Beware of Used Car Loans that Could Double Your Interest


Are you looking to buy a new car? Looking to save a bit of money on your purchase? Your desire to save money would often lead you to choose a cheaper used car over a brand new one.

But while the price of the used car may be lower, used vehicle loans aren’t always coming with cheap terms anymore. In fact, many used car loans now have interest rates that nearly double the rates for a typical new car loan.

There are several reasons for this. The primary reason is that loans for used cars are targeting buyers with low credit scores and slapping on interest rates of up to 17%. Compared to new car loan interest rates, which usually top out at 13% or lower (even for those with poor credit) these loans aren’t doing buyers any financial favors.

Unfortunately, those with low credit scores aren’t always in prime financial health. The result? These increased interest rates can increase the danger of defaulting on the loan.

Where buyers are losing out

The high interest rates mean that a large portion of your payments will go directly to interest each month. It also means that you’re paying much more on the car than it’s actually valued. Those with high credit scores, conversely, benefit from lower interest rates. Applicants with excellent credit are offered loans with interest rates as low as 5% for a used car.

Is a new car the cheaper option?

You can determine if a new car will be the more or less expensive option by comparison shopping. Look at both a new car you’d like to buy and a used car, and get an estimate of what type of loan terms you would qualify for with both. Then compare the overall price of both, including all interest payments. The APR and length of each loan, combined with the original price of the car, will determine which is the cheaper option overall.

This is something that will vary for everyone based on the cars they are looking at and the terms they qualify for. Also remember that experts still point towards the depreciation of a new car (estimated at an immediate 20% as soon as you drive off the lot) as a major disadvantage of buying a new car.

So what can you do to avoid poor loan terms when shopping for a used car loan?

Credit Score

The best way to obtain the more favorable interest rates is to enter into the loan with a favorable credit score. This is not an impossibility if you currently have a low credit score. You can increase your credit score – perhaps even in as little as 3-6 months. (Use our Credit Score Resource Center to get started) If you’re able to hold off purchasing a car, you will have the benefit of lower interest rates once your score has increased. Saving for a higher down payment will also require less financing, thus improving your loan terms.

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Understand the Loan Terms

In addition to benefiting from a higher credit score, it’s paramount to understand any terms before signing a loan. Take more than just a single read to review the loan terms and ask plenty of questions to make sure you understand the details. As with any contract, you want to understand where you stand long term and if you’re entering into a fair exchange. A high interest rate can result in paying thousands of dollars extra. If you cannot realistically afford that you should find out beforehand, so you can walk away from the loan before signing it.

Comparing loans will also help you to understand your loan terms. Shopping around helps you to see your options and also guide you on what is a realistic interest rate for your current financial circumstances.

Alternate Forms of Transportation

Another guaranteed way to avoid car loan terms is to forgo car ownership. This option,  admittedly, isn’t an option for everyone. But car costs can account for a huge percentage of your annual income, so why not avoid all that if possible? The cumulative cost of gas, car insurance, tolls, maintenance, and parking make owning a car a costly affair. If you’re able to supplement your daily travels with other modes of transportation you can save quite a bit of money. These can include biking, public transportation and carpooling. If your job depends on your commute, these might not be viable options but consider them before signing for a car loan.

It’s also important to remember that any time you take out a loan you are taking on debt. Not everyone can pay cash upfront for a car but getting the fairest loan terms possible should be a priority. It’s an important and serious decision and should be considered as such!

Image Credit Kimberly Gauthier | Keep the Tail Wagging

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