How Do Used Car Loans Work?

Used car loans can be a mysterious process. Banks don’t publicize the exact ways they determine your eligibility, and since most people don’t have constant access to their credit report, the potential for headache-inducing surprises. In order to pull back the curtain on these arcane practices, we’ve put together this guide to help you understand used car auto loans and how they work.

The Basics of Lending

auto loan used car

While any financial product can be confusing, something that often helps is to remember that the basic idea of lending is to invest money in an effort to generate a profit. The profit comes from interest rates that the lender charges.

However, each individual loan is different, and if it doesn’t get repaid the lender will take a loss. Thus, interest rates are a measure of how much of a risk a lender thinks is involved in a specific loan. The more risk, the more money the lender will want to make back in order to see the loan as worthy of the risk. Consequentially the lower someone’s credit, the higher the interest rates they’ll be offered, and so loans will cost more.

Keeping this in mind will help you understand what’s going on when you’re exploring the used car loan process.

Things Lenders Look at When Deciding on a Used Car Loan

In order to determine how much of a risk your loan will be, there are a number of things that banks will look at. Anything that you can do to show the bank you’re a safe bet will lower your interest rates and thus the total cost of your loan.

Credit Score

The first thing that most lenders will look at is your credit score. Your credit score is the result of past credit reporting on you from other creditors, and has a number of different elements. Some of the elements included are

  • Length of credit history
  • Percentage of credit used
  • Credit available
  • Negative remarks on credit report

As a result, individuals who have an established record of paying creditors back on time and aren’t using a lot of their available credit are seen as less risky than those with limited or no credit history, or who have a record of missing or late payments.

Vehicle

The next thing that lenders will check is the vehicle that you want to buy. They want to ensure that you are paying a reasonably fair value for the vehicle, and also that if you default on the loan they’ll be able to sell the car to recoup some of their losses. This also leads to a bit of a strange situation, as it may be cheaper to get a newer model used car as the lender will charge a lower interest rate. For example, a USAA used car loan or a PNC used car loan will be cheaper for a car that is the same make, model, and relative mileage as a car that is two model years older. This means that your loan may actually be cheaper if you buy a newer used car.

Parts of a Used Car Loan

Now that you understand what things a bank looks at when determining a loan, it is time to learn the different parts of a loan. The principal is the total amount that you are taking out for the loan. That is, the total price of the car, minus your down payment, plus interest.

 The down payment is the money that you can pay toward the car at the time of purchase. A bigger down payment will result in a cheaper loan, because you’ll have to borrow less. For example, Bank of American used car loan rates will be much cheaper with a bigger down payment, as not only does it reduce the principal, but also demonstrates that you can save and so are less of a risk.

 The interest rate is the amount of money that your lender will make from the loan, expressed as a percentage of the loan. Thus, a 10% interest rate means that you will pay 10% more than the value of the car.

In order to find the best interest rates, it’s recommend that you look for used car loans online. This will let you compare rates from different lenders to find the loan that works the best for you!