Choosing to purchase a used vehicle today is an excellent financial move. Not only will you benefit from the lower price tag, but most dealerships offer certified preowned vehicle programs. That means the car you buy will undergo rigorous testing and often comes backed by a manufacturer or dealership warranty.

Buying a reliable car at an affordable price is a win-win for you and your wallet. But did you know other factors can affect the total cost of your used car?

Let’s explore the additional costs of preowned vehicles and how you can reduce how much you pay.

1. Your Credit Score
It’s no secret that your credit score can affect how much it costs to finance a car. But many people fail to realize how significant the impact can be on your monthly payment and the total amount of interest paid.

To illustrate the benefits of a good credit score, let’s start by examining how loans are priced. While each lender will have their own tiers, credit score pricing is typically broken up in the following fashion:

Now, assume you plan to purchase a $25,000 preowned car and finance it over a 48-month term. The following example compares an excellent credit score (800+) with one on the lower end of the spectrum (600).

The lower credit score (600) receives an interest rate of 7.50% APR. Consequently, the monthly payment is $39.99 higher than the excellent score (800). While an extra $40 a month might not be a deal breaker, the extra interest paid is significant. The lower score will pay an additional $1,919.81 in interest for the same car!

Solution: If you know you’ll need to purchase a new car in the future, spend time now bettering your credit score. Even modest improvements can help you reach the next credit score tier, resulting in lower costs.

2. How Much You Finance
As with any loan, the more money you borrow, the more interest you’ll pay. Two common ways to reduce the amount you finance are through a down payment and trading in your current car.

If you’re purchasing a used vehicle from a dealership, trading in your current car is an excellent strategy. It allows you to reduce the amount you finance without having to pay any cash upfront.

To demonstrate how a down payment or trade-in can affect the cost of financing, review the following example:

Assume you plan to purchase a $25,000 preowned car and finance it at 4% APR over a 48-month term. You plan to make a down payment of $5,000.

By making a down payment of $5,000 (or trading in a vehicle worth $5,000), your monthly payment will decrease by $112.90. In addition, you’ll save $418.98 in interest over the life of your loan.

Solution: For new vehicles, a rule of thumb is to try to put 20% down. This figure is because newer cars depreciate quicker. For used vehicles, 10% is a good benchmark.
To get the most for your trade, research its market value through websites like Kelley Blue Book (www.kbb.com). Or obtain written appraisals from other dealerships in the area.

3. The Length of Your Loan
One of the most common ways to affect the price of a car is through the loan term. Dealerships often extend the length of the loan to make the payments on more expensive vehicles affordable. But, as you’ll see in the following example, this also increases the total cost of the car.

Assume you plan to purchase a $25,000 preowned car and finance it at 4% APR.

The term, or length of the loan, has a dual effect on its cost. A shorter term (36 months) allows you to pay significantly less interest over the life of your loan. However, the monthly payment will be much higher.

Extending the term has the opposite effect. In this example, financing the used car for 60 months reduces the monthly payment by a whopping $277.69 when compared to 36 months. However, over the course of the loan, you’ll pay an extra $1,053.19 in interest.

Solution: Be cautious of extending loan terms too far. Ideally, you should aim to finance most preowned cars between 36 to 48 months. The exception is if you’re buying a used car that is relatively new, for example, one or two years old. Then, a 60-month term might be a better choice.

4. The Age of the Vehicle
Many people are surprised to learn that the age of the preowned car can also affect its cost. But, like car insurance, most lenders charge more for older vehicles. The reason is that lenders are assuming more risk.

When you finance a car, the vehicle is used as collateral. If the car is beyond its prime and has substantial mileage, the lender will have more difficulty recouping their losses should you be unable to repay the loan.

Usually, the extra cost comes when used vehicles pass the 10-year mark. If the car is older than ten years, the lender might add a percentage point or two to your approved interest rate to cover the added risk.

Solution: First, try to find a preowned car within your price range that is relatively new. If you’re set on buying an older car, contact the lender to ask if they have extra costs associated with older vehicles. Not all lenders charge these fees.
If you’re interested in buying a classic car, they typically do not fall into this category. Many lenders offer special loans for classics due to their age and appraisal values.

5. Add-On Products
If you’re purchasing a preowned car from an individual, you don’t have to worry about add-on products. However, if you’re buying your vehicle from a dealership, be prepared for the sale pitch!

Dealerships will try to sell you additional products and services for just about everything, including:

• Guaranteed Asset Protection (GAP)
• Extended Warranties
• Maintenance Plans
• Ding and Upholstery Protection

Solution: Most of these add-ons are entirely unnecessary and only raise the cost of the vehicle. Mentally prepare yourself prior to sitting down in the dealership finance office to say, “No, thanks.”

While some products are helpful, such as GAP, you can often purchase this same protection directly from the credit union for much less.

We’re Here to Help!
Purchasing a preowned vehicle is an excellent way to save more of your hard-earned money. However, there are additional costs that many tend to overlook, especially when financing a car.
If you’re preparing to buy a car soon, consider becoming pre-approved first. Our team will review your various financing options and help to find the right loan for you. To get started, please stop by the Credit Union or call 410-687-5240 today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.

3/2/23