A great way to save money when buying a car is to purchase a used vehicle instead of a new one. The moment you drive a new car off a dealer’s lot, it starts to depreciate rapidly. That means it’s worth less than what you paid for it. You can save thousands of dollars by letting someone else absorb the steep depreciation of the first few years of ownership. Buying the right car with good predicted reliability and low ownership costs can also save you money over the years.
Getting a good deal on a pre-owned car takes more work than buying a new vehicle, and there’s more long-term risk to your wallet since most used cars aren’t covered by factory warranties. In this article, we’ll help you through the steps that you should take to find the right car, get affordable financing, pay a fair amount, and minimize the risk of getting an unreliable vehicle.
Here are the steps you’ll should take to buy a used car:
Setting Your Used Car Budget
Finding the Right Used Car
The Certified Pre-Owned Car Option
Used Car Financing
Deciding Where to Buy a Used Car
Researching, Test Driving, and Inspecting a Used Car
Making a Deal and Completing the Paperwork
Add-Ons, Warranties, and Insurance
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Setting a Budget for a Used Car
Deciding on how much money to spend for a pre-owned car, truck, or SUV is more complicated than just looking for a vehicle with an affordable monthly payment. You need to look at the whole price of the car, including the cost of financing the purchase, plus consider the odds that it will require expensive repairs in the future.
The older a car is, the lower its price will usually be. But, unfortunately, the older the vehicle is, the more likely it is to need costly repairs. The trick is to find the right balance between the two. A great deal won’t seem so great when you’re waiting for a tow truck instead of heading to work or school.
Fortunately, there are many online resources to learn about a car’s reliability, repair costs, and frequent problems.
You’ll also want to consider the cost of car insurance for used cars and look at the coverage levels that you will need. Our guide to car insurance will help you with those decisions.
Finding the Right Used Car
Getting behind the wheel of the right used car is more challenging than buying a new car. When you buy new, you just have to find a vehicle that fits your needs and budget. Buying used adds additional steps to the mix, such as finding a car with low mileage, lack of significant crash damage, and a history of regular services. You need to learn much more about a three-year-old, 36,000-mile used car than you do about a brand-new car with 10 miles on the odometer.
Our used car rankings and reviews are a great place to start your search. We look at the consensus opinions of America’s top automotive experts and blend them with quantifiable data on safety, reliability, and total cost of ownership to create a score for nearly every vehicle you can buy dating back over a decade. Those scores are used to compare vehicles against competitors in their respective classes.
Choosing a used car to focus your search on can be daunting. Do you prefer an older, more luxurious model or a newer model without as many features for the same price? It’s important that you honestly evaluate why you drive, where your drive, and how you drive so that you can find the vehicle that fits both your needs and budget. While that Mazda Miata may be in your dreams, it can’t carry the kids to soccer practice every day. On the flip-side, opting for a Chevy Suburban for your daily commute into the city probably isn’t the best choice either. Be sure to evaluate the fuel economy of your options as well as the level of safety equipment that you’ll be comfortable with.
Buying a used car is a great way to get options that are costly on new vehicles for a fraction of the price. Higher trim levels and option packages don’t command nearly the same prices on used cars as they do on new cars. Using our used car rankings, you can compare cars you are considering both on their overall scores and on individual factors that car buyers tell us are critical to their buying decisions, such as performance, reliability, and safety.
When you start to narrow your search, you don’t have to start driving to car lots all over town. There are more than a million vehicles in our used car listings for you to browse.
The Certified Used Car Option
Manufacturer-certified pre-owned cars (CPO cars) blend the affordability of used vehicles with the security of a manufacturer-backed warranty. They’re typically low-mileage cars that have been properly serviced for the few years they have been in service. Often, they are vehicles that were returned to the dealer at the end of a lease, used as dealership service loaners, or driven by dealership or manufacturer staffs.
Certified used cars receive a thorough inspection and some refurbishment before they receive certified status. Unlike most used vehicles that are sold as-is with no warranty, CPO cars typically come with extensions to the manufacturer’s warranty. Many CPO programs also provide extras, such as roadside assistance and trip interruption coverage. The best CPO programs have a combination of good warranty coverage and nice perks. Automakers regularly offer special used car financing deals with low interest rates on CPO cars.
You’ll want to make sure any certified used car that you are considering is genuinely a manufacturer-certified vehicle. Some dealers will call a portion of their used cars “certified,” but unless it has been inspected to manufacturer standards and receives their stamp of approval and warranty, you won’t receive the benefits that the automaker offers. You’ll only find a brand’s certified models on their franchised dealer lots. If you see a Lexus marked certified on a Ford dealer’s lot, for example, it’s not a factory-certified pre-owned car. With most factory CPO programs, you’ll be able to get warranty coverage at any of the carmaker’s franchised car lots.
