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Why are Interest Rates Higher for Used Cars?

You may have noticed that interest rates for used vehicles are significantly more expensive than those for new ones. Why is that? Basically, it’s because lenders consider pre-owned vehicles a higher risk. And, as you know, higher risk means higher APR.

The Impact of Repairs and Maintenance on Your Budget

Most lenders do not consider a car that is less than 3 years old to be much more of a risk, but a car that is 10 years old is. The reasoning is simple:  older cars break down more often. Why is that important? The high cost of some repairs may strain your budget. That puts you at risk for being late on a payment or missing one altogether. If the repair is extensive and very expensive, some borrowers may chose to allow the vehicle be repossessed instead of making the repair.

Lender Restrictions on Age and Mileage

Lenders insulate themselves from these risks in two ways. One is to refuse to lend on a vehicle that has reached a certain age. For instance, many lenders have restrictions along these lines:

  • Vehicle Age:  no more than 7 years old
  • Vehicle Mileage:  no more than 100,000 miles

If you would like to purchase a vehicle that is significantly older than this, you may need to work with a specialty lender who finances these types of purchases. Go here to request financing for a used vehicle. We have countless dealers and lenders in our network who specialize in used vehicles.

Higher Risk Equals Higher Interest Rates

The other way lenders protect themselves is by charging a higher interest rate and only offering a shorter loan term. So, if you want a loan for a 3 year old car, you may, as an example, be offered (based on your credit) 7% interest and 4 years to repay. On the other hand, if you are looking to buy a 10 year old car with high mileage, you may have to pay 10% interest and only have 24 months to repay the loan. Generally, interest rates for new vehicles are 25-30% lower than those for used vehicles.  However, pre-owned vehicles are less expensive than their new counterparts, and lenders often have lower down payment requirements for them.

The Role of Captive Finance Companies

Most automakers have a captive finance company – a lender owned or directly associated with the manufacturer. In such cases, lower APR rates are often offered for new vehicles, simply because the manufacturer is more concerned with selling cars than making profit on the loan. An obvious form of this is 0% financing. Unfortunately, you must have truly stellar credit to qualify for such offers.

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About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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