NOT To Finance Your Used Car Purchase
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:
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
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.
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.
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.
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.
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.
fixate on just the price of the car; take the whole deal into account
and make your decision based on that.
with permission from EricPetersAutos.com.
[send him mail] is an
automotive columnist and author of Automotive
Atrocities and Road Hogs (2011). Visit his
© 2011 Eric Peters
Best of Eric Peters