There’s a lot to be said for buying a car in used condition rather than driving something brand new off a dealer’s lot, and buying used isn’t quite the risk anymore that it once was. Vehicles tend to remain reliable longer. This isn’t your grandfather’s Chevy anymore.
Santander Consumer USA reported that about 41 million consumers were expected to purchase used rather than new vehicles in 2019, more than double those who would buy brand new wheels. Deciding which option is best for you can come down to whether you prefer having a solid warranty in place or taking it easier on your budget.
Certified Pre-Owned Cars
That cryptic “CPO” designation you'll come across as you begin shopping refers to a certified pre-owned vehicle that’s available through a dealership. These vehicles have been gaining in popularity among consumers, with good reason. They come with a manufacturer’s warranty, and they’re usually on the newer side – less than three years old – with low mileage and no accident history.
They’re also given a thorough inspection before the sale, so you’re not taking a private seller’s word for it that, “There’s absolutely nothing wrong with this car!” They’ve been reconditioned so they’re in bona fide “like-new” condition. That automaker doesn’t want to have to come through on that warranty promise and pay for a lot of repairs, after all.
And here’s one other advantage: These manufacturers are known to offer competitive financing and other perks to buyers as well. These can include free roadside assistance, satellite radio and loaner cars in the event that repairs do become necessary. A few have even been known to lease these vehicles.
Vincentric, an auto data and analysis firm, even provides an annual list of the best CPO vehicle values to help guide you if you think purchasing one of these cars might be right for you. Search online for the “Best CPO Value in America Awards.” The downside is that you’ll pay more for these used vehicles.
Advantages of Buying a Used Car: Cost
New cars are notoriously expensive. You’ll almost certainly be able to wrap your budget around a used car more easily because of borrowing less for the purchase and because the insurance premiums are lower than they'd be for a new car. Registration fees will probably be less as well.
And you’re less likely to take that – Kaboom! – big depreciation hit as soon as you drive your new wheels home, at least if your used car is three or more years old.
Consider the Disadvantages: The Car’s History
You’ll nonetheless be rolling the dice somewhat if you buy used, particularly if you don’t go with a CPO vehicle, and doing diligent homework first can go a long way.
Even the best research probably won’t tell you that the previous owner’s very large St. Bernard vomited all over the back seat on a hot, humid Florida day. You might not ever realize this until you get into your car and notice a not-quite-identifiable odor emanating from within. But other issues can be more serious. It could cost you a bundle in repair costs – negating the advantage of that reduced purchase price – if your research fails to unearth mechanical issues and the seller doesn’t divulge them.
Read More: The Tipping Point: When to Repair or Sell Your Car
You Might Have to Settle
Odds are that you won’t get the car of your dreams, even if you take the certified pre-owned option. Maybe you’ve always envisioned yourself driving a cherry-red sports car, so you’ve decided to buy yourself one for your fortieth birthday or with that awesome new raise your employer just gave you. But you’re not walking into a dealership and pointing to that perfect vehicle sitting on the showroom floor. It comes down to what’s available and what used cars you can find that are for sale.
You might find that red sports car, but without any of the options you consider to be must-have. Or you might find all those options, but the vehicle is a burgundy family sedan.
Interest Rates on Used Car Loans
You might have to pay a higher interest rate on your loan if you opt for a used car, assuming that you don’t buy a CPO from a dealership or manufacturer who really, really wants your business and is willing to cut you a break with some competitive financing. Edmunds indicated in 2019 that the difference was 8.6 percent interest on used car loans, compared to 5.84 percent on new car loans. Experian put the numbers a little farther apart in the same year: 9.49 percent for a used car versus 5.76 percent for a new model.
This happens because used-car lenders take on more of a risk than new-car financers. They have less assurance that the vehicles that are acting as collateral for their loans will still be road-worthy if they must repossess and sell them because the buyers fail to make payments, particularly a couple of years down the road when a used car is even more used.
Financing Your New Car
LendingTree and Experian both advise that you’re probably better off paying cash for a used car, but not everyone has thousands of available dollars sitting in their savings accounts. Experian has indicated that more than 50 percent of used car purchases are financed.
Experian also says that used-car loans average terms of about 65 months – almost five and a half years. That’s a long time to pay a higher interest rate, and you might end up paying as much as you would have for a new car over the entire life of the loan when that interest is factored in.
How to Find a Lender: Buying From a Dealership
Maybe you’ve braced yourself for those interest rates. Where do you start looking for a used-car lender? Again, you’ll probably find the kindest terms with a certified pre-owned vehicle, always assuming that you have a sturdy credit history.
A dealership may be happy to obtain financing for you as part of the sale, even if you don’t buy a CPO. Dealerships typically have several lenders on standby that they commonly deal with. They might also be willing to work with you if your credit is less than perfect.
Some used car dealerships that sell only pre-owned vehicles offer their own in-house financing. They provide you with a loan for the purchase price if you buy from them. They’re sometimes referred to as BHPH dealerships – “buy here, pay here.” Their interest rates tend to be exorbitant, and they sometimes require more significant down payments as well.
