Used Car Loans Versus New Car Loans
Capital Car Loans writes consumer articles pertaining to the auto loan industry focused on helping customers to better understand auto loans and how they work.
Used Car Loans Versus New Car Loans [Car Loans]
February 11, 2010, 9:38 am
Ever wondered the difference between the loan you would get if you bought an old car as compared to a new one? Well, a used car loan differs from a new car loan in several aspects.
The major distinction between the two lies in the simple fact that new cars are more expensive than used cars. Ergo, loans given out by credit unions, banks, or even auto dealers themselves tend to be larger for new cars. The price of a used car is significantly lower so a smaller loan is extended to the prospective buyer.
However, because used cars pose a far higher risk to the institution offering the loan, the interest rates they charge on the principle amount is higher than the interest charged on new car loans.
The risk alluded to here when offering a used car loan is the lender's consideration that the car is already old and its value is likely to drop even more before the car buyer fully repays the lender. There exists a danger that the buyer will default on the repayment of the loan and therefore the lender covers such risk by increasing the interest rates.
Even the repayment period for the loan on a used car is always short because of this perceived risk. New car loans can have very lengthy repayment time; however long term loans are usually not advisable due to the overall increase in cost of the car.
Another difference between loans extended for new and those for old cars is that the interest rates of a used car loan differ with the age of each individual car. Logically, the older the car, the higher the rate. Furthermore, a used car that has passed a certain age may not even be eligible for a car loan. Usually lenders will not offer financing for cars above 10 years. The risk is too great. Then again, cars like that are usually cheaper and one can simply pay cash. New car loans seldom have such restrictions.
Often car dealerships can extend financing to a prospective buyer and when this is the case, a major difference will emerge between the loan for a new car and that for a used car. New car buyers can be offered the financing without a need for an initial down payment- a cash rebate sort of speak- that would be followed by subsequent monthly payments. However, loans for used cars can never be extended by the dealer without the need for an initial payment.
A used car loan is usually of a smaller amount, with higher interest rates, and shorter repayment period contrary to a new car loan.
