About 40.2 million used cars were sold in 2018, while only 17.2 million new cars were sold. That means if you’re looking for a new ride, a used option is the popular choice.
And it’s a financially smart option too, considering that a new car loses 20% to 30% of its value in the first year alone. And generally, 60% of their initial value is gone after the first 5 years.
So a used car is a better financial choice. But is financing one still smart? And how long can you finance a used car? Let’s talk about that.
Is It Smart to Finance a Used Car?
Let’s talk personal finance for a minute, and set car selling aside. Is it smart to finance a used car?
The Dave Ramsey financial gurus will say it’s never a good idea to finance a new car and get into debt. Instead, you should save up that money and buy the car when you can pay cash.
The problem is, that’s not realistic for most people. In most areas of America, you can’t function without a car. If you’re starting from scratch you may only be able to put a couple hundred to maybe a thousand dollars down on a used car.
When you pay that little for a used car, it’s bound to come with its myriad of mechanical issues that add up fast. These repairs keep dipping into your new car savings.
Even worse, that car might not even last long enough for you to recoup your investment.
And here’s the other problem—when you’re saving up several thousand dollars for a used car, that money is likely in a savings account or high-interest rate savings account.
In a savings account, your money is withering away because inflation lowers its buying power every year. In a high-interest rate savings account, you’re lucky if it’s barely keeping up with inflation.
You could always put your car savings in the stock market to let it grow while you save up, but the stock market is inherently volatile. While traditionally it provides good returns year over year, you can’t guarantee the market won’t drop right when you want to take that money out.
Financial advisors typically recommend a buy and hold method with investing, and ride out the market waves. It’s not a good place to store an emergency fund, or any funds you know you’ll need access to within a few years.
A Financed Used Car Is More Reliable Than a Paid-In-Full $1000 Car
So you need a car you can count on, even if you have to finance it.
But Dave Ramsey isn’t the only voice of reason in the personal finance community, and there are other, valid opinions out there.
Other financial proponents recommend taking on low-interest-rate debt. These are things like mortgages, car payments, and student loans. You pay only the minimum and invest what would have been extra payments or savings instead.
Why? Because the stock market traditionally gives a return of 8%-11% annually. So if you get a car loan with a used car finance rate of 4.5%, and invest everything else, you’re still getting an average return of 3.5% to 6.5% on your investments.
And in the meanwhile, you get to drive that car every month just for the minimum payment on your loan.
Of course, anytime you invest in a market, there are risks associated with that. You always need to do your research and not just trust a random person on the internet. But it is a school of thought worth considering.
And besides, it gets even better. When you’re looking at a used car, there are several things you need to consider.
You should see how well models traditionally hold their value. Some car models you can sell years later for nearly the same price you paid for them if you keep them well maintained while you own them.
Depreciation tends to level off after 5 years, so if you sell it again five years later for close to the same value, you’ll recoup most of your investment. On top of that, you’ll have been investing the entire time.
How Long Can You Finance a Used Car?
Another thing to consider here is how long you can finance a used car. Some financing options let you finance a car for up to eight years, but traditionally the number is still closer to 65 months.
By spreading out the length of your lease, you’ll likely have to pay a higher interest rate, but you’ll have lower payments in the meantime.
Sometimes car dealerships will offer used car finance deals like no interest for the first few months or even year. They may even let you drive a month or two before you have to make a payment.
When you can, take advantage of these deals so you have more wiggle room to invest your spare change, and drive for almost free.
You should also learn how to negotiate prices when you get a new car to get the best deal. And if your used car is financed by the same dealership, you may be able to negotiate interest rates and financing options too.
Leasing a Used Car Can Be a Smart Financial Investment
No really, it honestly can. Learning how to finance a used car and make it profitable for you isn’t complicated once you understand how it works.
Factors depend on how long can you finance a used car, how well it maintains its value, the interest you pay on the car, and investing spare cash on the side.
Taking these steps helps ensure financing a used car is a smart choice, one that will help your money grow.
Think you’re ready to finance a used car? See what we have available here.