5 Tips for Financing a Used Car the Smart Way

Posted by: Lydia on 1/10/2019

Category: General


It’s clear there are many pitfalls out there when it comes to financing a new car, but what about a used car? Because most used cars cost less than new ones, drivers may think the financing is easier to deal with. But unfortunately, that's not necessarily the case. 

Buying a used car with financing can potentially be an exhausting process – and some aspects of it can even lead to more financial problems down the line. That's why anyone considering buying a used car with financing really needs to ensure they do it the smart way. Here's what you need to know.

1. Confirm it makes sense

The first rule of financing anything, especially a used car, is to ensure it’s the right option for you. For example, if you’re a university student without a lot of disposable income, it’s important to distinguish between a need and a want. You may in fact need a car to commute to campus each week, but you may not need a slick late model two-door sports car. Purchasing more vehicle than you need is a fast way to create a financial headache for yourself, especially given that most cars depreciate quickly.

In circumstances like this, it’s prudent to consider whether you could afford to buy a car outright at a lower price. There will always be time in future to get your hands on that dream car, so make sure the car you're buying makes sense for your needs today. If you’re having doubts about whether financing is right for you right now, it’s wise to take pause and consider buying a more affordable car outright.

2. Understand the variables

Unlike buying a new car, where pricing is similar across the country, the prices of used vehicles can vary wildly depending on location. This is critical to keep in mind as you search for a used vehicle you like, as there are many market variables that result in different prices – for example,  proximity to a major city. 

A used car yard close to CBD will usually have far higher expenses for rent of the premises, alongside other expenses like local government fees. This means those costs will be incorporated into the price of the vehicles they sell - and the higher the price, the more you’ll need to finance. Bigger, more expensive car yards may also come with more extra financing fees, so do your homework.  


However, a used car yard 100 kms outside of town will usually be able to rent a bigger tract of land for a lower cost. This means there isn’t as much of a need to pass on the cost to customers, and – because they recognise their location isn't as convenient as a city yard – keeping prices low to make the trip worth it is a key part of their business model. 

3. Keep your loan simple

Financiers may try to upsell you with a number of optional extras. When you’re already prepared to make a big financial commitment, adding on a couple of additional costs may not seem like a big deal. This is what they're counting on, and part of what sees the Australian finance industry contribute $140 billion to the national economy each year.

ASIC has been clear on their view that these extras are not good value. These expenses are unlikely to bankrupt you, but they're sure to annoy you when you find out they provide little benefit in return for extra money. 

4. Save for additional costs

Anyone who buys a used car with financing understands that they'll have to make regular car payments, but fewer people factor in the extra costs that can come with the purchase. 

Take car insurance, for example. It’s true that you can usually expect a used car to have a lower insurance premium than a new one. However, if the car is a rare or luxury vehicle – which many Aussies buy used – your insurance costs may be quite high.

In addition, used cars have a higher risk of breaking down as the years add up and wear and tear takes its toll. Realistically, financiers don't care about your after-purchase costs, and in all fairness, it’s not really their business to care about them – but it’s certainly your business to do so. So even if it appears on paper that you can buy the vehicle you want with financing, take pause and add repair costs to the equation to ensure you can afford buying and owning the car.

5. Keep the loan as short as possible

At first, a smaller repayment over a longer term may be tempting. In certain circumstances – such as when you’re certain you’ve found your dream car and will still be driving it in a decade – it may also be a good choice. Most of the time, though, a shorter loan is ideal even if it involves higher payments. This is because the depreciation in your car’s value is likely to occur alongside a change in your life and its circumstances. 

A term like seven years may not seem all that long when you consider lower payments, but a lot can happen in seven years. You may get married, start a family, or expand your family – all changes that may mean your car no longer suits your needs. Also consider that electric cars are becoming more prevalent, and self-driving cars will likely be seen on our roads by 2025. You may love the car you buy now, but keep your options open by keeping your loan term as short as possible.

Financing is ultimately one step in making a success of car ownership. Once you own the car, however, there’s the need to maintain it, and also to anticipate issues that can arise while you're using it

Ensure your finances stay healthy for the life of the loan, and you'll enjoy your vehicle instead of dreading paying for it. Follow the tips here, and you’ll be sure the next used car you buy will come without any of the pain a bad financing deal causes.

What other tips are important for financing a used car the smart way? Let us know in the comments below:

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