Used cars can be expensive. How to finance your purchase without paying more than you have to.
By Benjamin Preston
Used cars can offer great savings over new cars, but if you need to finance your purchase, you may not be saving as much as it first appears. For starters, the median price of a used car is nearly $29,000 — much higher than it was before the pandemic. And rates on used cars can be twice as high as on new car financing, which is often subsidized by the manufacturer to make higher-priced new cars more attractive. With interest rates rising, a higher interest rate could cost you thousands.
“The price of the used car you’re looking at can still be quite high, so it’s a good idea to avoid expensive financing and dealer surcharges,” says Chuck Bell, a CR fiscal advocate. “It may be better to arrange your own financing or consider buying from a private seller, which can be more hassle but may result in a better price.”
The following tips will help you avoid common pitfalls and pay more than you have to when buying and financing a used car.
Check vehicle history. You don’t want to be faced with repaying a loan if it turns out that the car is having serious problems or if the resale value is collapsing due to hidden accidental damage. Vehicle history reports can’t show floods, collisions, or other damage, so checking more than one for each car you’re serious about buying can help eliminate potential blind spots. CarFax reports are only a few dollars, and VINcheck is offered free of charge by the National Insurance Crime Bureau. The National Motor Vehicle Title Information System also provides links to numerous authorized vehicle history providers. And always have a vehicle checked by a mechanic you trust before you buy it.
Check your credit score. Whether buying new or used, the best interest rates usually go to those with the best credit ratings. Melinda Zabritski, senior director of automotive financial solutions at Experian, a credit reporting agency, says the average interest rate on a used-car loan is 5.53 percent for someone with the highest credit rating and 16.85 percent for someone with the lowest credit rating. The difference between these two could be a few thousand dollars over the course of a traditional loan. It’s a good idea to regularly review your credit score to see if there are any areas that need improvement. You can do this using a number of free credit reporting services such as annualcreditreport.com, Credit Karma or Experian. Zabritski says that in general, the best way to keep your credit score in good shape is to pay bills on time and keep your credit card balance as low as possible. Experian Boost is a free service that helps you improve your credit score by including utility and other bills paid on time. (Learn how to fix your credit score.)
Get pre-approved. This is good advice for any car purchase, new or used, and is required when financing a used car purchase from a private seller. Pre-approval also gives you a base to start from and empowers you to decline a dealer’s financing if conditions are not favorable. Zabritski says not to worry about making multiple car loan requests. They can still be excluded from your credit report, and if not, they’re likely only counted as one request if they’re all made within the same 30-day period. Most dealers offer financing through a third party, and online providers like Carvana and Vroom also offer financing and easy online pre-qualification. However, you may be able to get a better interest rate from your own financial institution. Look around to see who has the best prices.
Make a substantial deposit. Put down as much money as you can comfortably afford, says Bell. The more you pay upfront, the less money you lose on interest payments. For example, if you pay $3,000 for a $29,000 car, you will pay a total of $32,341 for a 48-month loan at 5.53 percent APR (excluding sales tax, which varies widely by state and the price can increase by thousands). ). If you deposit $5,000, you’ll save more than $200 over the life of the loan. If you compare how much interest your money would earn in a savings account, it’s probably less than what you would save if you made a larger down payment.
Avoid long-term loans. A 60-month loan can keep your monthly payments low, but you’ll be paying more in the long run, and likely a higher interest rate as well. For example, if you use Navy Federal Credit Union numbers and you fund $23,000 at 5.44 percent over 36 months, the total amount you pay is approximately $31,280. Taking out a 60-month loan carries a higher interest rate of 5.74 percent, and the total cost would be $32,812 — more than $1,500 more than a shorter-term loan. The likelihood of you being “upside down” or owing more on the car than it’s worth also increases with longer-term loans.
Avoid merchant add-ons. Once you’ve agreed on a price, there’s a good chance a dealer will try to pressure you into buying an extended warranty. (Some will tell you credit is required, which is rarely the case.) Make sure the original factory warranty has expired before even considering an extended warranty (some certified used cars already have an extended warranty and may not need another). . In general, CR advises against buying an extended warranty: it is often not worth the money. Instead, keep a rainy day fund for auto repairs. This money can even earn a little interest if it’s in the right account.
Consider potential maintenance costs. If you buy an older vehicle, you will definitely save money compared to the price of a new car. But don’t forget the inevitable costs of any repairs. Consumer Reports recommends finding a CR-endorsed model known for safety, reliability, and great fuel economy, which can help contain costs. You can find these in our recommended used cars list; The CR used car marketplace shows the satisfaction and reliability of the owners directly in the offers. It’s still a good idea to create a rough annual maintenance budget based on a car’s age and mileage using CR’s online repair calculator. Then factor that into your monthly payment estimate to see how much money you’re actually saving when you buy used.
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