Used cars are more economical than new vehicles because a brand-new car depreciates significantly as soon as you take possession. The average car value drops 15 to 20 percent within the first year, according to Bankrate.com writer Lucy Lazarony, and its worth continues decreasing. The cost savings makes used cars appealing if your finances are limited, but there are some challenges to getting a loan for a pre-owned auto, if you have past credit problems.
Preparation
Clean up your credit reports before applying for any loans. This will eliminate some of the problems associated with used car financing. The Federal Trade Commission (FTC) website explains that you can do this for free if you get your Experian, Equifax and TransUnion reports from annualcreditreport.com. The direct credit sites charge for reports or make you sign up for costly memberships to get them, the FTC warns. Find and dispute mistakes that keep your car loan from getting approved. For example, challenge on-time payments reported as late or inaccurate account balances that make your debt load look worse than it is. The bureaus must investigate and fix or erase the questioned entries within 30 days, so wait until these inquiries are done before shopping for auto financing. You will receive notification when the investigations end.
Price and Down Payment
When you choose an affordable used car and save up a large down payment, financing is easier to obtain, even if you have some credit problems,. Every dollar you put down reduces the loan amount. Lenders are more willing to take a risk on a modest amount because it increases their chances of recouping the money if you default and they have to repossess and sell the car.
Sources
Do not rely on dealerships for used car financing, recommends Warren Clarke, editor, Edmunds.com, an auto research site. Search for lenders on your own before car shopping. Your current bank or credit union might be willing to approve you, even with credit problems, if you have a long customer history. Otherwise, expand your search to other banks and finance companies. Dealers get money when finding you a lender, so you usually get a better interest rate if you do your own legwork. Bankrate.com writer Karen Kroll warns that some even imply your credit is worse than it really is to fool you into paying more interest.
Warning
Unscrupulous car dealers use poor credit and vehicle financing to scam buyers. Kroll warns that some call customers weeks after the sale, claiming the financing fell through, when the dealer should be able to get immediate approval. Typically they demand more money, ask you to sign a higher interest contract or try to make you take a different car. CarBuyingTips.com writer Jeff Ostroff advises looking for a "subject to financing" clause in your contract, which gives an opening for this scam. Getting your own preapproved loan prevents dealerships from cheating you this way.
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