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Why does the loan for older used cars have higher interest rate?

teetee1 1,973 918 October 6, 2015 at 08:10 AM in Autos (2)

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Last Edited by teetee1 October 6, 2015 at 08:13 AM
I understand that the longer loan period means higher interest rate since the lender waits longer for the full amount to be returned and needs compensation for the wait. This post is not about this.

I noticed that with the same loan period, some lenders charge higher interest rate for the loan for the older used cars. For example, the 2014 used car loan has interest rate of 1.99%. For used cars made in 2010, the interest rate is increased to 3.09%. Both loans are for 66mo period.

What's the reason for this increase from banker's perspective? If they take the depreciation value of the used car into consideration, the depreciation curve should give the opposite result, meaning that they should charge higher interest rate for newer used car than the older used car.

Or the interest rates difference is the means that they want used car consumers to get newer used cars? But why?



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Joined Aug 2008
L99: Slicker than Ice
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New cars have rates subsidized by the manufactures who make money on new car sales, not so much on old car sales - also, new cars will still be under warranty in case the person doesn't pay and the car breaks, whereas if the person doesn't pay and they repo the old car, lost of issues that could arise - thus it's safer for them, so they charge less - more risk for them on the old cars, so they charge more
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Yup. They have actuaries that run risk probabilities. Older cars are less reliable (and hence a greater chance people will not pay off the loan if something major breaks). The people that buy older cars tend to be less financially secure as well. More risk to the lender means higher rates.
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Joined Jan 2004
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Ding ding, you have your answer Thumbsup
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I can't answer the question as to why things are the way they are (what the other posters have said may be accurate), but do some shopping around with credit unions. We just bought a 2007 and got our loan through a credit union near us which is offering rates of 1.74% for up to 36 months on cars as old as 10 years old.
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Joined Nov 2005
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Risk risk risk. Even third parties (like PFCU) will have higher "used" rates. For "new" - the check is going to a dealer that certifies the car is new and the value is reliable (it's a brand new car afterall...); for "used" , value varies wildly based on condition (tough to actuarialize) so to mitigate the risk, the interest rate is higher.
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