Why Are Used Auto Loan Rates Higher than New Ones

If you've been trying to decide between whether to buy a new car or a used car, you may have discovered that used auto loan rates are somewhat higher than loan rates for new cars. You may also be wondering why this is the case. There is no single clear-cut reason for the difference in interest rates between used cars and new cars. Rather, there are several fairly complex reasons for the differences.

Possibly the most obvious reason for used car loans having a higher interest rate than loans for new cars, is the potential risk to the bank in financing a used car. Let's face it, used cars break down and fail more often than brand-new cars. This may seem like an oversimplification of the issue, but it is accurate.

When a person purchases a car or truck, whether new or used, they do so with the expectation they will be able to use the vehicle for however long as they might need or require. But as we all know, used vehicles don't always function or work as we expect them to and sometimes can be very expensive to fix or repair. With that being said, banks know that people are less likely to make payments on a vehicle that is broken and cannot be driven. So, this creates added risk and exposure to potential loss, for the bank.

For this very reason, most banks not only charge a higher interest rate on used car loans-they also limit terms for loans on used cars or trucks. While you can get a new car loan with a term as long as 84 months, the majority of used car loans have a maximum term of 48 months. Again, this is because of the fact that used cars break down more often than new cars.

When determining interest rates for loans, most banks weigh the profit potential for the actual amount of money lent out versus the amount of collectible interest. After all, banks are in business to earn a profit. In fact, 10 or 15 years ago it was very difficult to get a used car loan with a term longer than 24 months; however, banks have become a lot more lenient in that regard.

Since both customers and banks have a lot more faith in the dependability of brand-new vehicles, many banks offer much longer financing terms for new vehicles. Many times new cars and trucks are financed for terms of 6 or 7 years. Because of the relatively long term lengths of the loans, banks can afford to offer lower interest rates and still earn a healthy and sustainable profit. Furthermore, there is less chance that a customer will default on their obligation to the bank. In short, new car loans are usually a more reliable and profitable investment for most banks.

Of course, there are other less significant reasons for the differences in rates between used cars and new cars. But, we have covered the major reasons for the disparity between the interest rates.