Not only are used cars the less expensive option, vehicles are simply lasting longer these days. Before, you may have only been able to drive your car for around 100,000 miles; now, it’s common to see vehicles with mileage well above that. We uncover why you should jump on the used-car-buying train, especially if you have less than perfect credit.
Used Car Sales Trending Upward
Due to the coronavirus, people are staying home more and even working from home, which means fewer miles on their vehicles. In turn, they’re likely to have them longer. Combine that with fewer new cars on dealership lots due to COVID production halts, and you have more borrowers buying used vehicles instead of the brand-new ones because of the lack of variety.
Not to mention, the average loan term for a new car is 70 months long, and the average selling price of a new vehicle is over $30,000. No wonder Americans are going for used cars, with the average financing for a used one clocks in at around $20,000.
If a used vehicle can last for well over 200,000 miles and you can possibly save thousands of dollars, it makes sense why used cars are trending upward.
Used Cars Can Save You Cash
It's no wonder used vehicles are trending up, and who doesn’t like saving money? Exactly.
A great way to save money each month is going for a cheaper, used car instead of going for the latest and greatest (and most expensive) vehicle that suits your needs. Used cars cost less, and people are simply holding on to their vehicles for longer than ever before because they last longer now than they did even a decade ago.
Research from IHS Markit has found that 25% of cars on the road today are 16 years old or older. A quarter of vehicles on the road are old enough to get their own driver’s license!
Over the years, the average age of cars on the road has continued to rise. Right now, the average age of vehicles on the road is almost 12 years, compared to 2002 when it was 9.6 years.
On top of that, the latest auto loan trends are pointing toward consumers looking at the used cars due to a struggling economic climate, and the global COVID-19 pandemic.
Why You Shouldn't Finance a New Vehicle
Still want that new car smell? It may be great, but it won't help keep your gas tank full if you overextend yourself on the payments for a vehicle. Consider your wallet and how it’s going to feel after you finance a new car.
Not only are the selling prices of brand-new vehicles typically much higher than a used one, you also run the risk of being stuck in negative equity, having a much longer loan term, paying more in interest charges, and having a higher monthly payment.
Negative equity is when you owe more on an auto loan than the car is actually worth, and it’s a pretty common position for new vehicle shoppers to find themselves in. Since new cars typically lose about 20% of their value within 12 months, it can take a while for a borrower’s payments to catch up with the dramatic drop in value, which leaves them owing more on the loan than what the vehicle can sell for.
Furthermore, since new cars are so expensive now, many borrowers are finding themselves signing up for longer loan terms to simply get the monthly payment to a manageable amount. Higher monthly payments on new vehicles are a big concern for many borrowers. A common piece of advice offered by personal finance experts is that you should go for the shortest loan term you can, or no longer than 48 or 60 months (four to five years).
With the longer loan terms people are taking out comes more interest charges. Auto loans are almost always simple interest, which means interest accrues daily on the balance of your loan. The more you owe, and the longer it takes you to pay it off, the more interest you pay.
All of these extra expenses can really eat into your budget, but if you opt for a pre-owned car, you can save yourself a lot of money. And if you’re a bad credit borrower, buying a used vehicle has other advantages, as well.
Credit Repair With Used Cars
If your credit is poor, it isn’t the end of the world, but you should consider a used car to give yourself an opportunity to repair your credit.
Since having bad credit likely means you need to work with a subprime auto lender, you’re probably going to have better luck qualifying for an affordable used vehicle.
This is because subprime lenders, also called bad credit lenders, look at all the moving parts of your financial situation. They base your car loan consideration on many factors of your financial life, not just your credit score. If you meet all the lender qualifications, you then work with the dealer to choose a vehicle that fits into the monthly payment range you're approved for.
When you’re looking to repair your credit and get into an auto loan you can afford, shoot for a reliable, less expensive car for now. If you default on a more expensive auto loan, you run the risk of damaging your credit and walking away with a lower credit score than what you start with.
Qualifying for a Bad Credit Car Loan
Subprime lenders require a down payment – typically of at least $1,000 or 10% of the vehicle’s selling price. With a new car, you could be looking at a massive down payment requirement so you can get to the monthly payment that you qualify for.
On top of that, new vehicle loans are usually very large amounts. With a bad credit score, it means your interest rate could be in the double digits. This could mean paying a lot of interest charges, and a higher risk of being in negative equity.
Qualifying for a bad credit auto loan means being able to repay the loan. If you try to shoot for the latest and greatest with a lower credit score, it may not be possible right now. The goal with many bad credit car loans is to set you up with a vehicle that you can comfortably afford – not get you into a dream car.
Focus on being strategic with your vehicle choice, and repairing your credit score one car payment at a time. Lower your risk of defaulting on an auto loan by improving your credit with a bad credit car loan, and working yourself up to be able to qualify for new vehicle deals in the future.
Ready for Your Next Auto Loan?
Whether or not you’re looking for a new or used car, finding an auto lender that can work with your credit score should be one of your first priorities. But, having a lower credit score can mean struggling to get that car loan approval. We want to help make that easier.
Here at The Car Connection, we’ve built a nationwide network of dealerships that are signed up with subprime lenders. Finding a dealer that has the resources to work with bad credit borrowers isn’t always easy, but we can help.
To get matched to a dealership in your local area, fill out our free auto loan request form. There’s never any obligation to buy anything, so start now!