If you need to finance a car when you are dealing with credit issues, it might be best to go with a used vehicle.
In fact, many personal finance experts always recommend buying a used car over a new one. From a financial standpoint, they believe it simply makes more sense. When you are dealing with bad credit, this reason becomes even more relevant thanks to the higher-than-average interest rates used by subprime lenders.
Reasons to Not Finance a New Vehicle
New vehicles come with a factory warranty, added peace of mind, and the latest features. However, there are a few downsides to taking out an auto loan on a new vehicle.
Depreciation, while often forgotten, is the most expensive cost that comes with owning a car. And new cars depreciate rapidly in the first few years. New cars lose around 20% of their value in the first year of ownership. In 3-5 years, most aren't even worth 50% of their value when new. If you buy used, you avoid the steep initial drop in depreciation.
- Your Warranty Will Run Out Before Your Payments Do
A big new vehicle selling point is the factory warranty. The majority of automakers offer a 3-year, 36,000-mile (whichever happens first) warranty. However, the average auto loan term length is around 60 months these days. This means your warranty is probably going to expire before your done paying off the car.
- More Expensive
Of course, a new vehicle will be more expensive than a similar used car. If that means you have to extend the loan term to get a manageable monthly payment, it only makes the loan more expensive due to interest charges. Plus, that higher price tag means more sales tax. Also, new vehicles are generally more expensive to insure.
These reasons are why many financial experts think buying used represents the better value.
Buying a Used Car with Bad Credit
Buying used often represents the better value because these vehicles cost less and you can avoid the steep initial drop in depreciation. Furthermore, today's cars last longer than ever. When you have bad credit, it usually makes more sense to look at used vehicle options.
However, you should still borrow responsibly. Keep in mind the following tips to make sure you buy used the right way.
- Don't Be a Monthly Payment Buyer
Always keep in mind the total cost of the loan instead of just the amount of your monthly payment. Extending the loan term to receive a lower monthly payment is only increasing the total cost of the loan due to interest. When you have bad credit, this becomes even more important to focus on. Try to keep the loan term as short as you can afford to.
- Target the Right Kind of Used Vehicles
Depreciation is the steepest in the first couple of years of ownership. You can avoid that initial drop and get the most for your money by looking at cars that are around three to five years old. A vehicle in this age range won't have too many miles on it and you can expect it to last for a long time.
- Use the Information Available to You
Car buyers today have a lot of information available to them. Vehicle history reports are more detailed and available than ever before. Also, you can research reliability ratings, reviews and more to learn about your different options. This helps you make sure that you are buying a dependable vehicle that you can count on for years to come.
Getting Financed When You Have Bad Credit
Buying used allows you to save money on the sticker price and avoid the vehicle's initial depreciation drop. When you need to get financed with bad credit, it makes even more sense to look for used car options.
But if you are having trouble getting approved for an auto loan, you should know that Drivers Lane can help. We match applicants with damaged credit to a dealership in their area that stands to give them their best shot at getting approved. You may even be able to finance your vehicle with little or no money down.
Get the process started by filling out our free and easy online application.