That you can save money by purchasing a used car is an irrefutable truth. However, there are situations in which buying a new car means you’ll spend less money each month.
This happens because interest rates for used car loans are higher than those for new cars. So, while the purchase price might be less, you’ll pay more to borrow the money to get a used car.
And yes, we do get it — that sounds odd.
So, here’s why it costs more to finance a used car.
Too Many Unknowns
A finance company can easily calculate the depreciation on a new car based upon historical evidence. This is a critical consideration when it comes to writing loans because the vehicle secures them. The more a car is worth, the less the lender’s potential loss will be should they ever have to repossess it.
Used cars, on the other hand, have been through one or more owners and there’s no way to really predict the soundness of their condition, which is a key aspect of the value of the car. There is also the possibility of unreported accidents, which could further diminish the value of the used car.
With so many elements left to chance, finance companies try to buffer the risk by charging more for the loan. That way, they’ll recoup their investments faster and potentially have more of their money back in hand if things go belly up.
Carmakers are in the business of selling new cars, which means it’s in their interests to do everything possible to help you buy a car. Fairly early on, they realized they could move more metal if they agreed to float buyers loans to make the cars easier to purchase. To that end, they formed subsidiaries to provide loans, which also gave them another revenue stream.
Because they stand to make so much money on the deal — after all, they’re selling you the car at a profit and loaning you the money to buy it, also at a profit — they can afford to be more forgiving in terms of the interest they charge on those loans.
This positions them to make buying a new car more attractive, even though it costs more.
Used Car Buyers Tend to Have More Financial Problems
One of the quirky aspects of life is those who can afford to pay the most are generally required to pay the least, while those who can barely afford to pay are usually called upon to pay the most.
If you’ve had credit problems, odds are it’s because your cash flow is slow. This, in turn, signals to creditors you’re likely to be more of a risk. To ensure their profit in the event of a default, they charge you more for doing business.
And yeah, we do get how backwards that is.
If you want to make sure somebody pays you back when you grant a loan, it would seem to make more sense to ensure paying you back is as affordable as possible.
But, we digress.
Bottom line: Because many used car buyers have lower credit scores, the interest rates they face are usually higher.
Lower Resale Value
If you buy a new car and the lender has to repossess it after two years, it’s taking back a two-year-old car. If you buy a two-year-old used car and the lender has to repossess it after two years, that’s a four-year-old car. It’ll be worth less, so they’ll charge more to finance it to offset the potential loss.
That’s one more reason why it costs more to finance a used car.