The used car shopping experience can be like a treasure hunt. While there are a lot of great deals out there, you have to do some research. Now with the internet to aid in searches, the odds are even better of finding an amazing deal that will meet your needs, wants and, most importantly, budget. You may even be able to look for a used luxury vehicle that might be out of your budget as a new car.
Regardless of what you choose, you’ll probably need to get financing. As many as 55% of buyers use financing, according to the credit bureau Experian. Financing is simply a loan that you have to pay interest on. The longer it takes you to pay back the loan, the more interest you’ll pay.
Therefore, getting a smaller loan that can be paid back in a shorter period of time will be much more economical. Lower-cost used cars are easier to finance via short-term loans. This is an additional value of getting a used car that many shoppers overlook.
You Can Save a Lot of Money Buying a Used Car
According to the National Automobile Dealers Association, the average person owns 13 vehicles over their lifetime. If all those hypothetical cars were three years old when you bought them (as opposed to being new), you could save as much as $130,000.
Then there is the matter of depreciation. A new car loses 30% of its value in the first year. Roughly 20% is lost when you buy it, and the other 10% is lost in wear and tear. You won’t notice anything until you go to sell or trade the vehicle down the road.
Let’s say you bought a new car for $30,000. If you sold it for $15,000 three years later, you’ve lost $15,000 in depreciation. If someone else bought that car from you for $15,000 and then sold it three years after that for $10,000, they’ve lost only $5,000 in depreciation. It’s a significant difference.
You save money in other ways when choosing to buy a used vehicle. The insurance rates for used vehicles are typically lower. The cost of registration renewal is lower, too. However, one of the best perks of getting a used car is paying less for your loan.
Financing a Used Vehicle
Most people think of financing at the end of the deal when buying a used car. This is a mistake; the best time to deal with financing is before you even start looking.
The first thing you’ll want to know is your credit score. Your score is a snapshot of your credit history and what lenders use to determine whether or not they’ll give you a car loan and at what rate. Your credit score is based on data from Equifax, Experian, and TransUnion, the three major credit reporting bureaus.
While many end up in the dealership’s financing office, that’s not always your best option. Some dealers will offer fair options on financing loans. In most cases, however, a dealer with have no incentive to make a great offer. This will change if you’ve already shopped lenders and you have a great pre-approved offer to show them. The dealer might try to match or offer you something better.
You can even go ahead and apply for used car loans so you’ll have several offers to choose from. During the loan process, they’ll ask for your personal financial information. It’s best to give them a complete and truthful accounting on the information requested.
When searching for financing on used car loans, you’ll often find higher interest rates and shorter loan terms than those offered for new vehicles. There may also be restrictions on the age or value of the vehicle you want to finance. The reason for this is the risk. There’s more risk for lenders in financing used cars because there is a higher risk that they won’t be repaid.
Comparing Loan Offers to Save on Loan Interest
How much your monthly payment will be is an important consideration. Of course, you’ll also think about the interest rate. However, these aren’t the only two aspects to focus on when financing your used vehicle. While a given monthly payment may sound good and fit well into your budget, it may be costing you a lot more in the long run. It can depend on if the load has a variable rate or a simple fixed rate.
What is the total cost of the vehicle? In determining this, you’ll need to look at everything including the down payment, the total of all monthly payments for the duration of the loan, and any fees. The math is pretty easy, and there are many good loan calculators online that can help you.
Maybe you’ve decided on a three-year-old Subaru Forester for $20,000 with $5,000 required as a down payment. You’ll be financing the remaining $15,000. As an example, say you have a loan offer for 36 months at a 5% annual percentage rate. With an estimated 5% sales tax, the payments would come out to be $480 per month for 36 months.
The amount of interest paid during the life of the loan is $1,263. In total, you’ve paid $17,280 for your used Subaru Forester.
Finding Lenders
It’s important to look at lenders outside of any dealership where you plan to shop. There are many places where you can prequalify for financing. Some lenders even offer special programs for first-time buyers or those with less-than-stellar credit histories.
The larger national banks are an option. Financial institutions like Capital One, Chase, Bank of America, and others have many branch offices you can visit. However, these larger banks also tend to have higher interest rates and fees unless you can catch a special promotion. If you have credit problems, they may not lend to you at all.
Credit unions also offer used vehicle financing, although they usually cater to specific groups or communities. If you qualify for a credit union, you just might find a good deal. The profits are returned to member-owners as lower interest rates for financing and higher interest rates for savings and money-market accounts.
A small to medium-sized credit union might be a great option if your credit isn’t the best. More personal connections can be established at credit unions during the process. Once you partner with an actual person, you’ll be able to explain your individual circumstances.
Smaller community or local banks are also possibilities for used vehicle financing. They are usually limited to certain geographical areas. Like credit unions, though, they may be able to offer a level of flexibility that you wouldn’t receive from a larger bank.
There are also finance companies that strictly deal with loans and don’t offer other banking products. These companies borrow money from banks and then lend it to you for your used or new auto buys. Several of these companies cater specifically to niche customers in the auto market, including those with lower credit scores. Some of these companies are lending branches of the automakers, like Honda Financial Services, Ford Motor Credit, and more.
Finally, there are online banks that are completely digital. The good news is that they often offer a pretty simple loan application process online that you can complete from the comfort of your home. They don’t have physical branches that you can visit if you need to speak to someone about personal circumstances.
Finding Your Used Vehicle
Once you know your credit score and have some pre-approved loan offers in hand, you can visit a dealership or website to look for a quality used vehicle and shop in confidence. You will have most of your financial legwork completed already.
You can then focus on finding a good used vehicle. Since the vehicle isn’t new, remember to request a history report like those from CarFax or AutoCheck; these reports will let you know if there are any problems in the vehicle’s history. If it has been in a major accident, sustained fire or flood damage, or had title issues, you’ll want to know before you make any commitments. It’s also recommended that you have the vehicle evaluated by an independent and reputable mechanic. If the dealer doesn’t comply with either of these requests, you may want to rethink doing business with them.
Sealing the Deal
When it comes to negotiating, be sure to keep track of the separate items in the transaction. Many dealers want to bundle the cost of the vehicle, the trade-in, and the financing together. That only makes it more difficult for you to tell if you’re getting a good deal. Many owners handle the sale of previous vehicles on their own to keep dealers out of the transaction. To ensure you’re saving money, keep these components separate.
When selecting a used vehicle, you can save a lot of money in a variety of ways. When it comes to loan interest, you can find a good deal if you do a little legwork. Remember, the goal is to pay the car off as soon as possible so that you minimize interest fees. Lower-cost used cars are easier to finance with a smaller loan and pay off quickly.
