When is a Used Car Loan Interest Rate Too High?

You need to be more aggressive about your used car loan interest rate because the value of the car will rapidly decrease. Your used car loan interest rate must be low enough to protect you from a few financing nightmares. The information below can help you decide whether or not the interest rate on your loan is too high.


Length of Loan vs. Life of Car
Cars are not built to last forever. Check the standard life-cycle by mileage on the model of car you wish to purchase. For example, the engine in a Nissan Altima typically lasts slightly over 200,000 miles. You are looking to purchase one that has 90,000 miles on it already. You know you drive an average of 15,000 miles per year. This means the car should last another 7 years if you drive it regularly. When you seek a used car loan interest rate, ensure the rate quoted is for a span of time less than 7 years. If you will not pay off your loan for 10 years, you will not own the asset outright when it is time to purchase your replacement vehicle. Decreasing the length of the loan will drive up your monthly payments but reduce your interest rate. Your interest rate should allow you to pay off your loan in 5 years for a used car with close to 100,000 miles on it. This will protect you against owing money if your car fails you.

Upside-Down Loan
An upside-down loan is a term applied when the amount of your loan is higher than the value of your car. Your used car will not be worth as much in 3 years as it is today. Particularly with outdated or old cars which may seem like a great deal, be wary of your interest rate. For example, find the cost of the car you are purchasing when it was new. If it is now 6 years old, look at the percentage its value has depreciated each year. If it depreciates at a similar aggregating rate for 2 more years, what will it be worth? In two years, how much will you owe based on your current used car loan interest rate? Is the amount you owe more than the value of the asset? Your interest rate should be low enough to protect you against this scenario. You may be able to refinance your loan at some point in the future for a lower used car loan interest rate. However, there is no guarantee you will find a lower interest rate in the future. Be aggressive in finding a low rate today when rates are generally low across the board.

 


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