How to Get a Good Deal on a Used Car Loan with a Small Down Payment

Small down payment loans typically have higher interest rates. This happens because the loan limits must be higher, forcing a longer loan. The longer a car loan lasts, the higher the interest rates climb. Sticking with a short loan of under 5 years is always preferable for any car loan, but it is particularly advantageous in a used car loan.

Opting for a Short Loan

There are two main reasons to opt for a shorter loan. The first is to reduce the interest rate as previously discussed. The second is to protect against a large financial loss that comes as a car's value depreciates. Automobiles are a unique asset because their value drops so swiftly. Financing an auto means you will ultimately pay far more for the asset than it is worth once you fully own it. This is particularly true with a used car. The value of cars depreciate at a rapidly increasing rate each year. Basically, this means there less of a difference between a 1 and 2 year old car than there is between a 2 and 3 year old car. If you are buying a 5-year-old car with 70,000 miles, you will find it is worth far less than you purchased it for another 5 years down the line. Sticking to a short loan minimizes the total cost of financing and the total net loss on the car.

Higher Monthly Payments

The main disadvantage to a short automobile loan is the high monthly payments. This is particularly true if you have a low down payment because your loan principal will be very high. Paying off a high principal in just a few years can mean payments over $300-$500 a month depending on the expense of the car. In order to make this situation work in your favor, you should budget for the higher cost each month prior to selecting the exact car you will purchase. Start by cutting your monthly salary in half. Next, subtract all fixed payments you currently have including mortgage, rent and other debts. The remaining sum is what you can reasonably afford on your auto loan each month. Any higher, and you will be running the risk of default.

Less Favorable Loan Terms

If you are willing to lock in your loan terms at the beginning, the lender will give you a much better deal. This means agreeing to high fees if you prepay or otherwise alter the loan contract. Since the loan is going to be short-term, you are risking much less locking in terms than you would be if you were opting for a long-term loan. The lender may additionally ask for a recourse loan, which is problematic with a used car. This essentially means, if the car is repossessed and comes in under the value remaining on the loan, you will be responsible for the difference. Since used cars do depreciate in value, you will be assuming far more risk with a recourse loan. However, it may be worth the risk to secure a low interest rate despite a small down payment.

Need an Auto Loan? Get a Free Quote Here!