Rising car prices are sending even strong-credit buyers to the used lot

With the cost of new cars rising, even drivers with top-notch credit are seeking more-affordable used options, automotive researchers report.

Customers with good to excellent credit accounted for more than half of used-car financing, a record, in the second quarter this year, according to the credit bureau Experian.

That is a change from past years when "prime" borrowers — generally, those with credit scores above 660 — tended to buy new cars, said Melinda Zabritski, Experian's senior director of automotive financial services.

The average car loan for both new and used cars continues to rise, to more than $32,000 for a new car and just more than $20,000 for a used car, Experian found.

Adding to the rising number of used-car purchases is an influx of used cars available after the expiration of leases, which typically run for 24- or 36-month terms.

"There's a really large supply of gently used late-model cars," said Ernest Garcia, chief executive of Carvana, a startup that buys and sells used cars online.

Such cars are new enough to have updated safety equipment, while the first owner has already shouldered most of the loss of the car's value through depreciation, said Mike Quincy, an automotive writer with Consumer Reports.

"A good two- to three-year-old used car is a really good deal," Quincy said.

The savings can be significant. Car shoppers could save more than $14,400, on average, by buying a three-year-old car instead of its new equivalent, according to a second-quarter used-car report from the automotive website Edmunds. The average transaction price for a new car was about $37,000, compared with about $23,000 for a used car.

Ten years ago, Edmunds said, the average sticker price of a new vehicle was $6,500 higher than the base price; now, it's more than $10,000.

The difference is mostly because of advanced safety and entertainment systems and consumers' appetite for pricey add-ons in new cars. By buying used, shoppers can get the fancy features at a far lower cost.

"Used-car shoppers are getting the most bang for their buck," Ivan Drury, Edmunds' senior manager of industry analysis, said in prepared remarks about its used-car report.

Carvana, for instance, lets online buyers choose from two options:

They can have their vehicles delivered to them or can pick them up at multistory glass towers that the company calls "vending machines."

Here are some questions and answers about buying a used car:

Q: What terms are available on car loans these days?

A: The average interest rate for a new-car loan was just more than 6% in the second quarter, compared with more than 10% for a used car, Experian said. (Borrowers with very good credit typically pay lower rates.) Experian said the average monthly used-car payment was $392 in the second quarter — an increase of $25 over a year earlier.

A: The overall cheapest way to buy a car — used or new — is to pay with cash, Quincy said. (About 14% of new cars and 44% of used cars were purchased with cash in the second quarter, Experian said.) If, like many buyers, you must finance the purchase, make as large a down payment as you can afford, Quincy advised. And keep the term of the loan as short as possible.

As cars have become pricier, shoppers are extending loan terms to five years and even as long as eight years to reduce their monthly payments. But the longer term means the buyer is paying substantially more interest over the life of the loan. The average term of a used-car loan is now more than 60 months, Experian said.

If you find yourself having to drastically extend the term of your loan to afford a car, it may be a sign that the car is too costly for your budget. "Buy a less-expensive car," Quincy said.

Q: What steps should I take before buying a used car?

A: Always check a used car's history by using a service like Carfax or AutoCheck, which can help flag any crashes or repairs, Zabritski said. And, as with a new car, it also helps to get preapproved for financing — credit unions often have good rates — so you can compare that interest rate with terms offered by a dealership, Quincy said.