The number of choices and directions to go when purchasing a new car can be overwhelming, and one of the biggest questions to debate is whether or not you can finance a used car and, if so, if it’s even a good idea.
Well, the answer to the first question is quite simple: yes, you absolutely can finance a used car. The second question is where it gets difficult because, really, there are pros and cons to both financing new and financing old cars.
First of all — and possibly the most obvious –, financing an old car is a bit riskier; it’s a matter of determining how high the risk and if it is worth it. Second of all, used car loans tend to have higher interest rates than new car loans do, and there are a few reasons for this.
- Resale Value – the depreciation of new cars is vastly easier to predict than that of old cars, so since both you and the lender have no way of knowing for sure what the car will be worth when you decide to sell it again, the lender will protect himself by raising interest rates. This way, the bank will undoubtedly make money even if the buyer gives up when the car runs into unexpected issues.
- Lower Credit Score – most often, those looking to buy used cars have low credit scores. They aren’t able to get a deal they can manage with a new car, and the upfront costs are impossible if one has debt, so that leaves buying a used car as the only option. This is not to say, of course, that everyone who has a good credit score buys new.
- Finally, used cars tend to have less safety features and higher mileage, making breakdowns and injuries more likely.
However, whether you finance a new or used car, you’ll be required to purchase additional insurance which means you’ll be paying more. When you’re financing a car, comprehensive insurance is compulsory to protect the lender in case of an accident.
The best case scenario, of course, is if you are able to purchase a car in full; if so, you only need to purchase liability insurance to cover the cost of damage done to other cars in case of an accident, not your own.
So, should you finance a new or an old car? If you opt for new, there is less risk involved, it’s true. New cars have more technology and safety features, and you’re sure to walk away with a factory warranty as well as fewer maintenance costs. The car will be reliable, but you will pay much more upfront for it. Your best bet financially is to purchase it in full.
On the other hand, you could pay much less, have more chance of paying for a car in full, and have lower depreciation costs if you take the used car route. At the same time, you may be taking on more potential problems.
The good thing is that you can get a pretty accurate view of the car you’re looking to buy with sites like Edmunds, which has reviews and history of the vehicle.
At the end of the day, the choice is yours. The best thing you can do is look at all the options, weigh the good and the bad, and do what’s best for your lifestyle and your wallet!