Purchasing a pre-owned vehicle can often be a more budget-friendly option compared to a brand-new one. Nevertheless, the average cost of a used car in Canada can still be relatively high, and what’s considered affordable can vary from person to person. This is where used car loans come into the picture.
Used car loans can be a valuable tool to help you acquire a vehicle even if you can’t afford to pay for it outright. The question then arises: Is obtaining a loan for a used car a wise decision?
Can You Secure Financing for a Pre-Owned Vehicle?
Recent studies indicate that the average price of a used car in Canada exceeds $30,000, which can be a substantial amount for most individuals to pay in cash or via credit card.
Thankfully, there are various ways to finance a used car, whether you’re buying it from a used car dealership or a private seller. Many used car dealerships provide in-house financing programs to make the vehicles more affordable.
Similarly, banks, credit unions, and alternative lenders offer loans for used cars. You can also obtain car loans from these institutions when making private purchases.
Should You Consider a Used Car Loan?
There are several compelling reasons to consider obtaining a used car loan to finance your purchase. Some of the primary factors supporting the decision to finance a used car include:
Low Monthly Payments: Instead of making a substantial upfront payment of $20,000 or $30,000, you can opt for smaller monthly installments. With used car loans, the loan terms can vary from 3 to 9 years, depending on the vehicle’s value and your financial situation.
Lower Borrowing Amount: Compared to new cars, used cars typically come with lower price tags. This allows for more manageable down payments, which, in turn, can reduce the amount you need to borrow, ultimately lowering your monthly payments. Most dealers accept down payments of around 10% to 20% of the car’s value, and in some cases, even offer 0% down.
Access to a Higher-Quality Vehicle: Rather than paying with cash, financing allows you to afford a better car by spreading the cost over multiple payments. This means you can potentially purchase a slightly newer model with better features and lower mileage, rather than settling for an older or unreliable vehicle.
Competitive Interest Rates: While interest rates for used cars may be slightly higher than those for new cars, they can still be a more affordable option than paying the entire amount upfront. Moreover, you can often negotiate for lower rates by improving your financial situation and credit score. It’s also possible to finance the sales tax, which can amount to thousands of dollars depending on the car’s value.
Easy Qualification: Even if you have a less-than-perfect credit score, many lenders may still provide you with a loan for a used car. These loans are often secured against the vehicle, which provides lenders with a level of security, as they can repossess the vehicle if you default on your payments.
Can You Get a Used Car Loan with Bad Credit? The ability to secure a used car loan with bad credit may depend on where you apply. While traditional banks and credit unions may reject applications from individuals with credit scores around 600 or lower, there are numerous private lenders and online dealerships, such as Canada Auto Approval, that offer used car loans to individuals with varying credit backgrounds.
Requirements for Qualifying for Used Car Loans with Bad Credit: To qualify for a bad credit car loan from alternative sources, you will typically need a stable source of income that is sufficient to cover your upcoming payments. However, be prepared for the possibility of higher interest rates, ranging from approximately 7.83% to 29.99%, due to your credit history.
Types of Used Car Loans: When purchasing a used car in Canada, it’s essential to research and compare financing options from various sources, as there are at least three types of car loans available for financing a used vehicle:
Many auto dealers offer their in-house financing programs, often including special incentives like 0% financing for a limited time, approval for those with bad credit, and loan terms ranging from 3 to 7 years.
In-Person Financing: Visiting a dealership in person can be a good choice if you prefer to physically inspect and test-drive vehicles. It allows you to negotiate pricing and interest rates. Plus, you can complete paperwork on the spot and drive your used car home the same day.
Online Financing: Some dealerships also offer online financing, providing a more convenient way to explore car and loan options without the pressure of salespeople. Many websites offer free pre-approval tools to help you assess potential deals.
Used Car Loans from Banks or Credit Unions:
If your credit score qualifies you for favorable terms and interest rates, obtaining a used car loan from your bank or credit union can be an excellent option. These financial institutions typically offer better rates, longer loan terms, and more payment flexibility.
However, they are generally less flexible in negotiations and may have stricter requirements for individuals with bad credit or lower incomes. The application and approval process can also be lengthier compared to dealership financing.
Used Car Loans from Alternative Lenders:
If you can’t secure a loan from a dealership or a financial institution, you can explore private lenders as an alternative. These lenders are often based online and typically have more lenient approval standards. They often accept borrowers with bad credit and lower incomes, as long as they can demonstrate an ability to meet their payments.
However, it’s important to be cautious, as loans from alternative lenders may come with higher interest rates and fees, particularly for individuals with poor credit. Be sure to watch out for scams and predatory lending practices when choosing a lender, seeking pre-approval, or signing loan agreements.
In summary, financing a used car can be a sensible choice for many individuals, offering flexibility, manageable payments, and access to higher-quality vehicles. The key is to carefully consider your financial situation and credit history, and explore various financing options to find the one that best suits your needs and budget.