Why used Car Loan interest rates are Higher than New Car Loan?

Used Car Loan Interest Rate

Every loan is risky. You may never know if your money will be ever returned. When we talk about used car loans, the risk becomes fourfold. First, the car is already used which means that their value is depreciated. Second, most of them might have faced some or the other mechanical issue which might have got repaired. The chances of that issue resurfacing will therefore be always there. Complications are more which is why used car loan interest rates are higher than new car loan.

New cars have many advantages. First, their end price is easy to determine since the product is new. Second, there is no issue of damage and repair hence product quality assurance is more than used cars. Third, the costs associated with handling new cars are less than used cars hence new car business is more profitable. All the above reasons makes new car loans cheaper and easier to obtain.

Potential risks associated with used cars:

1. Frequent breakdowns: This happens either because of the inferior quality of car mechanics or the first owner failed to maintain the car with regular servicing. In either case, the car depreciation turns out to be lot more.
2. Phased out car: A particular car model might be shelved off the market either due to failure to attract enough customers or inferior quality or some other reasons.
3. Legal issues: The car might not be registered with the transport authorities which make it illegal. This attracts problems in future.
4. Resale value prediction difficulties: For a new car, it’s easier to predict the depreciation and hence the tentative resale value the car might offer in case the customer fails to pay the loan and the lender goes to sell it to recover his costs. However, for a used car, the car is already depreciated and hence further prediction becomes an issue which makes it difficult to the tackle the situation mentioned above.
5. Overhead expenses: A dealer has to spend considerably on paints, body and internal damage repairs, testing of mechanical problems, interiors redesigning to make the car look attractive. This gets added in the final costs.
6. Age: Several cars are more than four years old. This itself acts a threat since older the car, more it might have been used and hence greater the wear and tear hence greater insurance expenses.
7. Higher insurance expenses: This burns deeper holes in the pockets of the dealer till the time buyer takes the car. The dealer needs to cover all these costs.

Based on the above points, it is clear that the potential risks associated with the used cars are far more than with the new cars. The dealer needs to earn a living out of his business by earning a margin after accounting for all the above risks. The costs ultimately need to be passed on to the end users. Hence, used car loans are disbursed at higher interest rates then new car loans and with more difficulty. In the end, both, the user and seller are in deepwaters as far as money goes.