Used Car Financing Basics And Tips
on Oct 01 in How to Buy tagged Financing, Used Cars by jasonl
If you’re like most Americans, you’ve decided to arrange financing in order to buy a car. There are lots of different lenders and financing options, but for the most part all used vehicle financing follows the same basic rules:
1. Used Car Financing Rates Are Higher
Used vehicle interest rates are higher than new vehicles for a few reasons, but the main reason is that used vehicles represent more risk to the lender. Used vehicles are more likely to suffer a major mechanical failure that could render them worthless (like a engine replacement, or instance).
2. It’s Harder To Get Financing For A Used Car Than A New Car
It’s much harder to acquire used vehicle financing than new vehicle financing, and the reason is really simple. New car manufacturers (like Toyota, Ford, Chevy, etc.) want to sell cars, so they’ll provide special financing to people to help them be able to buy. Additionally, new vehicles often come with rebates and/or special interest rates. If you have less-than-perfect credit, it might make sense to buy a new car.
3. Used Car Financing Is More Restrictive
Typically, most banks will not lend money on any used vehicle that has more than 100k miles or is more than 8 years old. These higher miles, older vehicles represent much more risk for the lender because they’re more likely to suffer a major breakdown. Older vehicles are also more likely to be stolen and “chopped up”, making recovery impossible. NOTE: If your credit is less-than-perfect, lenders will probably restrict you to a vehicle that’s not more than 5 years old and/or one that has less than 75k miles.
4. Credit Unions Are Great Used Car Lenders
In just about every case, your local credit union will offer the best financing for a used car. I strongly recommend you join whatever credit union you can. Credit Union interest rates are usually excellent, and they are much more likely to provide Often times you can join a credit union through your work (your HR department should know about this). If not, many credit unions allow people to join based on the neighborhood they live in. Search for a credit union to join here.
5. Leasing A Used Car Is Usually A Bad Idea
In my entire career, I have never seen a used car lease that made financial sense. Typically, used car leases are structured just like new car leases. There’s an upfront payment, a low monthly payment, and a low mileage limit. Unlike new car leases, however, every used vehicle lease I’ve seen had $500-$1,000 in extra fees. Finally, used vehicle leases aren’t usually substantially less expensive than a comparable new vehicle lease. For all these reasons, plus the fact that most used vehicle leases don’t protect a customer the way a new vehicle lease does, I don’t recommend anyone lease a used car.
For more information, check out our section on New and Used Car Financing.
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Tony M
Jul 13th, 2010With all due respect, feel free to send me your fax number and I’ll be glad to be the one to show you, for the first time in your career that used car leases can make sense. Less than a year ago, I lease a used LT4 Corvette (1 yr old, 9k miles) with every option for less than 456/month for 39 months, 15k miles/yr and that includes extended GM bumpber to bumper warranty that covers the vehicle to 75k miles. Money up front is similar to any other financing, zero down or as much as you’d like to put down. I put down 3000 which brought my payment to 380 per month. The absolute cheapestt price for a new LT4 corvette based on a 3 month nationwide search with exact same equipment was $1100 per month, zero down, 36 months. $1100 to $456 isn’t significant savings? Maybe to you $644 per month isn’t significant but to most of us it is. Better protection? Are you kidding? I have always had extended bumper to bumper warranty and I have never had a problem, not even once.
No I didn’t get lucky, I simply didn’t listen to people that gave me bad advice such as what’s stated above. Just a few minutes of research kept me from listening to bad advice. The trick to finding a good used lease is to find a car with selling price less than MSRP, that has less mileage than expected (12k per yr) and with any other options that increase the residual such as extended warranty/certified or any other item that the lender considers something that would increase the residual value. Finally, some lenders prefer certain terms and may yield a much better payment if that term is chosen. Finally, there has been a significant decline in lenders that still do used car leasing. They generally tend to be local credit unions. In the recent year, some credit unions have changed their contracts so that at the end of the lease, the car goes back to the dealer and not the bank so the dealer has more control in what cars to lease. Don’t give consumers bad advice and you can achieve that by doing your homework before giving accurate advice.
Tony M
Jul 13th, 2010As far as rates, take a look at current rates at this particular cu http://www.nwfcu.org/rates/vehicle.html
Correct me if I’m wrong but that’s a credit union and it looks like the apr is the same for both Used and New car lease (3.74% or 3.49% as internet special)
Jason
Jul 15th, 2010Tony – I’m glad to hear that your lease worked out. As I said in the article, used car leases are USUALLY a bad idea and I don’t recommend them. Take your lease:
Let’s say a 1 year old 4LT Corvette convertible is worth $50k (retail). Let’s say that same car is going to be worth $30k when it’s 4 years old. NOTE: I’m basing these numbers on cars I can find right now on AutoTrader.com.
With a used car lease you’re buying depreciation. If a 1 year old Corvette Convertible depreciates $20k over the course of 3 years, and your total lease cost is $17,820, you did great.
On the other hand, if you bought a one year old Corvette for $40k last year (and you might have been able to last year – it was one of the worst sales years since the 1970′s), and if the car market recovers by the time your lease ends, your car could be worth $30-35k.
I’m seeing 2005 Vettes with 60k miles online for $30k+. If you paid $18k to buy 10k worth of depreciation, then I guess you didn’t get a great deal after all.
As for comparing your used car lease to a new car lease, I don’t see the connection.
Finally, Tony, I would encourage you to consider the fact that your experience really isn’t typical. Of all the people in the USA considering buying or leasing a used car, the vast majority aren’t looking at Corvettes.
I don’t think there’s any bad advice here bro – you may have done very well on your lease (only I’m guessing your used Vette was closer to $40k than $50k), but the average person looking at the average used car would be wise to avoid a used car lease.
Brad
Jan 31st, 2011Your both right and it all depends on the deal – I leased a used 2006 taurus in 2007 for 2 yrs- purchased the car from someone who had access to the Manhiem auction – I financed the taurus as a used car lease for $9000 – zero down – when other taurus’s were going for 12 – 14k, getting the 3000 depreciation up front gave me $118/mnth payment when the residual was put in the payment and the car had 15000 miles on it to start. Best deal I ever had. My credit union discontinued the used car leasing – so thanks for the C.U tip Tony – I did have to pay 500 at the end of the lease but otherwise – no problems.
Andrea
Dec 3rd, 2011I have been approved through 2 major lenders for a used vehicle under $16,000 & under 80K miles…now thinking of joining a credit union to try to get better interest rate &/or few thousand more dollars in lending power(i can put more down than the $1,00 the major lenders “ok’d.”) But, heard that yes, will get better interest rate; BUT, credit union will even further restrict vehicle age & mileage…so, best to stick with the major lenders. Is this true? When offered the dealership $2,000 down, they came back with “oh, but we can approve you for $16K, under 80K miles with only $1,000 down!” Trying to get lil’ more borrowing power & obviously, better interest rate without being screwed, or given 1 million restrictions: credit union, or stick with a major lender? Thnx
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