Why Are Used Car Loan Interest Rates Higher Than New Car Rates?
Have you noticed that used car loan interest rates are usually higher than the rates on a new car? You’re not alone if you have.
Why is this? We find out.
>>In short: because most used car loans are considered higher risk.
Lenders (eg. banks) are less likely to approve a loan based on risky conditions.
This is because lenders consider these kinds of loans likely to get repaid late or not at all which causes them huge problems. Therefore, 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 higher risk for several reasons.
Used cars have less value to the lender
In the event that a borrower can’t or won’t repay the loan, lenders might need to resort to repossessing the vehicle and selling it to cover their losses.
Although this is extremely rare, it’s still something lenders have to factor in.
This is dependent on the type of vehicle too.
Note that repossessing cars is the last thing lenders want to do and only happens when all other avenues are exhausted. Remember, lenders are businesses and want customers and want to provide good customer service. If you ever experience concerns about loan repayments, contact your lender immediately.
Used car loans usually have shorter terms
The longer a loan term is, the more a borrower will pay in interest - that’s in terms of dollars. Ie; the longer you hold someone else’s money, the more you’ll have to pay to do so.
With a shorter loan term for used cars, you will pay less overall for your vehicle. This is why used car loan interest rates are often a little higher.
Used car borrowers tend to have low credit scores
Lenders, like insurance companies, base their prices (rates and fees) on statistics that are constantly under review and constantly monitored.
Although quite general, used car loan applicants commonly have lower credit scores than new car buyers which makes them higher risk borrowers.
Your credit score determines your ability to repay a loan in the future so is critical in determining interest rates.
Also, borrowers with high credit scores tend to go for new cars with much lower risk of repossession. This lower risk of repossession translates into lower interest rates.
Note that this is only a generalisation and may not be applicable to your situation.
HINT: if you’re not sure of your credit score or credit report, get a free credit check. Simply viewing a credit report won’t affect it and knowing the details is hugely helpful when applying for credit.
Used cars are hard to appraise
Unlike new cars that have straightforward depreciation, the value of used cars can be tricky to calculate.
Age aside, they may also have mechanical problems, cosmetic issues like paint problems and unreported accidents. All these need to be factored in when assessing their monetary value.
In other words, with a new car from the factory, lenders can rest assured of the vehicle’s condition but with used cars, they can’t.
Used cars are hard to sell
Often, used cars that are repossessed are difficult to sell at a good price because of mileage and condition issues - the older the used vehicles are, the less chance of them being sold.
A “good price” for a lender means getting enough money back from the sale of the vehicle to cover their costs. These costs can include:
- Paying someone to locate and pick up the vehicle
- Paying someone to sell the vehicle
- Losses from any outstanding money that the borrower didn’t pay back
- Any damage that the vehicle may have sustained
- Covering staff costs from organising the loan in the first place
In some situations, 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 used car loan interest rates. This way, they'll have the extra money in case the repossessed vehicle is not sold.
Lenders want borrowers to get new cars
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.
When shopping for used car loans, it's important to read car pricing guides and check the history of the vehicle you're eyeing before making a decision. The price of that used car you want may be attractive, but are all the other factors the best they can be for you and your circumstances?
The solution to used car loan interest rates
Talk. To. Experts.
Some people focus too much on the vehicle they (might) be getting and miss other crucial information which can unfortunately lead to missed repayments, defaults and ultimately trouble getting credit in the future.
Other mistakes include getting finance as a lone wolf meaning shopping for loans by applying to multiple lenders like banks. Each time you formally apply for a loan, it’s recorded on your credit report and typically knocks down your credit score - approved or not.
Talk to the Positive team.
We help hundreds of Australians find the right path to the right loan products matching their situation - without damaging credit reports.
How? Through years of research, expertise and experience that can work for you too.
Get started with a quick quote today.