In the market for a used car? New online options make it easier (but not cheaper) than ever – and you might be able to charge part of your purchase on your credit card. Here’s what you need to know.
Buying a used car isn’t the junkyard sale of yore. Plentiful returns of two- and three-year-old leased cars and internet innovations like instant maintenance reports and online sales options make the process smoother and less risky than ever before.
True, interest rates on used car loans are higher than those on new cars (more on that later). Still, if you’re careful and do your research, purchasing one of the many lightly-used cars or trucks on the market today can save you money while still getting you a near-new vehicle.
See related: Buying a car with no credit: 6 things to know
Pros, cons of buying a used car
The worth of a new car plummets the minute you drive it off the lot; when you buy a used car, that initial price drop was a previous owner’s problem.
“The primary advantage of used cars is the savings off of that initial depreciation,” said Alain Nana-Sinkam, the vice president of strategic initiatives for online car shopping site TrueCar. However, he added, used car owners assume a different risk. “Whenever you buy something someone else has owned, you don’t have control over how they treated it,” he said.
Nearly one-third of Americans lease, rather than buy, new vehicles, according to Cars.com. When the leases are up, the cars return to the dealerships – and in many cases, the dealerships turn right back around, declare the cars “pre-owned” and offer them for sale on their used car lots.
Most leases limit driving to anywhere between 10,000 and 15,000 miles per year, translating into a wide selection of cars with a mileage between 20,000 and 45,000.
New (and old) ways to shop for a used car
It’s easy to learn a lot about those vehicles, quickly. Services like AutoCheck and Carfax offer reports on individual cars that detail where and when they were serviced, how many owners they’ve had and whether or not they’ve been in an accident. Often, sellers will link to a report for free online, but if not, the reports can also be purchased for a small fee.
There’s also an increasing variety of ways to purchase used cars. Dealerships themselves offer two types: what they call pre-owned, and certified pre-owned. The latter costs more, but comes with detailed inspections, reconditioning, extended warranties and other perks.
There may be, in your area, local, independent brokers – the modern-day equivalent of the old used car lot. Some car owners offer vehicles for sale themselves, through Craigslist, for example. And now there are a few online options as well.
Customers of Shift, CarMax and Carvana trade the chance to negotiate for ease of purchase. The services post numerous pictures of each vehicle, offer financing and online buying, and will deliver the vehicles to customers’ homes. They will also do a purchase or trade-in of an existing car.
Shift gives customers five days or 200 miles, whichever comes first, to return the vehicle if they’re not satisfied; at CarMax and Carvana, it’s one week.
It’s an option particularly ideal for the haggle-averse. “You could be leaving a bit on the table,” said David Bakke, a consumer expert at Money Crashers, “but when you factor in all of the other benefits, this could be the best route to go.”
Interest rates on used cars
However you decide to purchase, you’ll have to accept a higher interest rate on a used car purchase than on a new one. “Used car loans are riskier for lenders to make,” said John Vincent, senior reporter at U.S. News and World Report, “and they charge additional interest to cover the added risk.”
There are a couple of reasons for this additional risk.
- For one, the older a car is, the harder it is for the lender to predict its condition and its accident history, Vincent said.
- Also, used car buyers tend to default at a higher rate than new car buyers, regardless of their credit scores, and it’s harder for a lender to recoup investment on an old car should it need to be repossessed, reconditioned and resold, he said.
For example, in late August 2019, Bank of America advertised on its website the following 60-month auto loan rates: 2.94 percent APR for new cars, 3.14 percent APR for used cars purchased from a dealership and 5.74 percent APR for cars purchased from an individual seller.
The last rate is higher because, again, so is the risk, said Nana-Sinkam of TrueCar. This time, the risk is in the details – will you and the private party file the proper paperwork? Pay the correct amount of taxes? Remember to put the bank as lienholder? Or will the bank have to spend time and money having someone inside the bank correct your mistakes?
Charging a used car on your credit card
For those eager to get some measure of credit card points out of the used car buying effort, it may be possible to charge part of the purchase to a credit card.
This is not an option with any of the three online buying services, which insist on cash in the form of electronic funds transfer, cashier’s check or, in the case of CarMax, debit cards or personal checks.
But dealerships may allow you to make a down payment, as well as pay for insurance, registration and other fees with your credit card, said Laura Gonzalez, marketing manager at Audi Bellevue, a dealership near Seattle.
As with any major loan, it’s also a good idea to prep your credit beforehand, she said. That means:
- Paying off any outstanding debts.
- Making credit card and other payments on time.
- Not applying for new credit cards in the six months before you apply for a car loan, and so forth.
Then, when you do whip out that plastic at the dealership, make sure you have the funds on hand to pay the bill when it arrives.
That way, Gonzalez said, “you won’t go too far into debt with the card – which will have higher interest rates than any auto loan – and you’ll be able to reap the rewards.”