Used Car Loans: Everything You Need to Know

Buying a new car is a huge financial commitment, and a lot of different factors can affect your final budget. One of the first decisions you must make on your car buying journey is whether to shop for new or used vehicles. While truthfully there isn’t a huge difference between budgeting for a used car versus a new one, used cars do have a few unique benefits that can help stretch your budget to get your dream car.

Used Cars are Budget Friendly

Buying a used car is easier on the wallet, which can make higher-end vehicles more accessible. On average the upfront cost of a new car is $38,723. Comparatively, the average cost of a used vehicle is much lower at $23,643. One thing to be aware of when financing a used car is that depending on who you get your loan from, the interest rates might be higher. This is due to some increased risk factors depending on the car’s age, so for example a loan for a 10-year-old car might have a higher interest rate than a loan for a 2-year-old car. However, due to the decreased cost of a used car, the loan terms are often shorter, which means less time making payments.

Used Car Loans are Less Restrictive

Another perk of the smaller price tag is that you don’t need to borrow as much. Smaller loan amounts are often less restrictive about credit score requirements. New car loans tend to have very strict credit score requirements to receive a good rate. Experian suggests having a credit score of 670 or higher to get approved by most lenders. Since smaller loans carry less risk, lenders are willing to accept applicants from a wider credit range.

Used Cars Depreciate Slower

Several factors determine a car’s depreciation. For example, a car will depreciate the more it is driven, as the odometer rises the value of the car will drop. Even the make and model of a vehicle can affect the depreciation rate, including whether the car is the basic package or includes some tech upgrades. New cars depreciate as much as 10% the second you turn out of the car lot and can depreciate as much as 60% in just five years. With the longer loan terms that come with new cars, buyers can easily end up owing more than the car is worth soon after purchasing. Buying a used car greatly cuts down on the value lost to depreciation. Buying a car that is just one year old can save you as much as 30%.

Certified Used Cars are Like New

One of the major factors in deciding the rate of your loan is the risk to the lender, and just like an older car presents a higher risk, poorly maintained cars are a high risk for lenders as well. High-risk investments for lenders mean they pass those costs onto you. One of the ways to avoid these costs when shopping for the best used cars is to go with a certified pre-owned vehicle from a reputable dealership. To become a certified pre-owned vehicle the car must undergo a rigorous inspection of all its parts from the tires to the computerized controls to ensure everything is in working order.

Additionally, certified pre-owned cars come with an extended warranty, some policies extend as far as three years after the date of purchase no matter what year the car was manufactured. Lastly, some dealerships will let you exchange the car within a few days of purchase. So, if you were on the fence between two cars you don’t have to worry about buyer’s remorse.

Whether your goal is to make flashy upgrades affordable or avoid losing the race to depreciation, shopping is the smart way to get the most bang for your buck so you can hit the road without breaking the bank.