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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.

Resale Value

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

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.


Doug Demuro
Doug Demuro
Doug DeMuro writes articles and makes videos, mainly about cars. Doug was born in Denver, Colorado, and received an economics degree from Emory University in Atlanta. After graduation, Doug spent three years working for Porsche Cars North America. Eventually, he quit his job to become a writer, largely because it meant that he no longer had to wear pants. Doug’s work has been featured in a... Read More about Doug Demuro

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  1. Higher risk always means higher interest rates.  Another consideration risk-wise for a used car lender is the higher likelihood of abandonment, at least borrowers who can qualify but do not have excellent FICO  scores, say those under about 720, which includes a very large percentage of used car buyers.  With a new car, there’s always a warranty that will cover any costly repairs for quite a while.  With a used car, there often is not unless the borrower purchases one.  And if he does, the loan to value ratio changes because the loan will be higher, which itself increases risk.  And if someone buys a 4 or 5 year old car, and one or two years later something major goes wrong which he can’t (or doesn’t want to) pay for to get fixed, he’s more likely to abandon the car and the payments.  Few people want to make payments on a car they can’t use, so the lender has to repossess it, cannot ever recover the full balance of the debt, and after the car is auctioned off sells the remaider of the debt at a loss to some collection outfit.

  2. Nope, just bought a used Volvo. Lots find it hard to sell used cars…great, here I am, sell me! Negotiation is a little harder, but when a used car has a record and you know you can fix those details and get a lower price that is where the “fun” comes in. Also, if the used car is a trade on new purchase…CHA-CHING…a lot more wiggle room!

    • Interest rates and price are two different things. The article isn’t making the case that new cars are cheaper.

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