How to Finance a Used Car

You can finance a used car, although vehicle mileage and age may affect your loan approval. Because of lending requirements, you may have to shop for a car that meets bank guidelines. Before applying for a used-car loan, consider which information the bank uses to determine whether to approve you and which options are available if the bank declines your application.

Lender Restrictions

Many banks restrict lending for old or high-mileage vehicles. For example, you are not likely to obtain a loan on a vehicle that is over 10 years old or 5 years old with 150,000 miles on the odometer. As long as the vehicle meets lending thresholds, the bank uses loan-to-value ratios to determine your loan amount. Based on credit and vehicle value, you may be approved for anywhere from 60 to 120 percent of the vehicle's bank-determined value. Many banks also have minimum loan requirements which may require you to borrow more than $3,000. Lending thresholds may affect the vehicle you choose.

Debt-to-Income Ratio

The bank determines how much of a car payment you can afford by using your debt-to-income ratio. Your potential lender uses your credit report to view your monthly debts. Lenders also assess your mortgage or rental payment and income using the information you provide on your application. If you have $500 left after paying your monthly debts, the bank is not likely to extend you a $300-per-month loan. You may have to find a cheaper used car to meet bank lending requirements.

Personal Loans

If the vehicle you want to buy is too old or its mileage is too high, you can pursue a personal loan instead. If obtaining a personal loan, you do not need to provide your vehicle information. Because a personal loan is not secured with a vehicle, rates run higher than those available for used cars. Personal loans are often available for a term of 12 to 60 months. Similar to used-car loans, you can likely pay the loan off early without incurring penalty fees.

Other Options

If you can't obtain a traditional or personal loan, consider using a buy-here, pay-here lot to purchase a used car. These dealerships do not check the credit of buyers, although verifiable employment and a down payment is usually an approval requirement. Buy-here, pay-here lots usually require shorter payoff terms, allowing you to own the vehicle after one year of payments. Buy-here, pay-here lots may charge more for a vehicle than the market suggests but offer a way for customers to purchase a used vehicle if other options aren't available.