Surely, this is one of the most bizarre situations in car finance: You want to buy a cheap car . But no one will give you a credit. At the same time, you can easily secure a loan for a new vehicle, even though it’s a lot more expensive and will take far longer to pay off!
After decades of experience, we’re no longer surprised by this. And neither should you. There is a sinister logic behind this practise and unfortunately, it’s not going away anytime soon.
The problem is, of course, that you may not want to buy a new car. So what to do about this dilemma?
Fear not. In this article, we’ll show you why you should not give in to the bullying. There’s no need to buy a car you neither need nor want. You can get a used car loan if you really want one.
Also, the rules are different for those with bad credit. As you will see, it is actually a lot harder to get new car finance if your rating is less than optimal.
But first, you need an essential piece of the puzzle:
New car loans and used car loans are not even remotely the same.
This may sound strange. After all, outwardly, all car loans essentially look the same: You apply for finance. You get accepted. And then you pay off your debt in monthly instalments.
However, to a lender, not all loans are equally desirable.
A bank or a dealer will make a lot more money with a lot less risk of you buy a new car from them. Used cars on the other hand, although cheaper, can be a mixed bag. Although the second hand margins are excellent for dealers, they will always prefer you buy new.
And so, they will offer you all sorts of fantastic deals to lure you in.
Here are just some of these too-good-to-be-true deals for new cars:
- Low interest rates. Yes, you will usually get better interest rates for a new car than a used one. The lowest they can go is 0% and you’ve probably seen these kinds of offers at your local car lot.
- Bonus cash and manufacturer discounts: Car manufacturers obviously have something to lose if you buy used. After all, they only make money on new model sales. This is why they will often be able to give you incredible discounts on the sales price of the car. If a dealer does the same, it is usually called bonus cash. Nothing of this sort exists for used automobiles.
- Manufacturer finance: Almost all major makes have set up their own banks to help potential customers finance their car. This is an incredibly smart move and has worked out well for them. Again, this only applies to new cars.
- Free extras: Instead of offering you a discount, dealers will sometimes tease you with plenty of extras: Leather seats at no additional costs? A free entertainment system? Tinted windows? These luxurious pleasures are only available to those who buy new.
So is new car finance actually cheaper than used car finance?
Let’s be very clear about this: It isn’t.
First off, you will probably never get a 0% deal. These are reserved for those with perfect credit rating. And besides, they usually only apply for the first few months. After that, interest rates rise to a normal level and it’s business as usual.
There are plenty of reasons why used car finance is still a whole lot more affordable:
- The lower purchasing price of a used car means you can save money on the loan as well. As money saving magazine Nerdwallet have pointed out, just by buying 3-year old vehicles instead of new ones, you could save about 100,000 over the course of your life!
- Because you have more choice on the second hand market, you can find a car to perfectly match your budget.
- Yes, interest rates tend to be lower with a new car loan. However, the actual instalments are typically a lot higher and the loan term is longer. After all, you’re paying interest on a far higher total amount. Car insurance is also a lot lower for a used vehicle.
- The loss due to depreciation is lower. Cars tend to lose a lot of their original value over the first three years. In fact, they will generally drop in value by as much as 20% in the first year alone. With used cars, the brunt of the fall has already been absorbed by the first time buyer. So relatively speaking, the car will keep its value better.
In fact, used car finance is so much cheaper, that some buyers can switch to a far more luxurious model and still save money!
So why is it easier to get new car finance?
We mentioned that it makes complete sense for dealers, manufacturers and banks to try and convince you that new is best. The fact that they’re making more money this way is one important aspect of it. The fact that the manufacturer is part of the equation weighs in heavily, too.
But that’s not all:
- A car loan is based on the value of a car. But setting the value of a second hand car is an imprecise science. The dealer never knows if she could have made more. Vice versa, she may not sell the car at all if she overprices it. With new cars, however, the price is clear. And as a result, lenders know exactly how much of their money they can retrieve in case you should default.
- For the same reason, the risk of a loan for a new car is far less. Despite depreciation, lenders can still get a decent amount for a fairly young car. With used cars, the resale value is usually rather low.
- New cars have a manufacturer warranty. This is why dealers love them. If something should go wrong in the first years of driving the car, the cost of repairing the car is covered by the producers.
Still, this doesn’t mean that new car finance is, in fact, better.
Quite on the contrary. We actually firmly believe that there are very few reasons to buy a new car these days. Up to a point, used cars are just as reliable as new ones. They may actually be more reliable, as they have proven their worth by years of hands-on experience from drivers.
And the lower sales price means you can save a lot by opting for a second hand model.
What’s more, you simply have a far wider choice of financing options. Today, some dealers will even offer PCPs on used cars (not that we’re advising in favour of that!).
Also, if your credit is fine, you can essentially chose whatever you want. Yes, dealers will try and convince you to splurge on a brand new car. But they certainly won’t reject you if you insist on a second hand model instead.
Finally, here’s an unfortunate piece of information:
The situation changes drastically if you have bad credit.
Suddenly, all those beautiful deals and miraculous offers no longer apply. In fact, you’ll be hard pressed to even get a bank to loan to you. Dealers are your only option now, but even they will think twice before extending credit for a new car to you.
Since most of us have had financial trouble at some point, none of our credit scores are perfect. This is why the wonderful world of easy car credit is simply not accessible for you.
So what’s the dividing line between good and bad credit? It depends on the lender. Excellent and good ratings usually qualify for new car credits. If your rating is average, you can probably still get one. But you may have to pay more.
If your rating is below that or at the lower edge of average, you’re always better off with a used car loan.
Improve your situation
If you have bad credit, the usual piece of advice most experts will give you is to either
- delay buying a car,
- opt for the cheapest car you can buy,
- only buy a car you can pay for in cash,
- not buy a car at all.
It’s easy to see these recommendations are not very helpful.
Instead, we’d like to suggest something different: Make a decent downpayment! Anything you can put down before committing to the loan will help you keep costs down. A decent downpayment can improve your interest rates and reduce the loan term and thus make the entire deal a whole lot more attractive.