New Car Applications Are A Better Risk To Lenders.
Lenders, particularly banks advertise car loans with low interest rates. You don’t often see low interest rates advertised for used car loans. One reason is that used cars will retain their value longer, especially over the loan term; typically 5 years.
Another reason is that new cars are kept in better condition by their owners. People buying new cars are more likely to keep them clean, service them, keep them protected undercover when it rains and take more steps to keep them secure.
Lenders know through experience that used car buyers do not treat their used car with the same care. If a used car gets a few scratches or dents, they are generally not fixed. The older the car, the less attention the car gets too. Used cars older than 10 years are typically not looked after by their owners. Young first time drivers buy older used cars because they are cheaper but don’t spend the time looking after it for long; after perhaps the first month the novelty of keeping the car clean has worn off.
Statistically new cars cost more. The average car loan amount for new cars is higher than used cars by about $15,000. Lenders can make as much money charging a smaller interest rate on a larger amount compared to charging a higher interest rate on a smaller loan amount but with a greatly reduced risk to them because they have higher security.
Lending Criteria Matrix
When looking at the lending criteria used by lenders to assess whether to approve a secured car loan application, this is the comparison of a typical loan applicant for a new car compared to an applicant for a used car.
| Criteria | New Car Applicant | Used Car Applicant |
|---|---|---|
| Capital | New car buyers are more likely to be asset backed, with equity in a home and savings in the bank. | Used car buyers are often renting with little to no savings. |
| Capacity | People buying new cars generally have higher paying jobs and a surplus after paying their weekly commitments. | People buying used cars don’t often have a surplus after meeting their weekly commitments. |
| Credit | There is generally an established good credit history with no defaults associated with new car applicants. | Used car applicants have a higher rate of defaults and poor credit history. |
| Collateral | The new car ‘books’ well. There is greater security. | Used cars don’t often ‘book’ well. