Buying a used car over a new car can save you money -- the Edmunds websites states that new cars depreciate about 20 percent once driven off the dealer's lot. Used-car loans also come with an interest rate, which is the amount the bank charges for lending you money. Zero-percent interest rates are usually advertised for new-car loans, not used.
Term Options
Vehicle loans are available for a period of 24 months to 84 months. Obtaining a seven-year loan for a used car is uncommon, but if you are purchasing a high-priced item, at least $25,000 or more in most cases, you may find the term is an option. The lender usually has guidelines in place, such as price or credit requirements, to qualify borrowers for an 84-month loan. Some banks do not offer an 84-month term.
In addition, credit can affect loan term options. For example, someone with poor credit might be restricted to a lower loan term because, if the bank has to repossess the car, it wants to make sure it does not lose a significant amount of money. A poor credit borrower might also have a higher interest rate, up to 29 percent in some states. This can affect a borrower's budget and options significantly.
Rates
The term of the loan you establish will affect your interest rates. Rates up to 60 months are favorably advertised because they are the lowest and most competitive. For used-car loans over 60 months, expect to see an increase in the lowest qualifying rate. For example, if the best rates you can find are 5.9 percent, you are likely to see a one-point increase for 72 months and another point increase for 84 months.
Loan to Value Ratios
All used car lenders follow their own value and lending guidelines. The guidelines usually don't allow you to borrow more than the vehicle's value, however, the lending ratio compared to value depends on your credit in addition to the vehicle you want to purchase. For example, you cannot take out a five-year loan on a 10-year-old vehicle with 100,000 miles on it. A loan-to-value ratio considers the amount you want to borrow in comparison to the vehicle's bank-determined worth. Newer vehicles with lesser mileage warrant a longer loan terms.
Someone with excellent credit is often afforded a higher loan-to-value ratio. For example, someone with excellent credit may borrow 120 percent of the vehicle's bank-determined worth, while someone with poor credit may only borrow 60 percent of the vehicle's value, meaning the borrower has to put down a good amount of money.
Lenders
A variety of used car loan providers exist. On a local level, you should find various banks, from credit unions to national chains, such as HSBC or Bank of America, which exist in many towns throughout the United States. Subprime lenders, which lend to risky buyers at high interest rates, exist both locally and nationally, meaning you can apply online even if a branch does not exist in your area. Dealerships can also handle used car loans because they often work with a number of banks. The lender you decide on can affect your loan term and interest rate, as bank lending guidelines differ.
Considerations
The term of your loan paired with interest rate can greatly impact the amount you pay back over time. In addition, a longer term will decrease your equity amount. For example, if you are making a minimum payment over a long term loan, such as 72 months, your car may depreciate faster than you make payments. Before deciding on a term, consider rates and overall payback costs. You can enter in your loan amount into an auto loan calculator and change the terms to view your overall payback amount over time. The Edmunds website offers an auto loan calculator that's free to use.
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