Viable Ways to Finance a Used Car

By: Steve_Barker

Picture this: you’ve already done your homework on how to choose which used car to buy, but you’re still unsure how you’re going to pay for it. You ask yourself if it’s a smart move to finance a used car just as how most people would on a new car. Compared to the latter, there are several risks in financing a used car.

Generally, getting an auto loan can help you buy a car that costs more than its value by doing monthly payments. It is a matter of knowing how to borrow wisely so you can fully enjoy the benefits of a car loan. Otherwise, you’ll end up losing more cash since used cars may have higher interest rates than brand new cars. Before you take your plan to another step, take into consideration the pros and cons when financing a car compared to paying in cash.

The Pros and Cons of Financing a Used Car

Some of the top benefits you can get from this option include:

Affordable down payment

Most down payments for used cars range from 10%–20%. In some cases, dealers don’t require any down payments at all. However, this may sound appealing, but if long-term saving is your goal then this will not help you cut off the overall lifetime cost.

Dealerships offer lending choices with competitive lending programs or multiple financial options. Jonas Nielsen, CEO of AutoUncle, developed a platform that can guide buyers to find good dealerships to save time and money. This convenient option allows you to skip the separate processing with a lending company.

Keep your savings intact

Paying in cash would mean you’re getting a good chunk of money from your emergency savings which is often a bad idea. If your savings is just enough to get you that used car for yourself, spending it all might put you in big financial trouble later. By getting a financial loan, you won’t have to worry about exhausting your hard-earned savings.

Increases your credit score

If you have a bad credit score, opting for a car loan can help you recover your negative credit and start building your credit rating.

On the other hand, financing a used car may not be worth it, as some of the drawbacks you may encounter are:

Higher overall cost

Financing your car comes with interests to pay aside from your loan which adds up to the overall cost compared to cash-only transactions.

The car is not yours until you pay it off

When you finance a car, you don’t own your car until you pay it off – until then, the issuing lender holds the title, and can repossess your car if you don’t make payments

5 Tips to Help You Get Financial Support for Your Used Car

1. Ask for financing quotes

Consider asking for financial quotes from different lending companies and compare each offered rate, terms, and conditions. Some companies have competitive interest rates or give multiple offers that can help you negotiate with your dealer to get a better deal.

2. Know your credit score and choose your dealership 

Your credit score can significantly affect the type of auto loan you can get. For a good to excellent credit score that is 700 and above, you can receive quotes of around 3–4% interest. While for a score below, the interest can range from 6.5% to 15.9%.

3. Reduce your paying term as short as you can

As much as possible, aim to make the whole paying term for a short period of time. This would mean that you will be paying more cash monthly by compressing the duration. You’ll realize how much money you can save in the long run, since paying it faster means paying less interest. It’s a wise move to make for a depreciating asset.

4. Maximize your budget for the deposit

If you’re willing to take out more money for the deposit, then you’ll significantly save more money. Usually, people are encouraged to make down payments of at least 20% of the car’s total price. The reason is that this will be deducted from your initial loan. Take note that this won’t decrease the expenses, but will help you with the interest rate.

5. Recognize schemes that can cost you

Some buyers are lured to take the deal after seeing affordable monthly payments. However, the important focus should be the total cost. A good monthly rate can be tempting, but what should be considered is if it can be realistically afforded in the long run.

With the right knowledge on financing a used car, you shouldn’t be afraid of the risks to come. Before you get yourself in a deal, it’s always important to assess if you are setting off a realistic financial plan by making wise choices and avoiding appealing deals that are actually misdirected.

By Steve Barker

© 2020 Copyright Steve Barker - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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