Understanding Used Car Loans

Buying a used car can save you a lot of money. Even though used cars are cheaper than new cars you may still need financing. If you need finance to purchase a used car then you can get a used car loan. Some lenders may impose a restriction on the age of the car so you may need to buy a newer car. There are some lenders that will only loan you the money if the car you’re buying is between 2 and 5 years old for example.

You should also remember that the interest rate on a used car loan may be higher than a loan for a new car. You may also end up with a lower quality car. So take care when buying a used car.

 

How Does a Used Car Loan Work?

A used car loan is a secured one, so when you apply you need information about the car. There are some cases where you may find financing before you purchase the car through pre-approval. When you receive approval on the loan you agree to repay it within a set period of time called a “loan term” or “term period”.

While the term period may vary between lenders you can expect it to be between 1 and 7 years. Fixed rate loans have term periods of between 1 and 5 years. The lender may also let you make additional payments to pay it off faster. Some loans can be paid off early without you getting a penalty. There are some loans where you can redraw the money you’ve paid off. Then there are loans where you just have to pay back the loan by the due date.

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Is a Used Car Loan Cheaper Than Dealership Finance?

When you are offered financing by a car dealership you’ll usually be offered a low interest rate. They can be as low as 2% and are definitely tempting, but you need to be smart. Low repayments don’t automatically make a loan cheaper. The following things are what you need to look at and compare between a used car loan and financing to find the best deal.

  • Interest rate: The interest rate will usually be lower with a dealership finance. They can reach as low as 2% while the interest rate on a car loan can vary between 6.5% and 13%.
  • Residual Payments: Getting a car loan means not having to pay residual, or balloon, payments. Dealership financing does come with residual payments. The payment varies between cars but you can expect a payment of a few thousand dollars. The money car dealerships make with financing usually comes from these payments.
  • The Cost of the Car: Sometimes when you receive financing straight from the dealership it can have an effect on the price of the car. When dealerships offer you good financing it is usually because they are charging you more for the car. Be sure to get a price on the car before getting finance.
  • Extras: Extras don’t affect the price of financing but an extra like insurance or an extended warranty make one option preferable over the other.

 

Three Steps To The Right Finance

Getting the right financing for your car is as important as getting the right car. The longest loan terms can be up to 7 years so you could be stuck with the financial burden for a long time. Here are three steps to getting the right finance.

 

  1. Interest Rate: The first thing you look at between lenders is the interest rate on their used car loan. The interest rates on used car loans are often higher than for new car loans. Compare what options you have to find the best deal for you.
  2. Fees: Lenders can and will charge fees on their used car loans. These fees can be for early termination, administration, loan management, and plenty of others. Take a look at the fees to see how much a loan will really cost you.
  3. Flexibility: You should find out how flexible a loan is before committing to it. Do you have the option to make additional payments? Will you be penalised for paying it off early? Are you able to redraw additional payments? How restrictive is the loan? These are all questions you need to ask.

 

What Age Cars are Eligible for Used Car Loans?

If you use the car you buy as security for your loan then each brand has different limits. Here are the age limits some of the most prominent lenders have on used cars.

  • Beyond Bank: With Beyond Bank you get a Low Rate Car Loan if the car is less than six years old. You receive the Flexi Car Loan if it’s older.
  • ANZ: With ANZ the car you buy needs to be less than 7 years old.
  • CUA: With CUA the car has to be older than 2 years.
  • St. George: St. George doesn’t place a limit on the maximum age for their Unsecured Personal Loans. If you want to get a Secured Personal Loan then the car can’t be older than 12 years by the end of the loan period.
  • RACV: With RACV the car needs to be less than 10 years old.
  • IMB: To qualify for a Secured Personal Loan with IMB the car needs to be less than 5 years old.
  • NRMA: While NRMA do have financing options for older cars you may be charged higher rates depending on how old the car is.
  • Suncorp: Suncorp allow you to use your car as security if it will not be older than 12 years when the loan term ends.
  • Westpac: To qualify with Westpac the car has to be younger than 7 years old and also has to be worth more than $10,000. There is also an unsecured Flexi Loan option for older cars.

The Types of Used Car Loans You Can Get

You can typically get one of two different loan types: a secured loan and an unsecured car loan.

Secured Used Car Loan

A secured car loan is when you offer a personal possession or asset (usually the car you’re buying) as security for the loan. The advantage to getting a secured car loan is that the interest rates are lower because you have collateral. You should always read the terms and conditions though if you plan on using the car as collateral as lenders commonly place a restriction on this.

Unsecured Car Loan

With an unsecured car loan you don’t offer an asset as security. You qualify for the loan by showing the lender information about your savings or information about loans that you’ve successfully paid off in the past. You may also qualify by showing how well you’ve paid off credit card repayments. Unsecured car loans usually come with higher interest rates because there is no collateral offered. It does come with the advantage of never having to worry about losing your assets if you fail to repay however.

Home Equity Finance

If you have enough equity on your home loan then your lender may let you access it. These funds can then be used to buy a used car. You may also be able to borrow a little extra money that you repay with the same interest rate you have with your home loan.

Dealership Finance

When you look for a used car you’ll see that dealers usually offer financing. They present another choice for you. Financing is when you pay the money in small instalments with a low interest rate and then pay a balloon payment at the end of the loan term. The balloon payment is typically a few thousand dollars so ensure that you have all the information before signing the dotted line.

The Pros and Cons

Pros

  • If you negotiate a private sale with the dealership you could get a great deal on your used car
  • There are plenty of options such as secured and unsecured financing

Cons

  • The financing options offered by car dealerships tend to be more expensive and restrictive than the financing you receive for new cars
  • The car may be too old to sell on at a good price, so you could end up making a loss if the value of the car drops below the loan amount

 

What You Should Avoid

When applying for a used car loan you must read all the terms and conditions. There may be restrictions in them that the lender doesn’t make clear. These restrictions may make the loan not suited to you and you’re the one responsible for reading all of this. You should also find out about all the fees and charges you may or not be subjected to.

 

Buying a used car may be the best option when you’re looking for a new car. You just need to make sure you get a good deal with your financing.