As of 2019, Americans owe over $1.3 trillion in auto loans. In fact, most cars that hit American roads are financed with a loan or a lease.
The collective debt record has been increasing over the years. The correlation is clear: as the number of cars on American roads increases with every passing year, so does the debt.
Can you finance a used car? The simple answer is yes. In 2019, about 55.5 percent of all used cars were financed through auto loans.
Purchasing a used car has its benefits, especially when it comes to price. Depending on the type and model of the car in question, you can save thousands of dollars compared to purchasing a new car.
The main challenge, of course, is that financing a preowned car can be more difficult and expensive than financing a new car. With some preparation, patience, and persistence, however, you can get the auto loan you need to purchase your dream car.
In today’s post, we give some essential tips on how to finance a used car. But first:
Why Is Financing a Used Car More Expensive?
Earlier, we pointed out that auto loans for used cars tend to be more expensive. The interest rates for these cars are usually higher. Below, we give you three reasons why:
Resale Value Is Unpredictable
It’s almost impossible to predict the value of a used car a few years down the line when you want to resell it. With new vehicles, however, depreciation is easier to predict.
Because of the unpredictability involved with the resale value of preowned vehicles, used car lots that finance raise their interest rates. This way, the lot can make some extra money in case you bailout, or the car gets mechanical problems.
Chances Are You Have a Lower Credit Score
While not everyone with stellar credit buys a new car, most people with lower credit scores opt for preowned vehicles. That’s because it’s more difficult to get a great deal on financing for a new vehicle. Additionally, the upfront cost of buying a new car tends to be overwhelming for people with debt.
The Insurance Rate for Used Cars Tends to Be Higher
The law requires that you get car insurance when you buy a car. Preowned cars have higher mileage, fewer safety features, and a greater likelihood of breaking down than new cars. Insurance companies thus charge higher rates for insuring such vehicles.
How Can You Finance a Used Car and Get a Great Deal?
Getting an auto loan for a used car might not be as easy as financing a new vehicle. However, that doesn’t mean that you can’t do something to make things as smooth for you as possible. Below are some pro tips on the best way to finance a used car.
Know Your Credit Score First
Financing a vehicle is different from getting a mortgage in that car loans are available even for people with bad credit. The biggest issue is that you can’t get the best used car finance rates if your credit score is low. It’s the reason you need to know your credit score and fix any problems before going to the dealership.
Get Several Financing Quotes
One of the biggest mistakes you can make when seeking financing for any car is to settle on the first dealership or auto loan agency you come across. Get quotes from at least three companies before reaching a final decision. Compare how much each company is willing to loan you, the length of the loan terms, and their interest rates.
You could, of course, ask your car dealership for recommendations on reputable financing companies with the best rates.
Always Seek the Shortest Term
Taking a shorter loan term means that you’ll have to pay more every month. However, you’ll end up saving more money in the long term, compared to opting for a longer-term loan. Paying off your auto loan faster means that you end up paying less interest over time.
Pay as Large a Down Payment as Possible
Generally, car dealerships require that you pay at least 20 percent of the price of the vehicle upfront. If you can pay more than that, however, do so. That’s because a large down payment decreases both the interest rates and your monthly payments.
Pay Cash for Additional Fees
Other fees include anything else from documentation expenses to dealership fees. You’ll also most likely pay a sales tax. Instead of having these fees rolled into your auto loan, pay for them in cash.
Most dealerships will be happy to roll these fees to your loan, but that only increases the amount you owe. In the end, you end up paying for additional interest on the money added to your loan.
Opt for a Non-Recourse Loan
Financing companies have the right to repossess a vehicle when you default an auto loan. If the car is worth less than what you owe on your loan, and you have to pay for the deficit.
By choosing a non-recourse loan, you’re protected from this issue. In the unfortunate event where you’re unable to pay for the loan and the financing institution repossesses your car, you don’t have to pay the deficit.
Consider Getting a Co-Signer
In case you’re just starting out or have little credit, you may find yourself in a fix. Sure, you may be backed by a well-paying job, but chances are financiers will demand a high-interest rate if you don’t have a good credit history.
Consider getting someone with better credit to co-sign for you. The advantage is that your interest rates will be lower, which means lower monthly costs.
Beware of What You Don’t Understand
Auto loan contracts can be complicated, and first-time borrowers can agree to outrageous expectations. That’s why you need to read everything carefully and avoid anything that seems sketchy. Even better, only work with financial institutions with a good reputation.
You Can Get a Great Deal on Your Auto Loan
Hopefully, we’ve sufficiently answered your question: can you finance a used car? We’ve also provided enough information on how to get the best deal when financing your car. The thing to remember is to arm yourself with financial knowledge, including knowing your credit history and choosing the right financier.
Are you interested in getting the best financing for your next car? Contact us today.