Financing a Used Car in Houston

by Lyndon Bell

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February 1, 2011

Many people are surprised to learn a used car purchase can be financed, even when buying from a private party. And while credit is still something of a touchy subject as we head into 2011, there are a number of institutions both in Houston and online that will loan you money to purchase a used car.

A cursory search engine inquiry regarding financing a used car in Houston returns over one million hits. Naturally, Houston's used car dealers have a number of mechanisms in place to help you secure the money to purchase one of their used cars.

However, Houston has a lot of credit unions that will finance used cars too. And while credit unions are generally organized around some specific group, there are so many available, generally you will fit into one of the categories of individuals they are set up to serve.

It's important to note though, wherever the loan comes from, interest rates are usually higher and loan terms are generally shorter on used cars. Still, financing for them is available. Before you head out to sign on the dotted line, there are some other things you need to know as well.

A score of 680 or higher typically entitles you to the best interest rates available. The lower your score drops below that vaunted number, the more you can expect to pay in interest payments to secure the cash you need to buy your ride. You are entitled to get one free credit report every twelve months without an adverse effect on your credit rating. To get yours, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form available at ftc.gov/credit and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

The interest rate of a loan is usually calculated as an annual figure, regardless of the loan's repayment schedule. As an example, vehicle loans are routinely advertised as having something like a 2.9 percent Annual Percentage Rate (APR), even if the actual payments are spread out over five years. Basically what this means, is that for every $1000 you borrow, the lender will charge you $29 in interest'”which will be added to your monthly payment.

Interest rates are calculated based on the Federal Funds Rates established by the Federal Reserve Bank of the United States. The Federal Funds Rate is what it costs banks to borrow the money from each other to provide the loan to you for your purchase. Banks mark these loans up (retail them) when they extend them to you so they can pay back the loan they took out and make a profit on it too. By knowing what the prevailing

interest rates are before seeking financing, you can determine whether or not a loan being offered to you is a good deal.

By far, the most convenient form of auto financing is dealer financing. Generally though, you will pay for that convenience in the form of a higher interest rate. Dealers borrow money to finance the car for you, just as you would at a financial institution. Thing is, dealerships treat financing as an additional source of revenue, so in most cases they will charge you more than you would have paid had you secured your own financing. Even when purchasing a used car, many credit unions and banks will offer you financing, as long as the car isn't older than around five years. However, if it's a car with a high resale value, regardless of age, you can generally find a financing company that will write you a loan. But it will cost more.

Many people go shopping for a car based on the monthly payment they can afford. That is both smart and a mistake. Keeping your budget in mind is always a good idea, however focusing solely on the monthly payment can result in you paying more for a car than you should. A longer termed loan will have lower payments, but will cost more in the long run. If you have to stretch a loan on a used car more than three years to afford the payment, you ought to be looking at a less expensive car.