How to Finance a Used Car: A Car Buyer’s Smart Guide

October 10th, 2019 by

Ride Smart: Guide to the Best Way to Finance a Used Car

Buying a used car is a savvy idea.

You can get a great deal for your money, potentially saving $130,000 over a lifetime of car buying. But if you need a car right now and don’t have enough cash saved, how do you afford it?

You could save every spare dollar until you can buy a run-down older vehicle… or you could opt to finance and get a great deal on a decent used car.

Knowing why and how to finance a used car will help you work out what you can afford to spend on a vehicle.


Why Finance Instead of Buying with Cash?

Getting finance for a used car might not feel like a great financial decision, but in reality, it’s more likely to benefit your budget.

For a start, a finance deal allows you to buy a car that’s above your cash budget. You can get a larger, newer, lower mileage model when you choose to finance instead of buying with cash.

Buying with the cash you’ve saved up means you’ll be depriving yourself of essential capital that you might need for other things, such as an emergency savings fund.

A finance arrangement on a used car means you’re still getting a great deal but have the benefit of better cash flow. Instead of paying a lump sum, you’ll pay monthly amounts that you can afford, meaning the money you’ve saved stays in your pocket instead of being tied up in your vehicle.

Don’t forget you’ll also need cash for insurance, taxes, gas, and possible future repairs. Spending your last saved dollars on a car means you won’t have anything spare for these costs. Financing your car leaves you with a pool of cash to cover your running costs without leaving you short of cash.


How to Finance a Used Car in 6 Easy Steps

Getting finance doesn’t have to be complicated or scary. Before you buy your used car, follow these steps to get the best car finance deal.


1. Know Your Credit Score Before You Apply

Finance agreements will mean a credit check before you’re approved for the loan.

If you are unsure of how to obtain your credit score, give a local dealership a call or stop by and they can verify it for you. If your credit score isn’t the hottest, this will affect how much a car dealer can offer you on finance.

Don’t despair, though. You can take steps to improve your credit score for future applications. First, stop applying for credit! Make sure you leave a few months between each credit application. This creates a more favourable profile to lenders.

Also, make sure you always repay your credit agreements and bills in full every month. Part-payments or missed payments will negatively affect your score.

If you’ve never had credit before, apply for a credit card even if you don’t need one. Use it to buy your usual expenses, such as groceries, and pay it off in full every month. That’ll help build a credit profile that shows you’re a responsible borrower.


2. Put Down the Biggest Deposit You Can Afford

Keep aside plenty of cash for your taxes, registration fees, insurance, and running costs and then use the rest of your car fund to put down a deposit.

A larger deposit means you’re borrowing less overall, which will reduce your loan costs. For example, if your dream used car costs $5000 and you can put down $2000, opt for that instead of holding onto the cash. You might immediately have extra cash in your pocket, but a lower deposit will extend your loan term and costs.

Alternatively, a bigger deposit can help you afford a more expensive—and therefore larger, newer, more efficient—car than you might have previously considered.


3. Keep the Agreement Term Short

A standard term usually is three or five years for a car finance loan. The shorter your term, the lower the overall cost will be.

This is because you pay interest on the loan over the entire term you have it. Paying a shorter loan may mean slightly higher monthly payments, but you’ll spend less overall compared to a longer-term finance arrangement.

A short loan also helps you be realistic about your future budget and commitments. It’s hard to see too far into the future. Knowing you’re committed to only a three-year loan, instead of five years or longer, means planning your short-term financial future is easy.


4. Be Realistic About Your Payment Commitment

A good rule of thumb for car finance is to pay no more than approximately ten percent of your monthly income. So if you earn $3000 a month, your payment shouldn’t be much higher than $300.

Working this out will make sure you can always afford your car repayments every month. Missing your payments will negatively affect your credit score and ability to borrow in the future. Repeated missed payments could result in you losing the car and even legal action to recover the costs.


5. Consider Part Exchange on Your Old Car

If you already own a vehicle and want to upgrade it for something else, consider offering it to the dealership as part of your deal.

Your dealership will offer a reasonable trade-in price and take this off the sale price of the used car you’ve got your eye on. You could knock thousands of dollars off the price, reduce your finance term, and have more of your hard-earned saved cash left in the bank.


6. Negotiate the Used Car Price

Getting finance on your used car doesn’t mean you can’t haggle, too! Many dealerships will be willing to consider negotiating a reduction in price for a used car on their lot if you know what you’re looking for.

For example, a car that’s been on the lot for a while may be easier to negotiate a reduction on than the vehicle that came in yesterday. Study the vehicle carefully and, if your buying from a small non-franchised car lot or privately, get a mechanic to give it a once-over to identify any potentially costly problems.


Work out Your Finance Options Online

Now you know how to finance a used car, so it’s time to work out what you can afford.

Take a look at your current savings. Work out how much you’ll need to pay for taxes, registration, insurance, and running costs and subtract these from the total. The figure you’re left with is your deposit amount.

When you know your deposit amount, and how much you can afford in monthly payments, you can work out how much you’ll be able to borrow. Check out our online payment calculator to find out how much you could borrow to buy your next used car!