Many people can afford to buy cars due to the availability of financing. In fact, the vast majority of all new cars purchased in Canada were initially under some type of financing plan. However, this raises the question, “What about used or second-hand cars?”
People are often led to believe that used or second hand cars are not eligible for financing. This often forces them to delay their purchase until they have saved enough to buy a unit with cold cash. However, many lending institutions offer financing options for used motor vehicles.
In addition to going to the nearest bank or credit union, a person who is interested in obtaining a used car loan can also apply online. Basically, the prospective applicant would only have to fill out a standard form and they will be pre-qualified. However, in the event that an application pre-qualifies, the lender can still contact the applicant directly, as part of the company’s security protocol.
Now that that’s settled, let’s talk about some important concepts behind used car loans. Here are the top three used car financing myths, along with explanations why they’re wrong.
Myth No. 1: It’s a little too hard to get approved.
Applying for a used car loan is the same as applying for a new car. Actually the only difference is that one is for used cars and one is not. The application requirements are largely the same: bits of personal information, work-related status, contact information, and income data.
Approval of a used car loan application depends more on a person’s credit history than on the vehicle itself. Therefore, the difficulty in obtaining approval occurs only when a person’s creditworthiness is questionable. Otherwise, approval should be a piece of cake.
Myth No. 2: Interest rates are simply too high.
This is another common misconception about used car loans. Many people believe that the interest rate (APR) associated with used car loans is prohibitively expensive. However, this is a mistaken notion that must be destroyed once and for all.
In general, used car loan interest rates are slightly higher than new car loans. This small difference is used to account for increased risk of default, which is caused by a car potentially leaving your life soon. However, this difference is usually less than one percent. For people with stellar credit scores, the difference can be as low as 0.2 percent, which is practically negligible.
Myth No. 3: Payback periods are too short for comfort.
“Too short” is probably an exaggeration. Auto loan repayment periods are affected by two factors: the age of the car and the interest rate.
There are some auto loan packages that determine the amortization period of a car by a base value minus the age of the car in years. For example, a 5-year (60-month) car loan can reduce the repayment period to 3 years (36 months) if the car you purchased is two years old. This is to make sure that the collateral (the car) still has value, which is the rationale behind getting loans.
On the other hand, an interest rate increase can also be applied so that a used car loan can be paid off over a longer period. The increased interest rate will be used to offset the effects of depreciation on the value of the car. However, this option is mostly given to people who have stellar credit, something that can be immensely difficult to achieve.
