Financing a Used Auto: Car Loans Clarified

Used auto car loans are similar to new car loans but present a few unique challenges: purchasing your car from a third party, the potential for upside-down loans, and credit insurance for extenuating circumstances.

Third Party Purchases
If you get a loan from a dealership, you do not need to provide the full amount of the loan in person. They will hold the deed to your car until it is paid. A third-party will require the entire payment up front in order to transfer the title. Your used auto car loan needs to be available in cash the moment you want to purchase the vehicle.

Upside-Down Loans
Upside-down loans occur when you owe more than the asset is worth. This is particularly dangerous with old, outdated vehicles. In two years, if you still owe $8,000 but the value of the car is only $6,000, you have an upside-down loan. Avoid this by seeking shorter loans on used cars. Provide a bigger down payment or trade in to reduce your loan size.

Insurance for Lemons
Credit insurance usually protects a lender in case the purchaser of the loan is unable to pay. When you are buying a used car, you should seek similar insurance. With a used auto car loan, it is possible your car may have problems you do not know about. You do not want to be stuck with the terms of the loan if your car fails. Consider stipulating a trial period in which your loan is refundable if you have problems with the car.

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