Why Do Used Cars Have Higher Interest Rates?
If you've shopped for new and used cars lately, you've probably discovered that new cars are usually available with better interest rates than used models. That means it can sometimes be less expensive to buy a new car than a used one -- even if the new car's purchase price is higher. But have you ever wondered why new cars offer better rates? We've listed a few reasons.
One of the major reasons a new car has better rates than a used car is that a new car's resale value is easier to predict. Imagine you're the bank lending money; you might need to repossess the car someday. If it's a new car, you can easily estimate how much it will depreciate over time. That's harder to predict when the car is several years old, has thousands of miles on the odometer and could have mechanical issues, as well.
As a result, the lender makes up for the unknown by increasing the interest rate. That way, the bank makes extra money in case the buyer bails out, or if the car has mechanical issues or excessive mileage.
Lenders Want You to Buy New Cars
Another big reason new cars have lower interest rates is surprisingly simple: Lenders want you to buy new cars. Automakers (think Toyota Financial or Ford Credit) own many new-car lenders, which means they can provide incentives to help buyers afford new models. Those incentives often come in the form of reduced interest rates. That's not true on used cars, where the lenders are usually private banks, not automakers, meaning they don't have the same sales volume goals to reach.
Credit scores are another reason why new cars have lower rates than used ones. People with higher credit scores tend to go for new cars, while those with lower scores pick used ones. That isn't always the case, as we know that many people with high credit scores buy used cars. But generally it's true, which is why lenders tend to offer higher rates on used cars. After all, a lower risk of repossession means lower interest rates -- and the risk of repossession is much lower with new cars.