How To Buy a Used Car
So you’ve decided that you want to buy a used car, congratulations! Buying a used car is an exciting process and an important milestone in your life. Although, it’s easy to get caught up in the excitement of buying a car which can result in some complications down the road. For example, you might over pay for your used car, buy add-ons you don’t need or end up with loan conditions you didn’t want. This isn’t meant to scare you, but rather to remind you that buying a used car is an important financial decision that should be taken seriously. You will have all the time in the world to enjoy your car, so it’s best to stay focused during the purchasing stage!
In this guide, we’ve gathered 7 tips that make buying a used car easy on your wallet and life.
1. Get Pre-Approved
Before you set foot on the used dealership’s lot, get pre-approved for a car loan. When you get pre-approved for a loan, the lender is offering you a certain amount of financing with defined conditions. Usually, a pre-approved loan offer expires after a specific period of time, but it’ll be enough time for you to complete the purchase. There are several benefits to getting pre-approved.
First, you will know how much you can spend before beginning to shop. This will prevent you from overspending. In addition, you won’t have to stress about finding financing for a car you thought you could afford, but are having trouble securing financing for.
Second, you can use your pre-approved loan amount as a bargaining chip with used car dealers. If there’s a used car that’s just outside of your budget, you can tell the dealer you can only afford to spend a certain amount. Everyone likes a deal on a used car!
Third, the process of pre-approval can reveal issues with your credit and areas for improvement. There could be errors on your credit report that you never noticed before that you can fix now. In addition, you can find opportunities to boost your credit in an attempt to reduce your interest rate or get more favourable terms.
Finally, if you obtain pre-approved loans from various lenders, you can compare, negotiate and get the best deal. Many people consider in-house dealership financing too. By knowing what rate external lenders are offering, you can make a better decision in relation to in-house financing.
Having trouble with the math on your car loan? Use our car loan calculator!
2. Consider the cost to maintain
The cost of the car itself is one thing, but the cost to maintain a car is another. You will need to pay for gas, insurance, registration, licensing, repairs and maintenance, and potentially parking. Keep in mind that it can be hard to estimate these costs until you know what car you’re going to buy. Each car has a different cost to maintain.
With that being said, that doesn’t mean you can’t determine how much you’re willing to spend on the cost to operate your car. Revisit your monthly budget before shopping to determine how much you can set aside for your used car.
3. Don’t purchase add ons at the dealership
Dealerships are notorious for trying to upsell you, especially near the end of the deal when you’re tired and want the process to be over. Examples of add-ons dealerships may try to sell include extended warranties, tire protection, paint protection or gap insurance.
Normally, dealers will attempt to sway you by making you aware of the potential damage that could be done to your car if you don’t buy the add-ons. This is a tactic that uses fear to convince you to buy -- don’t fall for it. In addition, these products can be extremely expensive when buying at a dealership, but most buyers don’t have the first clue as to how to determine a fair price. Dealers may try to convince you that it’s only a few extra bucks every month to sway you. Say no to this coverage and simply purchase the used vehicle you want.
Keep in mind that these add-ons can be useful to some used car buyers. If you would like to purchase an add-on, you can do so later. For extended warranties, you should follow the same process as finding a loan. Nearly all dealerships offer this product. Compare quotes from multiple vendors and pick the lowest one. For other kinds of coverage and protection, you can reach out to your regular car insurance company. There will likely be bundle savings this way and you’re more likely to pay less than at the dealership.
4. Due your due diligence
Once you’ve narrowed down your used car shopping list, you should do your research. Of course, this step is optional, but it could save you money and prevent problems from happening down the road. The main thing you should be concerned with is the sales price and mechanical problems with the car.
In terms of price, your due diligence could be as simple as looking up similar cars on Kijiji or at other dealerships. It could also become quite complex if you want to determine depreciation, costs to maintain and costs to repair. Good resources for this kind of information include the Kelley Blue Book and consumer reports.
Mechanical problems with your car are important to consider too because the last thing you want is to end up with a lemon or a serious car repair. There are a number of ways to do your due diligence here. To start, you should get a CARFAX report. This gives you history of the vehicle including liens and accidents. From there, you can also read online reviews of others who drove the same car, including common issues they experienced.
5. Inspections and test drive
Once you find a used car at a dealership you’re interested in purchasing, you should inspect it and take it for a test drive. Before driving, check the car for damage or warnings. The list of what could be wrong with a car is long, but exterior damage, interior damage, leakage and warning lights are the main things to look out for.
If the car appears to be in good condition, it’s time to take it for a test drive. The way the car drives can also be indicative of potential damage, for example, weak breaks, non-smooth steering or strange sounds.
If a dealer doesn’t let you inspect or test drive the car you’re interested in, that’s a red flag that they’re not being honest with you. It’s wise to walk away from the deal at this point.
6. Be Wary of Long Loan Terms
In terms of car loans, a longer loan term is typically considered to be six years or longer. Many people choose longer loan terms to secure a lower monthly payment. However, you will pay more interest in the long run, most of which is paid during the earlier portion of the loan’s term.
Another risk of longer loan terms is negative equity. Cars are an asset which means they accumulate equity. You can calculate equity by determining the current market value of your car and deducting any obligations outstanding against it, usually just the loan on a used car. If your car loan is worth more than your car, you will have negative equity. If you run into financial problems and need to liquidate your assets, you would have to pay for the negative equity out of pocket. In other words, your car would be worth less than what you owe. In general, negative equity in any asset is a sign of poor financial health. It is more likely that you will run into negative equity problems with a longer loan term because you’re paying the balance down much slower.
So what is the ideal term length? The sweet spot for used car loan terms is three years or 36 months. However, 2 to 4-year terms are reasonable too. Even though making the car loan’s term longer means you’ll pay more monthly, it’s a better decision for your overall finances. If you can’t afford a car loan without a six-year term or longer, consider buying a cheaper car or making a larger down payment to avoid the risks.
7. Read the Whole Contract (Yes, the WHOLE contract!)
Let’s face it, no one likes legal jargon. Who can even understand it? However, reading your purchase contract and your financing agreement is an important step of the process. In fact, it’s the final step, so it’s definitely worth your time after all the work you’ve done. Not only will you learn more about taking out a loan on a used car during the process, you’ll identify potential issues in the contracts. It’s far better that you identify them now as opposed to later.
A common limitation included in car financing contracts is closed versus open payment plans. A closed payment plan does not allow for early repayment unless the borrower pays a penalty, which is usually substantial. On the other hand, an open payment plan allows you to repay the loan early with no additional penalty. The latter is usually preferred because you may come into some money and want to pay off the balance early. Alternatively, you may want to get rid of your car because you can’t afford it or have a new lifestyle which is much easier to do with an open payment plan.
Other than that, keep your eyes peeled for strange conditions when reviewing the final purchase and financing agreements.
Now that you’ve got some handy used car shopping tips under your belt, it’s time to start your journey! Car Loans Canada wishes you the best of luck while shopping and getting a loan on a used car.
If you’re ready to get approved for financing, complete an online application with Car Loans Canada, It only takes a few minutes!