This article is sponsored by PenFed Credit Union
Late summer leading up to the Labor Day holiday can be a great time to consider purchasing a used vehicle. Whether you’re looking for a less expensive option for a student headed off to college or a commuter car for yourself, there are good deals to be found. Here are a few things to keep in mind.
Take Advantage of the Depreciation Curve
You probably know that cars lose value quickly as soon as they are purchased. But that actually presents an opportunity when looking at a used vehicle. That’s because the biggest hit to value happens in the first year. By comparison, the amount lost in years 2 through 4 combined can be less than the amount lost in the first year.
So if you can purchase a one-year-old vehicle and pay it off or sell it before the next big dip in depreciation comes at year 5, you can maximize your spending. Remember that different types of cars depreciate at different rates, too. For example, a compact car or pickup truck will generally depreciate less quickly than a luxury car.
Watch the LTV Ratio
LTV stands for “Loan to Value” and it’s the ratio of amount financed plus interest to what the car is worth. Paying for a car — especially a used car — over a long period of time can put you in a situation where you owe significantly more than the car’s value. That’s why a shorter loan period, even if it means higher monthly payments, is a better idea.
Consider Gap Insurance
For the very reason that you’re likely to owe more on your used car than it’s worth, gap insurance can be a good idea. Gap insurance is an optional product that covers you for the “gap” between the loan amount and the car’s value in the event the car is totaled or stolen. While you can purchase gap insurance from a dealership, you can often get a better deal through your local credit union.
Do Your Homework — Or Get Someone Else To
When it comes to used cars especially, prices can vary widely on similar vehicles. Be sure to research the vehicle you’re interested in at more than one dealership. Using a service like PenFed’s Car Buying Service helps you easily see all the dealer inventory in your area and understand the fine details like mileage, past accidents and number of owners that can make two similar cars very different. And it’s available at no cost to PenFed members.
PenFed Credit Union is federally insurance by NCUA.