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Why Are Interest Rates Higher On Used Cars?

Person putting a sale sign on a used car

If you’ve been looking for a car loan, maybe you've noticed that interest rates are usually higher on used cars than they are on new cars. Here are a few reasons that used cars have higher interest rates.

New Cars Are Worth More

New cars are often much more expensive than used cars. This means a larger loan amount that is more profitable for lenders, so they don’t have to charge as much interest.

Also, people buying new cars generally have good credit. This doesn’t apply to everyone, of course. But better credit results in better car loan rates.

One last point that’s painfully obvious if you’ve ever traded in a vehicle – a car’s value goes down with every year that passes. Used cars are worth less, which causes interest rates for a used car loan to be higher.

Used Cars Come With Risks

Used cars have an uncertain value. Cars can be more or less popular on the used market, and that popularity can affect their value. Higher used car loan rates help protect lenders against a drop in your vehicle’s value.

Older cars can be less reliable. Used cars aren’t under warranty anymore, and repairs can be expensive. Higher used car loan rates help offset the risk if your used car bites the dust.

Many lenders choose not to offer their longest loan terms, such as 84 months or more, on their used car loans. Those longest repayment times are reserved for new vehicles that are more likely to last 7 years, compared to a used vehicle that might not make it that long!

New Vs. Used Car Loan Rates At Royal Credit Union

So where do we draw the line between new and used? Here at Royal Credit Union, it’s based on model year. Vehicles with a model year within the last 4 years generally get lower interest rates, while older used vehicles have a little higher interest rates.

Note that it’s still possible to get the lowest car loan rate on an older used vehicle if the term of the loan is short enough. Royal offers your choice of loan terms for the flexibility to fit your budget. See Royal’s car loan rates here. It’s also important to know that all loan interest rates are based on creditworthiness, and we show the lowest possible rates based on excellent credit.

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