Most lenders will consider offering a loan to buy a used car. Since used cars carry a higher risk for a default, loans for them carry a higher interest rate and a lender may want to see a slightly better credit rating.
Lenders consider used cars a higher risk asset because they can break down more often than a new vehicle. If the cost of repairs is too high, a borrower may be tempted to default on the loan thinking there is no reason to pay for a vehicle that is inoperable. Given the additional risk associated with used vehicles, a lender may have more stringent lending requirements for used car loans, both in terms of borrower profile and vehicle condition.
Bank-Financed Used Vehicle Restrictions
Many banks place specific limitations on used vehicles that may be financed. These vary from bank to bank, but may include the following:
- Age: no older than 7.5 years.
- Mileage: no greater than 100,000 miles.
- Seller: must be approved dealership, not a private party.
In general, if you have a credit score under 680 or have active collections, a traditional lender will most likely pass on your loan application. Credit unions may have a lower credit score in mind, but active collections usually automatically exclude your application from consideration with them as well.
There are two things that you can do to increase the likelihood of getting the used car loan that you need. First, you can request your credit reports from the three major reporting agencies. You can do this at www.annualcreditreport.com. Correct any errors that you may find, then address any collection actions you may have. Second, you can be sure to offer a down payment of around 20 percent of the purchase price of the vehicle. Admittedly, you may be able to get the loan with a smaller down payment, but a larger down payment makes your application more attractive to lenders and will lower your monthly payment and the total interest that you will pay over the life of the loan.
If you do these two things and your loan is still denied by traditional lenders, look online. There are dozens of specialty lenders waiting to offer used car loans to individuals with lower credit scores. There are even lenders who will work with people who have had collection issues and repossessions in the past. We can put you in touch with a finance professional from a dealer in your area who can most likely arrange a used car loan from a bank, credit union, or subprime auto lender willing to work with your credit and finances.