The bad news about CPO cars is they’re more expensive than equivalent non-factory certified pre-owned vehicles. You’ll want to balance the higher price with the chance that you’ll have a higher total cost of ownership with a non-certified model. The predicted reliability rating in our used car reviews can give you some insight as to a car’s future repair needs. You can also compare the additional cost and benefits of a CPO car to those of an extended warranty to see which is the better long-term deal.
Financing a Used Car
Unless you have the cash on hand to buy a used car outright, you’ll need to take out a used-car loan to get the money to make the purchase. While many consumers don’t even think about financing until they are sitting in the finance office at the dealership, it’s critical that you get a pre-approved financing deal in place before you start shopping for a car.
While shopping and applying for used car financing is similar to getting a new-car loan, there are some differences. Lenders see used car loans as riskier than new car loans so you can expect to pay a higher interest rate. The increased risk stems from the fact that you’re more likely to have major repair costs as a car ages, which may compromise your ability to pay the monthly payments down the road. The value of the car is also more unpredictable as it ages, making it more difficult for a lender to value their collateral, your used car.
Depending on the used car that you choose, some lenders will price the loan like new-car financing. If you find a car with very low miles or being sold as a certified used car, there’s a good chance that the lender will treat it as a new car.
The following steps will help you get the best deal on your pre-owned vehicle financing:
By getting all of your financing ducks in a row well before you start car shopping, you’ll be prepared with a pre-approved deal in place before you get near a car dealer or start talking with private-party sellers. The first step is to look at your credit score and the credit reports that it is based on.
Your credit score is one of the primary criteria used by lenders to determine whether they will make you a loan and what interest they will charge. If you have a low score, you’ll likely have to pay a higher rate, accept a shorter loan term, or put more money down than someone with a high score would. If your score is excellent, you’ll qualify for the best interest rates, longest loan terms, and be able to take advantage of automaker-subsidized financing offers on certified pre-owned cars.
By looking at your credit score early, you’ll have time to correct any errors and see where your credit is weak so you can start on the path to improving it. The most critical information in your credit report is your history of making on-time payments and the amount of outstanding debt you have.
Where to Shop for a Loan
There are many places to get used-car financing, and you should seek offers from several before deciding on which car loan is right for you. Some lenders have special programs for current customers, first-time car buyers, or buyers with damaged credit. Taking advantage of these special programs can save you money and hassle.
Large National Banks
With thousands of locations across the country, America’s biggest banks offer a vast array of auto lending options and services both in their brick and mortar locations and online. Though you might also find loan occasional loan specials, their interest rates tend to be higher than some other lenders and their rigid lending policies not amenable to customers with bruised credit.
Credit Unions differ from other financial institutions in that they are owned by their members, rather than by shareholders. Because they return their profits to their members with higher savings interest rates and lower loan interest rates, they tend to be less expensive places to get used car financing than other financial institutions.
You have to be a member of a credit union to get a loan from one. Not everyone can join every credit union. The industry’s federal regulator, the National Credit Union Administration, has a credit union locator at MyCreditUnion.gov that you can use to find an institution that you can join. You’ll find credit unions ranging in size from tiny, one-person operations to massive operations rivaling the reach of national banks.
With smaller geographic footprints and branch networks than national banks, community banks offer many of the same auto lending services, but are likely to do so with more of a personal touch. If you have special lending needs or bruised credit, a smaller institution such as a community bank or a midsize credit union might be the right place to make a more personal connection to a lender willing to hear your financial story.
A newer contender in the car loan marketplace is the online bank. They forgo traditional brick-and-mortar locations and instead offer completely online loan processes. If you don’t need a lot of hand-holding, the streamlined loan processes of online lenders can have you set up with a pre-approved loan faster than most other lenders. Plus, you can do it from your couch while you’re eating pizza.
Financing companies are similar to banks, except that lending money is their only business. They don’t take deposits; instead, they borrow money from other financial institutions and use it to make consumer loans. Many finance companies cater to certain types of borrowers, such as those with poor credit.
Many automakers have their own finance companies, such as Ford Motor Credit or Honda Financial Services. They finance loans and leases for customers getting cars at their franchised dealerships and are the lenders that manufacturers use to provide their special new car financing deals and certified used car financing offers.
Most car dealerships don’t make car loans. Though it might seem like they do, they more typically act as brokers for other lenders, including banks, credit unions, and financing companies. They usually make a profit on financing by marking up the interest rate on the loan. In most states, they don’t have to disclose the amount of markup that they are charging on the loan.
While you may choose one of the financing offers that you’ll be presented with at a car dealer, it’s vital that you have at least one other offer. Without one, the dealer won’t have any incentive to offer you a great deal to earn your financing business.