If you’re in the market for a car, then it’s important to know whether your financial situation is conducive to getting a used car or a new one. That’s because there’s a marked difference between new and used car loan interest rates. You might be surprised to learn that used cars often have higher interest rates – but it will make sense after you read below.
It All Starts with the Credit Scores
Just ask yourself a general question: if you had a high credit score, what kind of car would you pursue – a new one or a used one? The reality of the situation is that people with subprime (low) credit scores tend to find it difficult to get new cars, since lenders don’t have favorable auto loan terms for them. Realistically, it would be a bad idea anyway to get a brand new, more costly car if you’re trying to build your credit score up.
Although there are exceptions – which is par for the course with nearly any rule, as you well know – auto lenders offer higher interest rates on used cars, because people with relatively poor credit get these cars. The higher rates are commensurate with the higher levels of risk they lenders are undertaking, since the chance of repossession is higher with subprime borrowers.
New Car Purchases Benefit Lenders More
This reason becomes immediately obvious once you realize that new cars come from automakers directly, whereas most used cars come from private resellers and banks. The giant automakers of course have deals with many auto lenders, which incentivizes them to pitch the new car over the used one to a prospective owner. Since quotas accompany these deals, the sales people are obviously trying to meet them, and this is reflected in the enticing lower interest rates.
New Cars Have Higher Future Value
This fact better allows the lender to hedge its bet. This is to say that, should the time come one day when they need to repossess the vehicle because of delinquencies or other reasons, they can estimate the value from the time since they sold it to you to the present day – far better than for a used car. Since interest rates are fundamentally all about shifting the risk to the buyer, by having higher interest rates on used cars, they’re pawning off the negative possibilities onto you.
Is There a Possibility of Vehicle Abandonment?
You might think this isn’t very realistic, but that’s thinking about it the wrong way. It’s about what’s more likely, and the answer is obvious – almost no one would ever abandon a new car, whereas a used car with a lot of mileage and mechanical problems might find a new home at the side of the road.
After all, new cars have warranties to aid in expensive repairs, whereas older used cars don’t – unless you bothered to purchase these separately. But if you could do that, why wouldn’t you just get a new car? As you can see, the rules governing interest rates on new and used cars come down to a numbers game, and denote what the majority of people would do.
In sum, then, always remember that all the stuff about interest rates, and their correlation with your credit history and preference for a new or used car, boils down to the amount of risk the lender is assuming, and their imperative to pass that risk off to you in the form of monthly payments.