Read More: 7 Kinds of Interest Rates
Arranging Your Own Financing
Banks and credit unions are worth looking into if you’re not buying through a dealership and have a solid credit history, although they might impose limits as to the age of the vehicle you’re considering, as well as the mileage.
Credit unions tend to be a little kinder than banks about the loans they offer because they’re smaller, they’re non-profits and they serve a defined membership rather than the public at large. You have to become a member first, but that’s usually just a simple matter of opening a checking, savings or other account with them that involves making a deposit. They have a reputation for being a little less critical of less-than-perfect credit, too.
You might also want to consider an online lender, particularly if serendipity smiled on you and you actually did find that red sports car at a reasonable price, but another potential buyer is standing right behind you with checkbook in hand. The car could be gone by the time you work out something with your bank. Online lenders will often approve you much more quickly, and they might even offer more favorable rates and terms. They take applications 24/7 and some even specialize in auto loans.
Do Your Homework: What’s the Car Worth?
Yes, buying a used car might mean risking a few downsides, but you have control over many of them. You could end up with a decent car that lasts you many years without breaking the bank if you do your homework and approach the process right.
Forewarned is forearmed, so determine what the make and model is actually worth before you even begin shopping for the car you want. Numerous resources are available to help you pin down this information, from Kelley Blue Book to the National Automobile Dealers Association. Edmunds and Consumer Reports can be very helpful as well.
Knowing the approximate value can help you in two ways. You can begin the process of getting pre-approved for a loan in the amount you’re likely going to need, and you’ll also know if that private party seller is asking way more than the vehicle is worth.
Get an Auto History Report
Take the time to get a comprehensive vehicle history report after you’ve found the vehicle you want at an acceptable price. AutoCheck, Carfax and VINCheckPro are some options that provide these reports for a fee. It’s just a simple matter of providing the car’s vehicle identification number or “VIN.”
These services tell you if the vehicle has ever been in an accident. Depending on the service you use, you can also usually make sure that the private individual who’s selling you the car actually does indeed own it and have the right to do. This might require an additional step, however. You might have to contact the National Motor Vehicle Title Information System.
You can also match up the odometer records provided in a history report against what actually appears on the car so you know if a private-party seller has scrolled those numbers back a bit. They most likely won’t be able to tip you off about that St. Bernard, however.
Ask a Qualified Mechanic
It might cost you a few extra dollars out of pocket, but another good idea is to have an independent mechanic inspect the vehicle before you commit. This doesn’t mean your brother’s good friend who tinkers with cars on weekends. Make sure the mechanic is qualified, and ideally is certified. They know what to look for, and they’ll have seen enough problems with vehicles in the past that small, telltale signs of trouble will jump out at them. Since you're likely buying the car as is, it's worth the investment to know what you're getting.
Line Up Auto Insurance
All states have insurance requirements that must be in place before you get behind the wheel of that new-to-you used car to drive it home. In fact, it’s unlikely that a dealership will hand over the keys unless you can prove that you've insured the vehicle. You’ll probably need comprehensive, collision and liability coverage if you’re financing it, because the car is the lender’s security that the loan will be repaid even if it’s totaled at some point.
Get a quote from your current insurer if you already have a car, and ask if they’ll automatically insure your new purchase for a short period of time until you get around to actually adding it to your policy. Some insurance companies are willing to do this for a day or two, such as if you buy on a weekend, but be sure to get it in writing if they agree.
Don’t neglect to shop around and ask a few other insurers what their premiums would be as well. This, too, can help you bring down your ownership costs.
The Final Touches
So everything has lined up and you’re feeling pretty good about this purchase. You might want to take one last step just the same. Grab that smartphone or tablet and do a quick search for the vehicle’s VIN, just to be absolutely sure there’s no strange, hidden information out there about the car that no other source has turned up. Safecar.gov is one site you might want to check out.
And it goes without saying that you won’t want to sign on the dotted line until you’ve taken the car for a test drive. The bottom line is that you feel good behind the wheel, because you'll ideally be driving it for a few years.
- Santander Consumer USA: 9 Reasons Buying a Used Car May Be a Better Choice Than New
- Santander Consumer USA: What Does Certified Pre-Owned Mean? Value If You Buy Right
- Smart About Money: Pros and Cons of Buying Used
- LendingTree: How to Finance a Used Car
- Experian: How to Get a Used Car Loan
- Car and Driver: Do I Need Insurance Before I Buy a Used Car?
- Autotrader: Buying a Car – How Do You Add Insurance If You Buy Over the Weekend?
- Car and Driver: New vs. Used Cars – Everything You Need to Know
- Consumer Reports: The Truth About Certified Pre-Owned Cars
- Vincentric: Vincentric Best CPO Value in America Awards
- National Highway Traffic Safety Administration: Safecar.gov
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.