Read these 12 Used Auto Financing Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Auto Loans tips and hundreds of other topics.
Even if you have perfect credit, your used car loan rate is still going to be higher than the rate you'd pay for a new car loan. Used cars are considered a riskier investment on the part of banks and credit unions. In the eyes of a lender, a used car is partially used up (depreciated).
Lenders like to know that an investment is backed by a reliable asset. Used cars, even the most reliable, have less useful life left in them than a new car and therefore are considered a riskier investment. Banks vary in how much of a premium they tack on to their used car rates.
*It's a good idea to compare rates at several local lenders before choosing one.
Used car loans are essentially the same as new car loans with two exceptions. First, banks aren't generally willing to go as far out on a limb when financing a used car, so the loan terms aren't usually as generous as those for a new car. Some banks, for example, will only allow you to finance a new car for a maximum of 48 months, whereas the same bank may allow a new car to be financed for up to 72 months.
Used cars, in theory, won't last as long as a new car. The bank doesn't want to be holding the note on a vehicle that's in the scrap heap instead of on the road. Though not always the case, interest rates on new cars are generally lower than those for used cars. Still, it is entirely possible to get a great rate on a used car loan.
Chances are that if you're buying a used car you aren't going to have the full purchase price in cash (that means getting a used car loan). Shopping around for the best loan beforehand will keep you from succumbing to high-pressure tactics car dealers use to try to convince customers to accept their financing options at higher rates.
The best way to compare the true cost of one loan to another is to find out what the annual percentage rate (APR) is. APR is the actual interest rate you pay annually on the unpaid balance of the loan, including any fees.
Used auto financing (as well as new car financing) is what auto dealers refer to as their "backend" business. Many dealers make the lion's share of their profits from financing deals they cut with lenders. With these deals, the higher the interest rate you pay on your loan, the more money the dealer makes.
The interest rate you are offered on your loan depends on the market rates and your personal credit rating. Before you even begin looking at cars, it's a good idea to get a copy of your credit report. Check it for errors. If your credit rating is less than perfect, see if you can pay off a credit card or two before you apply for your auto loan. And keep an eye on the going rates.
In order to qualify for financing a used car or new car, most financial institutions will require a down payment of between 20 and 25 percent down. The lending agency will authorize a maximum amount, referred to as a finance value or loan value. The value will qualify the borrower for a specific car model and year. Generally, the finance value is approximately 25 percent less than the normal retail value of the vehicle. As a result, the loan value or finance value are excellent ways to gauge the affordability of the seller's asking price.
Some people detest negotiating the price on a car purchase while other people find the process thrilling. No matter what your personal preference is, it is important to go into price negotiations for a used car with enough stamina to insist upon a better deal than what the dealer initially offers you. One of the best negotiating tactics you have is to already have sifted through the various used car auto loans offered by the various lenders you are willing to do business with and to have a loan pre-approved and a check in your hand. This essentially makes you a cash buyer, and it gives you a huge advantage over other buyers who are at the mercy of the dealership for financing.
Do your research beforehand so you don't demand something that is simply unreasonable – like wanting to pay $15,000 for a used car that is worth $35,000 – and arrive at the dealership with documentation in hand of your research such as a copy of a Kelly Blue Book report on the car you want to buy. You also need to be willing to walk away if the dealership isn't offering you what you want. A good portion of the time, when a potential buyer gets up to walk away from the negotiating table the salesperson suddenly agrees to the terms. Don't ever accept an offer which you do not think is reasonable, and remember that negotiating can save you quite a bit of money if you do it correctly.
There is certainly no shortage of methods to use when looking to buy a used car. Internet users can use one of the hundreds of websites dedicated to finding used cars for buyers. Sites like AutoTrader.com and Cars.com have extensive listings of used cars, and most auto dealerships list their used cars for sale online as well. Walking onto a car lot will also provide plenty of options for used cars, as will a quick glance at the classified section of your local newspaper. The important thing to remember when looking for a used car to buy is that you should always secure financing before you even start shopping for your car. Apply for the highest amount you think you may need, and then when you find the car you want you are treated like a cash buyer because the money is already available to you. Finding suitable used auto financing is similar to finding your used car: you can search online, go with a local lender, or sift through the various lenders advertising in the local newspaper. Be sure to do some research on both the car you intend to purchase and the lender you intend to borrow money from. You want to make sure you are getting the best car at the best interest rate.
One of the fears of buying a used car is that it will break down shortly after driving it off the lot. Certified pre-owned cars, on the other hand, have been thoroughly inspected and carry with them a limited warranty. This is one way dealerships attempt to make buyers feel better about purchasing a used car. You can expect a certified pre-owned car to be in good shape, but this does not mean that you should skip an inspection by a mechanic of your choice or that you shouldn't take a close look at the vehicle before you purchase it. You should still demand a Carfax report as well, even if the used car you are buying is a certified pre-owned car. You should also ask the dealer exactly who the car is certified through. Is it certified by the manufacturer, or is it an internal dealership certification? Ask about the length and coverage of the warranty to make sure the extra cost of a certified pre-owned car is worth it. You don't want to pay extra for a certified pre-owned used car if all it means is the dealership did a simple inspection on the car and deemed it certified. Your used auto loan rates will not be any lower with a certified pre-owned car, but the certification may give you some piece of mind.
When you buy a used car from a dealership or an individual you can either trust them when they say the car is in good working order, or you can take the time to have a mechanic thoroughly inspect the car to make sure you aren't about to buy a lemon. Although taking a car to a mechanic for an inspection will cost you some money, it is worth it for the piece of mind it will give you. If the mechanic finds a major problem with the car it may be that the seller truly didn't know about the problem, or instead that the seller was trying to unload the car on someone else before the major repairs became unavoidable. Insist on an inspection of the car, and insist on a mechanic of your choosing, not one that the dealer or individual seller chooses. You certainly don't want to finance a used car only to have it break down right after you sign the final paperwork.
New cars are awfully tempting, but they are also much more expensive than used cars. Even though used auto loan rates are usually higher than new auto rates, the difference in the prices makes it worth it. Many dealerships offer used cars that are just as nice as newer cars, and many times you can find a used car with some of the warranty remaining. The best reason to purchase a used car is the lack of rapid depreciation. New cars lose their value rapidly, but used cars have already had a huge value plunge with the first owners. When you purchase a used car it does not suddenly lose a large portion of its value like many new cars do. This makes the idea of buying a used car much more attractive. Considering many people trade cars in after only having owed them for a year or two, you can usually find a relatively new car for a used car price if you are willing to spend some time looking around at various dealerships. You should consider buying a used car if you would like to save money with your auto purchase.
Buying a used car from an individual is a little different from buying a car from a used car dealership. The interest rate for person-to-person used auto loans is usually higher than the interest rate of a used auto loan from a dealership. You also won't be able to roll any extra costs into the balance of the loan. In other words, you will have to pay for extended warranties, life or disability insurance, taxes, and filing fees on your own. The person selling the car must be the title holder and therefore legally able to sell the car. There are also extra steps which need to be taken if the current owner still has a loan out on the car. None of these steps are very complicated, though, so you shouldn't allow them to stop you from buying a used car from another person.
When you apply for a used car auto loan, keep the age of the car in mind. Larger loan amounts and longer financing terms may make sense for a certified pre-owned car that is fresh off lease with low miles and a long warranty.
If you are buying a later model car with higher mileage that's out of warranty, you should borrow as little as your budget will allow and pay it back over as short a term as you can. Otherwise, you may find yourself in the position of having to pay for both costly repairs and a car payment.
|Jennifer Mathes, Ph.D.|