Recently by Eric Peters: How to Make Your Car Last Forever … Or At Least, For As Long As Possible
With used cars, should you buy outright or finance?
The main advantage to buying a used car is (obviously) the lower purchase price. You have let the original purchaser absorb the depreciation hit, which can amount to a mountain of money. But when you finance the purchase of a used car, you can end up losing most of the financial advantages that you thought you were getting. Heres how:
First, they get you on the financing.
If you buy a used car on the payment plan, expect to pay more often, a lot more for the interest on the loan. Many new cars can be financed with no money down and 1-2 percent (or even 0 percent) interest. But current interest rates on used car loans are in the 6-7 percent range which can amount to many hundreds even thousands of additional dollars spent.
Why are interest rates on used car loans higher? First, the lenders know they can get away with it. Just like those shyster Payday Loan places, the used car market preys on the less affluent. Also and more respectably used cars contain less value (having depreciated) and the loan period is typically shorter, so the lenders hit you with a higher percentage to make the deal worth while to them.
The bottom line is, youll pay more to finance a used car than you would to take out a loan on a new car and if the interest rate youre paying is literally twice or three times (or even more) on the used car loan, it could actually make more sense to buy a new car. So dont fixate on the cost of just the car; you must factor in all related costs including the cost of interest on the loan.
Which brings up a related point: Insurance.
If you buy a used car outright, you have the option of buying just basic insurance a liability-only policy that pays for damages you may cause to someone elses car, but doesnt cover damages to your car. Because its your car so you can assume the risk of a total loss, if you decide its a reasonable risk and prefer to save money on the cost of insurance.
But if you are financing, then you dont own the car the lender does. Until you pay it off and all liens are removed from the title, you will be required to maintain comprehensive insurance coverage that will pay for damages to the car including total loss in the event you wreck. The lender will require this as part of the loan deal, because they dont want to be left holding the bag if you do have a wreck and the car is now scrap. New car loans have the same policy.
This, too, can add up to a lot of money you might not have factored into your original purchasing decision. Even just $50 additional per month (to buy a comprehensive vs. liability-only policy) works out to $600 per year. Over a three-year loan period, thats $1,800 not small change for most people.
Consider, too, that you could have used that $1,800 to buy more used car, had you waited a little, saved up more and been able to make a purchase outright, in cash (and buy the lower-cost liability-only policy).
The final thing worth mentioning about financing a used car is that your monthly payments are probably going to be higher even without factoring in the cost of money (interest). This is because the duration of the loan is typically much shorter, 2-3 years vs. the typical 5-6 year new car loan. It may actually be financially less burdensome to pay $350 per month for the next five years for a new car than it would be to come up with $500 per month for the next three years to finance a used one.
Again, dont fixate on just the price of the car; take the whole deal into account and make your decision based on that.
Reprinted with permission from EricPetersAutos.com.