Why are Used Cars Considered Higher Risk for Car Loans?
Are you in the market for used car loans and wondering why they have a higher interest rate than new vehicle financing? It's usually because most used car loans are considered high risk.
A high-risk loan is a financing that lenders considered risky to grant. It is likely to get repaid late or not at all. Thus, lenders charge a high interest rate and less flexible terms to compensate for the risk. In general, the older the car is, the higher the interest rate is.
Used car loans are typically high risked for several reasons.
1. Used cars have less value to the lender.
Unlike new cars that depreciate the moment you drive them off the lot, used vehicles have already depreciated. Thus, it will costs you less to purchase. To make the loan worthwhile, the lender will charge you with high interest.
Also, used cars don't come with better incentives, leaving dealers without any room to offer better terms.
2. Used car loans usually have shorter terms.
The longer term you have for a car loan, the more you’ll pay in interest.
With a shorter loan term for used cars, you will pay less overall for your vehicle. Thus, lenders raise the interest rate to make more money.
3. Used car borrowers tend to have low credit scores.
Most used car applicants have poor credit scores, which makes them high-risk borrowers. To make up for the inherent risk of granting them money, lenders set their interest rates higher.
Also, borrowers with high credit scores tend to go for new cars with much lower risk or repossession. This lower risk of repossession translates into lower interest rates.
4. Used cars are hard to appraise.
Unlike new cars that have straightforward depreciation, the value of used cars are tricky to calculate. Age aside, they may also have mechanical problems, safety issues and unreported accidents. All these need to be factored in when assessing their monetary value.
5. Used cars are hard to sell.
Used cars that are repossessed are difficult to sell because they have low resale value. The older the second-hand vehicles are, the less chance of them being sold. Thus, lenders may not be able to recoup the money they lost from the defaulted used car loan.
To compensate for the uncertainty, the lenders increase the interest rates of used cars. This way, they'll have the extra money in case the repossessed vehicles are not sold.
6. Lenders want you to get new cars.
Used cars don't come with low interest rates so that borrowers like you would prefer the latest models. A lot of automakers are in the business of financing new cars. They offer reduced interest rates and incentives to help buyers afford new models, enabling them to achieve their sales volume goals.
Dealers, who serve as middlemen, also get a commission from selling new cars and profit from new car sales through dealer holdbacks.
When shopping for used car loans, it's important to read car pricing guides and check the history of the second-hand vehicle you're eyeing before sealing the deal. The price of that used car you want may be attractive, but the high interest rate and unfavourable loans terms may leave you paying more in the long run.
A Smart Alternative
You can use a Personal Loan to buy a used car. As a general purpose instalment loan, the money you get from this type of financing is intended for any purpose. The processing time is also fast and you can get approved and receive the fund in just a matter of days.
Positive Lending Solutions offers Personal Finance to help you purchase a used car or for any other personal reasons. Call us on 1300 722 210 or fill out the Quick Quote form to kickstart your application and get the money you need fast!