [7], carefully planning your terms can make a big difference in overall costs.
Choose the Right Loan Length
Here's how the total cost of a $20,000 loan at 6% APR changes depending on the term:
| Loan Term | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 36 months | $608 | $1,887 | $21,887 |
| 60 months | $387 | $3,199 | $23,199 |
| 84 months | $293 | $4,613 | $24,613 |
Although the average loan term is 67 months [7], shorter loans save you money on interest and help you avoid owing more than the car is worth.
Plan Your Down Payment
Aiming for a 20% down payment is a smart move. It can lower your interest rate and even eliminate the need for GAP insurance [1][3]. A bigger down payment offers several advantages:
- Lowers your loan-to-value (LTV) ratio, which may qualify you for better rates
- Protects you from rapid depreciation
- Reduces the likelihood of needing GAP insurance
The Impact of Car Age on Rates
As discussed in Step 2, the age of the car affects your loan terms. Older vehicles often come with stricter lending requirements and higher interest rates, which can increase by 1-4% depending on the car's age:
| Vehicle Age | Rate Increase |
|---|---|
| 1-3 years | Base rate |
| 4-7 years | +1-2% |
| 8+ years | +2-4% or more |
Keeping clean maintenance records can help you secure better rates. Generally, newer cars qualify for lower APRs.
"For the best rates, look for used cars less than 5 years old with under 60,000 miles" [13]
Step 5: Review Final Agreement
After finalizing your terms in Step 4, take the time to carefully review the contract before signing. Skipping this step can be costly - 43% of car buyers admit they don't read their entire contract, which often leads to unpleasant surprises later [11].
Look for Extra Fees
Be on the lookout for common add-on fees that can inflate your costs:
| Fee Type | Typical Cost | Notes |
|---|---|---|
| Origination | 1-2% of loan | Sometimes negotiable [3] |
| Documentation | $75-$500 | Varies by lender [3] |
| Prepayment Penalty | 1-2% of balance | Best to avoid if possible [12] |
| GAP Insurance | $500-$700 | Optional, not always needed [12] |
| Extended Warranty | $1,000-$3,000 | Often heavily marked up [3] |
Double-Check Payment Details
Use tools like Bankrate or NerdWallet to verify the accuracy of payment calculations. Pay close attention to the difference between the interest rate and the APR, as they can significantly affect your total costs.
Key items to review:
- Monthly payment amount
- Total interest over the loan term
- Loan term length
- Late payment penalties
"The Truth in Lending Act requires lenders to disclose key terms of the credit agreement" [2]
Keep Refinancing Options Open
If interest rates improve in the future, refinancing could save you money. To take advantage, ensure your contract allows for refinancing without penalties. While Step 1 helped you work on your credit score, ongoing improvements (e.g., a 50+ point increase) can qualify you for better rates later.
Keep an eye on rates every few months - refinancing often becomes a good option within 6-12 months [13]. By carefully reviewing the agreement now, you protect the savings you've worked hard to secure while leaving room for future opportunities.
Conclusion
Getting the best financing rate for a used car takes some planning and smart decision-making. Improving your credit score can make a huge difference. For example, moving from a score of 501-600 to 661-780 could lower your interest rate from 17.99% to 7.84%. On a $20,000 loan over 60 months, that could save you thousands [3].
Breaking it down further, the average APR for a 60-month used car loan is 7.89% as of February 2025. If your credit score is 750 or higher, you could lock in rates as low as 5.59% [15]. And here's a smart tip: 42% of buyers in 2024 compared at least three offers before choosing, which is now easier than ever thanks to online pre-approval tools [13].
The financing world has evolved, with online lenders offering competitive rates alongside traditional banks [16]. To get the best deal, focus on improving your credit, researching lenders, and negotiating terms that work for you. This approach not only simplifies the process but also ensures you’re making informed decisions.
Treat financing as an integral part of buying a car, not an afterthought. With proper preparation, you can confidently secure a loan that fits your budget and saves you money.
FAQs
Here are answers to some common questions about the financing process discussed earlier:
What is the APR for used cars in 2024?
Your credit score is the biggest factor in determining the APR, as explained in Step 1. Currently, the average APR for used car loans is 11.74% (as of Q3 2024) [6]. This represents an increase of 3.12 percentage points since 2022 [6][2]. These rates are based on typical loan amounts of $28,755 [6].
How can I negotiate a lower interest rate on a car?
Yes, interest rates can be negotiated, and there are several strategies to help you secure a better deal. Credit unions often provide some of the best rates available [14].
Key strategies include:
- Improving your credit score (see Step 1)
- Getting multiple pre-approvals (covered in Step 3)
- Joining a credit union (discussed in Step 2)
- Making a down payment of 20% or more (Step 4)
- Opting for shorter loan terms, like 36-48 months (Step 4)
As highlighted in Step 3, pre-approval offers can be powerful tools when negotiating with dealers. By combining these strategies early in the process, you can save a considerable amount over the life of your loan.
