Used cars have always appealed to the budget-conscious shoppers
because of their low prices, but there’s always been a drawback — used
car loans. Until recently, bank loans for used cars were tricky to get,
and were much more expensive than new car loans.
But that’s changing.
With car dealers successfully edging banks out of many new car loans,
banks have turned their attention to the used car market. Today, more
than half of used car purchases are financed, and used car loan volume
keeps setting records, according to Experian. For the quarter ending in
June, the average used car loan term was 62 months, and 16% of used car
loans were even longer — both records, Experian said. In 2014, the
average used car loan balance passed $18,000, also a record.
Naturally, rates can vary a lot, based on how old the car is, how long the loan term is, and the buyer’s credit.
According to Experian, average rates for used car loans are roughly
double than those for new cars. The average interest rate for new
vehicles was 4.71% in Q1 2015, up from 4.54% in Q1 2014; the average
interest rate for used vehicles increased from 9.01% in Q1 2014 to 9.17%
in Q1 2015.
Rates are rising in part because used car loans have become more
popular, as have stretched-out loan terms. While longer term loans are growing, they do not necessarily
represent an ominous sign for the market,” said Melinda Zabritski,
Experian’s senior director of automotive finance. “Most longer-term
loans help consumers keep monthly payments manageable, while allowing
them to purchase the vehicles they need without having to break the
bank. However, it is critical for consumers to understand that if they
take a long-term loan, they need to keep the car longer or could face
negative equity should they choose to trade it in after only a few
years.”
While it can be easier to get financing for a used car purchased at a
dealership, it’s possible to get an auto loan for private party used
car sales, too. Many banks and credit unions offer them, for a price.
For example, Wells Fargo recently offered used car loan rates as low as
3.57% for purchases from a dealer, but the lowest available private
party rate was 5.71%. But shopping around is worth it. SunTrust, through
a subsidiary named Lightstream, says it offers used car dealer loans at
1.99% and private sale loans at 2.79%. And don’t neglect a phone call
to your local bank or credit union, which might match any rate you can
find to keep your business.
Used car loans come with all of the potential gotchas as new car loans.
Perhaps the biggest: If you finance through a dealer, you are more
likely to get talked into paying for extras you don’t want or need, like
undercoating. When you finance through a dealer, the dealer knows
exactly how much loan you can afford, giving them a bit of an upper hand
in the negotiations. It’s better to settle financing before you head to
the used car lot, and to pay with a pre-authorized car loan check you
get from your bank. And be ready to say “no,” to a lot of tack-on
offers.
For poor-credit consumers,
car buying can be even more risky. Among the latest trends in the
low-credit end of the spectrum is “buy here, pay here” lots. Buyers at
these lots consent to restrictive terms, such as agreeing to pay the
monthly bill in person, and can pay rates as high as 30%. Repossession of
“buy here, pay here” is common, as are prices that might be double or
triple Kelley Blue Book value. Used car loan consumers with poor credit
should know their rights when they shop around for and take out a loan.
Often, the dealer is acting directly as the lender in loans like these,
which means the dealer must comply with all Truth in Lending requirements, such as accurate disclosures.
Knowing your credit score can help you be better informed when you shop for a car loan. There are many ways to get your credit scores for free, including through Credit.com, where you can also get them updated monthly along with personalized tips to help you build your credit.
They can help keep monthly
costs down, but they come with a caveat — the upside-down loan.
