If you’re shopping for a car loan, one fact immediately becomes clear; if you’re buying a used car, you’re going to be paying a higher interest rate. In fact, in some cases, the interest rate can be so high that, long term, it’s actually cheaper to buy a new car! Nor is that the only difference; here’s what you need to know about finding used car financing.
Interest Rates Are Higher
This is the key difference, and it can be pretty shocking, depending on a number of factors. Sometimes you’ll see differences as high as five percent or more. But why are these rates so high in the first place?
There are a number of reasons for that. The most basic is simply credit scores; if you have less than perfect credit, you’re going to have a higher interest rate in the first place, and the used car interest rates will simply add to that. This creates a perception among lenders that used car loans are more likely to default, which is false, but an impression that’s turned out to be surprisingly hard to shake. Another factor? Lenders attached to an automaker, such as Ford Credit, want you to buy new cars for obvious reasons, so interest rates from those lenders tend to be slightly inflated when it comes to used cars.
The Model You Want Matters
Another factor is that, simply, used cars are worth less, and banks have to think in terms of the worst case scenario. If you default on your loan, they’ll repossess the car … and may find themselves stuck with a junker they have to take a loss on. Not helping matters is the belief, not necessarily backed up by data, that used car sales are more likely to end in a default.
As a result, you may find that if you’re looking to buy an older car that will see a lot of use, you’ll be quoted higher rates than you would be for a late-model minivan you plan to use on the weekends. In general, you should look for late-model cars in the first place, but keep this in mind as a factor.
You Can Borrow Less And Get A Better Deal
Despite what may sounds like quite a bit of difficulty getting a used car, one thing you do need to keep in mind is that you can find a good deal on a used car loan. First of all, alternative lenders are available to help you find a better loan at a price you’ll like. Especially in the used car market, that can be useful.
Secondly, if you want to borrow less, used cars may still be a better deal. Remember to do all the math with any loan; for example, if a loan for a used car has a higher interest rate than a new one, but the new car will require you to borrow more and pay off the loan over a longer term, the used car will likely turn out to be the better deal.
In short, buying a used car has been made a bit more difficult, even deliberately to some degree. But that doesn’t mean it isn’t worth looking into.