When Is A Car Too Old To Finance?

With the price of an average new car topping $50,000, something fresh and shiny from the factory isn't in the cards for everyone. But used cars aren't cheap either, with the typical secondhand vehicle selling for almost $27,000, according to CarGurus. For many, this means you'll need to take out a car loan even if you buy pre-owned. Of course, getting an older vehicle can make financing more manageable, but some lenders are more particular about which vehicles are eligible for loans.

When I sold cars, the banks we worked with had a hard cutoff of 10 model years for financing (and mileage restrictions also came into play, with the cutoff being around 100,000-120,000 miles). The 10-year limit still applies with some lenders today. That being said, cars are lasting longer — the average automobile on the road is nearly 13 years old – and even vehicles of this age may be out of reach for cash-only buyers. Something as mundane as an accident-free 2012 Toyota RAV4 with reasonable mileage will run $10,000-$12,000. Finance companies and dealers still want to do business, even if it means going beyond that 10-year standard. As a result, it's not difficult to find lenders that will offer loans on vehicles that could be up to 20 years old. Credit unions, like PenFed, are good options.

Of course, there may be hurdles to clear, such as vehicle condition, mileage limits, and clean titles. Lenders may also have minimum loan amounts, typically $5,000 or $10,000. Age and condition matter because the bank wants to know it can recover its money if you default on the loan. In other words, the car is collateral.

Auto lenders have become more flexible out of necessity. The ready availability of underwriting data (valuations, vehicle history, market conditions, etc.) makes branching out into financing older cars more feasible. Lenders still have underwriting standards that must be met, though, such as the loan-to-value (LTV) ratio. The LTV is a calculation of the amount of the loan against the car's value. For instance, a $15,000 loan on a $20,000 car has an LTV of 75%.

What's considered an acceptable LTV for loan approval is up to the finance company. Your credit rating is also part of the equation; you may be required to make a larger down payment to achieve a lower LTV, or you may be eligible for a loan with an LTV above 100% or higher. Different lenders will have different standards alongside different loan terms. Seven-year car loans are becoming more common for newer vehicles, which may be available for some older models, depending on the finance company.

It's worth including classic cars in the conversation. They're obviously older, but they still might be eligible for financing. The definition of what counts as "classic" may vary by lender, but 20 or 25 years is often the starting point. In this case, collectibility and resale value factor into loan calculations. Standard factors applied to daily drivers, like depreciation, matter less. There are specialized lenders in this arena, like Woodside Credit and Broad Arrow, but mainstream financial institutions like PenFed Credit Union also offer classic car loans.

There may be an option if you're set on buying an older vehicle but are unable (or unwilling) to pursue a standard auto loan. Perhaps the vehicle falls outside normal lending parameters, or the lender's terms don't meet your needs (like the man with a car loan at 27.9% interest over 68 months). If paying cash doesn't work, then a personal loan may be the solution. The vehicle's age and condition don't matter; this is unsecured financing that doesn't use the vehicle as collateral.

The trade-off here is that you need to have good credit because there's no collateral for the bank to repossess in the case of default. You can expect higher interest rates compared to regular car financing. The good news is that you don't need a down payment. Truist Bank cleverly pitches its LightStream financing to car buyers, highlighting that there are no restrictions on age or mileage. Underneath lies an unsecured personal loan.

Most banks and credit unions offer personal loans, so it's worth shopping around for the best terms and rates. There are online lenders, too. Take advantage of pre-qualification offers so you can compare options from different lenders via soft-credit inquiries, letting you avoid a hard hit to your credit until you're ready to sign for the loan.