used car buying guide

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Used Car Financing

It is important that you arrange your financing prior to negotiating price with a dealership or a private owner--ideally, before you even visit a them. The financing "arm" of a used car dealership is a prolific profit center--dealers will often take smaller profit deals when selling the car (the "front-end" profit) if they know that they are going to make a nice profit on the financing of the car (the "back-end" profit). The problem with this is that it is you save on the purchase buy give the savings back to the dealer on the financing. A private owner, of course, will not be able to offer financing and you will need to secure it on your own. We have a couple of very good sources for financing on this page.

Don't get hosed on the financing!

Don't make an expensive mistake. Many used car buyers spend time preparing to buy a used car, are able to negotiate an acceptable deal, and then, because they have done little or no preparation on the financing aspects, lose much of the amount they saved buying the vehicle by paying too much to finance it! Check your credit and investigate all your car financing options before you start visiting dealerships or shopping for vehicles from private owners. Used car financing rates will vary widely from source to source. Spending a few minutes in preparation can save you from paying hundreds of dollars in unnecessary interest charges. In addition, having your financing established in advance will eliminate a lot of confusion, and perhaps most importantly, it will strengthen your bargaining position when it comes time to negotiate price. A buyer with approved financing will always have more power than one where the financing is questionable. Look at it from your own perspective: if you were selling a used car and had 2 buyers in front of you, one with financing in hand and the other telling you they were planning to apply for financing some time in the future, which one would you negotiate closer with? If you received offers from both, which offer would you put the most emphasis on?

  • Check your credit upfront. Many financial institutions determine interest rates on a "tier" basis. The better your credit, and the more "in line" the price of the car is in relation to invoice (on a new car) or book value (on a used car), the lower your financing rate will be. It is a good idea, then, to make sure your credit report does not have mistakes or omissions before the bank sees it. You can get a Free copy of your credit report here.
  • Make comparisons. makes this extremely easy. Submit a simple application, and within 2 business days you will receive financing offers from up to 4 different lending institutions, all competing for your business. The power of the Internet at work! Click here to apply.
  • Check your local bank and/or credit union. The advantage of your local bank is that there is the possibility of a personal relationship with your banker. The disadvantage of a local (and smaller) bank may be an uncompetitive rate. If you have the availability of a credit union, the advantage here is the convenience of having your car payments deducted from your pay. The disadvantage is that you are tapping what may be an unsecured line of credit for a car--meaning what would normally be an easily accessible loan from your credit union (if, for example, you ever needed for an emergency) may no longer be available to you.
  • Home equity loans have become a popular source of car financing in recent years. The advantage is the possible tax deductibility of the interest paid on such a loan. To get comparisons of home equity loans, visit LendingTree's Home Equity Section. Note: The IRS will only allow you to deduct interest on a loan amount that does not exceed the value of your home, for good reason. Borrowing in excess of your home's value is not recommended.
  • Dealer financing may or may not be the best option for you. The advantage of financing a car at the dealership is convenience--you buy it there and you finance it there. The main disadvantage is the variation of interest rates, since the difference between what the dealer "sells" you the financing for and what they "buy" it from the bank for, is their profit. This is especially true when it comes to financing a used car, since there is so much variation in the rates. In a word, COMPARE! Obviously, if you arrange financing on your own somewhere such as, or from a local bank, the profit stays in your pocket!

Don't accept the rate that the dealer offers as gospel! You have far too many options that may save you money to just accept what the dealer puts on the table for you.

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