5 Things to Know About Used Car Financing

Be Prepared Before Financing Your Next Used Car

financing a used car
Carefully review your options before financing a used car. (c) MorgueFile.com

In the market for a used car? Just as important before buying are these 5 things to know about used car financing.

Used Car Loans Cost More

There’s a good article on the topic by John Vincent of U.S. News & World Report. He pointed out used car financers don’t like risk. Well, they do, but only when they’re getting paid a lot of money in the form of high interest rates. New car loans are predictable in terms of how much they will lose value or depreciate.

Used cars tend not to be as well cared for. Thus, their depreciation can vary widely. Lenders are going to charge higher interest rates to reduce their risk but that ends up costing the consumer more.

Your Loan Can Be Too Long

It’s been said many times before, including by me, but do not shop your used car based on monthly payments. You could end up with extremely long loans where you are paying for a car that is worth less than the loan. You never want to be in that situation.

In a future life, I worked for the Connecticut General Assembly as a press secretary. It became a common budget tactic to defer debt by bonding it. (I’ll let our expert on bonds explain the whole concept.) What you are doing by taking a long used car loan is, in effect, going into debt to pay off debt because you have an asset that is not worth as much as you are paying for it.

It all sounds very complicated and I apologize for that.

Essentially, you are setting yourself up to hurt your credit rating by taking on more debt than you can afford. Sure, you might get lucky and get through six years of a used car loan without any financial problems, but the cards are stacked against you.

Shop Around for a Used Car Loan

Here’s one of the least-used tips when it comes time to finance a used car.

Shop around. Consider a variety of sources when it comes to financing your used car. Chief among them should be credit unions. They usually have the best sources of financing – and it’s not that difficult to become a credit union member. One credit union near where I live will accept you as a member simply if you worship within the city limits. Others require that you usually work or live in a defined geographic area but they are usually pretty broad.

Plus, it doesn’t hurt your credit rating if there are a lot of inquiries in a short time. The credit rating agencies recognize that as you looking for a loan and no longer hold it against you.

Also, once you have an interest rate for a loan, you can use that to your advantage. I explain how below.

Used Car Dealer Is Not Your Enemy

If nothing else, I like to stress that probably 99 percent of all used car dealers are hard-working, honest people. Sure, some have business tactics that may stretch the limits of the law but overall their goal is just to make a profit and stay in business.

Want a quick indicator how friendly a used car dealer is? Consult our 10 questions to ask a used car dealer. See how forthright they are with their answers.

How else are they your friends?

They know things you don’t and will share that information with you. Case in point would be financing for your used car. Approach the used car dealer with the interest rate you achieved on your own. See if they can match it or beat it.

Why match it? Well, used car dealers have arrangements with lenders who reward them with a percentage of your loan. You’re helping the dealer stay profitable if they can sell you the loan. Just be careful it’s a good loan, as explained below.

Used Car Dealer Is Your Enemy

A used car dealer can be your enemy if it is primarily a buy-here, pay-here used car dealership. They’re not in business to sell you a used car. They are in business to sell you financing. They are going to charge you high interest rates.

That’s why you never accept a loan from a dealer that is a higher interest than what you have arranged on your own, regardless of the reasons they might give you.

You might be ending up in a buy-here, pay-here arrangement that rarely works out for the customer, especially if the loan isn’t reported to a credit rating agency.

Also, be leery of loans that seem too good to be true with a low-interest rate. That could be a used car loan with a balloon payment. You get sucked in with a low-interest rate and/or low monthly payments. Then at the end of the loan you are stuck with a big payment that eats up all the equity in your vehicle.

A little homework is going to be your best aid when it comes time to finance your used car. It’s an investment in time worth making because of the money you could save and the potential headaches you could spare yourself.