Why Used Car Loans are Higher than New Car Loans?

Buying a certified used car from a car dealership is usually a great buy for many people. They cost less and the buyer does not have to deal with the car depreciating when you drive it off the lot. However, used car loans are another story. They generally come at a much higher interest rate than new car loans do.

Why?

Used car loans are generally for a much shorter period of time than a new car loan and you generally borrow less. Car dealerships do not make their money from selling cars, they make money through the financing. So in order for the lender to make it worth their time to lend you money, they will usually charge a higher interest rate.

However, don’t fret… just because a used car loan has a higher rate of interest does not mean you can’t shop around. Most interest rates for used car loans are based upon these five things listed below:

Down Payment or Deposit- You can get a lower interest rate if you put at least 10% down on the purchase.

The length of your loan. Interest rates will vary greatly here and can vary by as much as two percentage points within any one lending organization.

How much money you need to borrow.

Your credit score- If your credit score is the 700-750 range you should be able to command a lower interest rate, especially if you go to an outside lender.

The lender’s typical rates.

In addition, many used car loans come with fees, like application fees and filing fees. These fees can be as little as a few dollars to as much as a few hundred. They can also come with a credit if you enable them to automatically deduct your monthly payment from your bank account. (Try to negotiate with the deal on these fees because 9 out of 10 times they will give you a discount or waive the fee altogether.)

Doing Your Homeworkusedcar

Just like new car loans, do a bit of research before you go out shopping for your car. Determine your budget for your car using a loan calculator and an estimated interest rate. Don’t forget to include your down payment.

Once you know about what you can afford, you can then go about researching your options. Oftentimes your local bank or credit union will offer the best used car loan rates. If you have bad credit, there are a number of options available now, take your time and read the fine print. Bad credit loans can come with extremely high fees and interest rates. Just because your monthly payment is low, doesn’t mean you’re paying a good rate. If you’re paying $100 a month for 60 months, that’s a lot more than paying $150 a month for 36 month.

In general, dealerships generally offer the worst financing options simply because they are the go-between between you and the bank, which often results in a higher interest rate to cover their costs.

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