How to Navigate the Used Car Market

After supply chain problems during the pandemic caused the price of new and used cars to skyrocket, we’re finally seeing used car prices begin to fall a bit.

According to Edmunds, a consumer car research site, the average price for a used car this past December was $1,600 less than a year earlier.

Good news? You bet. But the average cost is still mighty steep at nearly $30,000. And even though prices are lower, the interest rate on a car loan has been climbing. The current average rate for a 48-month used car loan is nearly 7%.

If you need a new car in 2023, I hope you will follow my advice:

Focus on what you need.

Your goal should be to buy the least expensive car. Period. That should steer you to a used car rather than a new car. A used car that is just three or four years old still likely has plenty of reliable miles ahead of it. Once you narrow your search to used, I can’t stress enough the importance of spending the minimum you need to get a reliable car. Please do not pay up for bells and whistles. Every dollar you don’t spend on a down payment and the monthly loan payment is a dollar that is available for all sorts of other uses. Groceries. Or your emergency savings account. Keep that idea front and center when you start to shop.

Wait to hit your prime.

Your credit score plays a major role in the interest rate you will be offered for a used car loan. According to Experian, borrowers with scores of at least 780 (on a scale of 300 to 850) recently had an average used car loan rate of less than 4%, while “subprime” borrowers with scores between 600 and 660 paid nearly 10%.

Unless you must buy ASAP, I would advise anyone with a credit score below 700 or so to work on building up their credit score before loan shopping. Paying all your bills on time is a big help, as is reducing any unpaid balance on your credit card bills.

Think short-term.

Your goal should be to finance a used car with a loan that is no longer than 48 months. In fact, a used car you can finance with a 36-month loan is even smarter. If that forces you to purchase a less expensive car, my work is done! That’s the goal.

The faster you get the loan paid off, the more months you will be driving without a loan payment. Let’s say you purchase a 3-year-old car and finance it with a 3-year loan. Today’s cars are reliable for a lot longer than 6 years. Let’s say you were paying $450 a month for a used car loan, and after paying off the loan you drive that car for another 4 years. Over the 4 years, you will have $21,600 ($450 x 48 months) that you can put toward other financial goals. Sure, there will be maintenance costs, but if you follow standard maintenance, you are still going to have plenty of free cash to spend, save, and invest.

Check out credit unions.

If you need a used car loan, the best deal might be through a credit union. The average used car loan at credit unions is typically at least a percentage point less than the rate at a regular bank. And please don’t assume the finance deal they offer you at the used car lot is best. You must shop around. A web search of “credit union used car loans” should give you a start on where to look. Many credit unions make it easy for anyone to join, and often at a very small cost or no cost at all.

Get a tax break for buying a used electric vehicle.

If you are interested in an EV, the federal government may help out with a significant tax break. Starting this year, if you purchase a used EV—at least two years old—from a licensed dealer for $25,000 or less, you may be eligible for a federal tax credit of up to $4,000. This is a new tax break, as previously only purchases of a new EV were eligible for a tax credit.

Single tax filers with income below $75,000 and married couples filing a joint tax return with income below $150,000 are eligible for this tax credit.

Tax credits are better than tax deductions. Every $1 of a tax credit reduces your taxable income by $1. Just be aware that this credit is “non-refundable.” That means the government won’t send you a tax refund based on the used EV credit. The credit can only be used to offset/reduce the taxes you owe.