When you buy a new car, it loses 20% of the value the moment you drive it off the lot. Buying a used car can help you save money in monthly repayments and fee. And when you buy a preowned car, you have more room to negotiate the price.
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Ben lives in Ontario and recently got a new job in another city. He decides to buy a car so he can drive to work and opts for a used vehicle to save some money. Ben visits a private dealership, where he finds a 2017 Hyundai Elantra in good condition with relatively low mileage. He finds the price reasonable at $14,500.00, so he makes a 20% down payment of $2,900.00 and heads to his local bank to get an auto loan to cover the remaining $11,600.00 + $1,885.00 HST.
Because Ben has a solid credit history, he is approved for a $13,485.00 auto loan with competitive terms. Along with the cost of his loan, Ben also pays approximately $180.00 to register his vehicle with the province of Ontario – this includes the cost of license plates, a sticker and a vehicle permit.
Cost of used car
$14,500.00
Loan type
Auto loan (term loan)
Loan amount
$13,485.00
Interest rate (APR)
4.90%
Loan term
5 years
Additional fees
4.00% origination fee ($539.40)
Payment
$253.86 monthly or $117.05 biweekly
Total loan cost
$15,231.67 with monthly payments or $15,216.50 with biweekly payments
*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.
4 ways to finance a used car
You have several options when it comes to getting a loan for a used car. These include:
Secured car loan. Most car loans are secured car loans, using the car as collateral. This option can help you qualify for a competitive rate, though you risk losing your car if you default on the loan.
Unsecured personal loan. Unsecured personal loans are generally offered to customers with good credit. These loans don’t require you to offer your car as collateral for the loan, but can results in higher interest rates and additional fees.
Home equity finance. Home equity financing is another option that allows a homeowner to borrow against the equity value of their home. This option can be risky because you’re putting your house up as collateral.
Dealer finance. Nearly every dealership you walk into will offer in-house or third-party financing to assist you in buying a car.
Find out more about using a personal loan to finance a used car here.
What are the limits on used car loans?
Lenders typically have minimum and maximum loan amounts, and often set limits to the age and mileage of vehicles that qualify for loan approval. Your credit score will also affect your chances of getting a car loan. A score of 630 or more gives you a good chance of securing a loan. But if your score is below 630, it will be difficult to gain approval. Find out how you can improve your credit score here.
Should I put a deposit on a used car?
Some lenders might request a deposit. This usually happens in three situations:
If you don’t have financing available after you negotiate the purchase price.
If the dealer needs to order your vehicle from a factory.
If the dealer you’re working with needs to exchange vehicles with another dealer before you get your car.
In any of these cases, it may be necessary to leave a deposit for your used car, but that doesn’t mean you have to settle for the dealer’s terms. Every step of a car purchase can be negotiated, and that includes your deposit.
Tips for making a deposit on a used car
Make sure it’s refundable. Read the terms of your contract carefully and have a sales manager change it if you find that it’s nonrefundable. That way you can back out if you don’t have financing on hand right away or haven’t had the car inspected.
Make sure it’s not listed as a partial payment. Deposits should never be listed on your contract as partial payments — it’s not a down payment on your car. This makes it easier for you to walk away from the deal, should you change your mind.
Pay with a credit card. You can easily dispute the charge with your credit card company if you decide to not go through with the sale.
What are the pros and cons of using a car loan to buy a used car?
Pros
You don’t need the full amount to buy the car.
Loans help you build and improve your credit score as long as you make payments on time and in full.
Compared to leasing a car, taking out a loan helps you build ownership of your car.
You can get a great price on a used car by negotiating in a private sale or at a dealership.
You have various financing options to consider — both secured and unsecured.
Cons
Could pay a high monthly payment with high interest rates.
Used car financing can be more expensive and restrictive than financing for new cars.
You could be buying a car with lots of problems.
The age of the used car affects its resale value.
3 steps to comparing your auto finance options
Securing the right finance is as important as finding the right car. Some car loan terms extend up to seven years, so it’s quite a commitment. Here’s what to look for when looking for the right financing:
Interest rate. The first thing to consider is your lenders’ interest rates and whether these rates are fixed or variable. Compare your options to find the most competitively priced and packaged loan.
Fees. Lenders can charge a range of fees on used car loans — termination fees, origination fees, loan maintenance fees and more. Review all the extra costs that come with your used car loan.
Flexibility. Can you make additional and lump-sum payments during your loan term? Are you able to repay your loan early without penalty?
How long will I pay my used car loan?
The average used car loan is shorter than a loan for a new car. Loan term varies between lenders, but it’s usually between two and seven years. Longer loan terms can make your monthly repayments smaller — but you’ll pay more interest, making your loan more expensive in the long run.
Are used car loans cheaper than dealership financing?
Low-interest car finance deals can be tempting, but keep in mind that interest can add up over time. Low, ongoing repayments don’t automatically mean a cheaper loan.
Take a look at the following features of both the loan and the dealership finance offer to find out which one is the better deal:
Interest rates. Dealership finance generally has lower interest rates to get you in the door. But if you shop around and find a used car loan with lower rates and reasonable loan terms, it may be the better choice.
Down payments. Dealership financing generally requires a down payment and is usually a couple of thousand dollars.
The price of the car. Sometimes dealerships offering good financing promotions can’t give as good a deal on the price of your vehicle — it pays to negotiate the price before securing your loan.
Extras. This shouldn’t affect the price of the actual finance amount, but you should consider the value of extras like additional insurance or an extended warranty, which might weigh some options in your favour.
Bottom line
Whenever you apply for a used car loan, take the time to read the terms and conditions. It’s important to be aware of all fees and charges, as well as any restrictions on the vehicle or loan.
A used car can be a reliable option when you’re looking for your next set of wheels — as long as you make sure you get the right used car financing.
Frequently asked questions
The amount of your down payment and your credit score will be major factors in calculating your interest rate. Whether the interest rate is fixed or variable is also very important. If the rate is fixed, it will stay the same throughout the entire period of repayment. If it’s variable, then the rate will fluctuate based on the prime lending rate, which is primarily set by the Bank of Canada and can go up or down at any given time.
When applying for a loan, the lender will do a hard pull on your credit to find detailed information about your history of borrowing and repaying. Hard pulls stay on your credit record for years and will temporarily drop your score. But as long as you’re not applying for multiple loans within a short period of time, your credit history should remain largely intact.
Some lenders and credit unions offer loan options specifically for those who have bad credit. You may also be able to use your car as collateral for an auto title loan. Additionally, many lenders offer short-term loans of up to $3,000, even if you have a poor credit history.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
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