In the market for a used car? Compare used car loans on interest rates, fees, features and more.
What is a used car loan?
To help finance your ‘new’ set of wheels, used car loans are a type of personal loan that allows you to purchase a second-hand car that is typically over a certain age - up to approximately seven years old. One of the main reasons why lenders place an age limit on used car loans is that they seek to minimise or avoid risk. Lenders therefore want to be confident that the used car you intend on purchasing will outlive the length of the loan.
When you take out a used car loan, the loan provider will lend you the money needed to cover the purchase price of the car. You are then required to repay the loan amount, plus interest, in regular instalments over a predetermined period of time.
How to compare used car loans?
Like any form of finance, lenders will offer multiple products to service a variety of consumer needs, therefore it’s important to consider a range of factors when shopping for and comparing used car loans.
Secured vs unsecured
A secured loan is guaranteed against the value of an asset. Car loans are one of the most common forms of secured personal loans, as the car itself can be used as security. Secured car loans will generally have lower interest rates than unsecured car loans, as they are considered to be less of a risk to lenders.
When it comes to used cars, age and condition are two key factors that can determine whether you might be eligible for a secured loan. If the lender isn't confident that the value of the car is enough to secure the loan amount, you may need to offer up an alternative asset as security or opt for an unsecured loan.
Car loan interest rates determine the amount of interest a borrower will pay over the life of the loan. If you opt for a fixed interest rate, your interest rate will remain the same throughout your loan term. If on the other hand you were to choose a variable rate, the rate is likely to fluctuate over time and in line with the market. Fixed rates can often make budgeting more manageable, but variable rate loans tend to offer more flexibility.
A balloon payment is an agreed-upon lump sum paid to your lender at the end of your car loan term. While balloon payments are more commonly offered upon purchase of a new car, by making a lump sum payment at the end of your loan term, a balloon payment allows you to reduce your regular loan repayments. However, balloon payments generally make the loan more expensive overall.
Balloon payments are popular with car loans as they tend to provide more cash flexibility, particularly for people who may have other expenses to pay for the life of the loan.
Lenders will often charge a number of fees for providing finance products. Many loans require application fees, service fees or annual feels - all of which can vary depending on the lender. As an example, a loan with a $10 monthly service fee over 3 years will cost you $360, therefore it’s important to consider all the fees involved before choosing a used car loan product.
Pros and cons of used car loans
The buyer doesn't have to pay the entire balance upfront
It is very rare when a consumer is able to buy a vehicle and pay off the entire amount at the time of purchase. Taking out a used car loan allows consumers to have access to the vehicle they need and/or want while paying the balance over time.
Builds credit score
For those who use them responsibly and make their payments on time, a used car auto loan can be a good way to build credit history to help you establish a reputation as a trustworthy borrower. However, you shouldn’t take out a car loan just for this purpose. Most lenders prefer borrowers that don’t have any existing debt.
Higher interest rates
When comparing interest rates against other loans like a new car loan or mortgage, used car loan rates are generally much higher.
Vehicles are among the fastest depreciating assets money can buy. Generally, the vehicle loses value quicker than the loan is paid off, which means your car can potentially be worth less than the loan amount that is owing. It’s worth noting, however, that new cars tend to depreciate faster than used cars.