used car financing basics and tipsIf 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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