One of the many decisions consumers must make when buying a car is whether to get a new vehicle or a used one. Even though a used car is generally cheaper than a new one, it makes the car-buying process much more complicated, especially if you need to finance it.
Some people argue that taking out a loan for a used car isn’t worth it, because the loans are more expensive, and by the time you pay off the loan, the car you own isn’t going to be worth much. There’s truth to that argument: Interest rates on used auto loans are higher, because the vehicle is collateral for that loan, but if it’s not worth as much as a new car, the lender will charge a higher rate.
“If you default on the loan, they can take it back, and they want to have something of value to that,” said Philip Reed, senior consumer advice editor for car-buying marketplace Edmunds.com.
On top of that, the borrower’s credit score will affect the interest rate, so financing a used car can get pricey.
Reed said the keys to taking out an affordable used car loan are the condition of the car and the length of the loan. For new-vehicle loans, a five-year term is common, but for used cars, a three-year term makes more financial sense.
“There’s also a psychological component that you will find it easier to pay for something that you think of as valuable,” Reed said. In other words: You’re not going to enjoy making loan payments on a vehicle with little value, so consider how that will feel when deciding on a car to buy and how long you’ll be paying for it.
If you can buy the car with cash, that’s likely the best financial decision (assuming you’re not depleting an emergency fund or jeopardizing your financial stability). Oftentimes, people don’t have that kind of money lying around, so if you must finance a used car, shop around for the best deal.
Reed said one of the biggest mistakes a buyer can make is to walk into a dealership and take the first thing they’re offered — dealers call them “get me done” customers, he said. They’re usually people who think their credit will prevent them from getting a good deal and think their best option is to approach a dealer and say, “I’ll take whatever you can get me.”
“There are options for that person, even if they feel that here are no options,” Reed said. “The solution is to find out where you stand — it may not be as bad as you think.”
You can get two free credit scores, updated every 14 days, on Credit.com. Once you know where you stand, you’ll be in a better position to comparison-shop for financing.
“You don’t want to go into a dealer not knowing what your credit score is, or what your situation is, because there are situations in which the loan could be marked up,” Reed said. Getting pre-approved by other lenders will give you negotiating power, as well. “There is a human factor to financing, so if you have the opportunity to meet face-to-face with somebody … it will make a difference. Bring records, and make a presentation.”
More on Auto Loans:
- Are There Car Loans for People With Bad Credit?
- What to Do If You Can’t Make Your Car Payments
- Top 5 Worst Car Buying Mistakes