I love brand new cars. And am sure you do as well. But I also try to manage my finances responsibly. Therefore, after weighing out quite a few options, I reluctantly came to the conclusion that buying a used car is beneficial, especially when it is your first purchase.
Why so? Here are some reasons:
Another good news for you is that -- AUSTRALIA HAS A HEALTHY USED CAR MARKET!
Check this for yourself:
Considering all the above aspects, you must be sure by now that you are in the right direction.
Now that you have made your decision, you next point of action is what is the best way to finance a used car?
First up — Choose the right loan option
I would recommend you to go for a secured car loan. It is in fact the best way to buy a used car -- generally up to about seven years old.
Most lenders will lend for cars up to seven years old and allow five years as loan term, making the maximum age of the vehicle to be 12 years at the end of the term.
Secured car loans will generally offer cheaper rates as the car is the security. Having a car as their security reduces their risk on the loan. The newer the car, the cheaper the rate offered by the lender. The simple rationale behind this is that you will keep the car for the full term of the loan offered by them.
You can also finance a used car through various secured car loan products. Which product you use will generally depend on where you are using the car -- for business or personal use.
1. Business-use products
These are classified as:
A hire purchase is also termed as an offer to hire. In this agreement, during the hire term, the financier owns the asset and the hirer pays monthly instalments. Post the completion of this period, the ownership of the asset is automatically transferred to the hirer. This agreement includes various positive sides such as application of ballooning option and tax deduction on the interest amount.
You can use this type of loan mainly when purchasing a car or equipment for business use. Here the lender shall advance the full loan amount to the customer, who in return can claim complete ownership of the chattel mortgage vehicle after purchase. The client can settle his loan in regular installments and pay off the residual at the end of the contract term.
This option is ideal when you wish to use your automobile for earning cash. The lender shall buy the car on your behalf and you will be required to pay a fixed monthly installment during the period of your lease. By the time the lease period is over, you can pay the residual amount to own the title of your leased vehicle.
This agreement is done among employer, employee, and lender. As an employee, the loan payments will be made to your financer from your pre-tax income. Again, there will be a balloon payment at the end of the loan tenure.
In either of these cases, loan terms can be one to five years, with or without balloon payments at the end of the loan.
2. Personal-use products
This includes the secured car loan. Lenders usually offer terms ranging from one to five years. Some may offer even up to seven years. But from my personal experience, seven years is too long for a car loan. And the longer the term, more is the interest to be paid.
So, what if I want a car that is more than seven years old?
Yes, I know I have spoken all about vehicles that fall below that timeline of seven years. But, if the age of your select model is more than seven years, you can get a personal loan or use equity from your home. Reason for this is that, most lenders don't like financing cars over seven years. Since personal loans can be quite expensive with rates, using your home loan will be a much better choice.
Some other considerations
Now that you are a bit clear on the best way to finance a used car, let me run you through a few other points that you need to consider:
1. Understand your credit score
There is no better time to track your credit score, than before gearing up for a used-car loan. A secured car loan generally would not stress much on your credit history. The reason? They can simply repossess your car if you don’t pay.
But what’s the downside here? Your rates would shoot up. Therefore, if you know your credit score, you can calculate your eligibility for the best car loan rates.
2. Get finance quotes if your credit score is shaky
What if you don’t have a stellar credit report? Get finance quotes from online lenders. This will enable you to calculate an interest rate and the maximum amount you can spend on the car. You can even use this financing option as a bargaining chip with the loan quote that is offered to you by the lender.
3. Go for shorter loan terms
Yes, these come with higher monthly payments. But the upside? Lower interest rates. In fact a $470 car payment can become a $350 car payment with an addition in the number of years. What you don’t notice here is that, you end up paying a lot more in terms of total interest and amount at the end.
4. Pay at least 20% of the car price as down payment
This is almost a no-brainer. Yes, even if you have an excellent credit score and don't require to pay any upfront amount, do insist on depositing at least 20% of the car price as down payment.
I understand that reading through all these points in one go might seem overwhelming. And especially, if you flee at the sight of huge financial jargons. But give it a couple more reads and get an idea about the best way to finance a used car. .
Take your time, understand every term, and read the fine print before signing on the dotted line.
Whenever in doubt, it is always recommended to seek counsel and advice from your accountant.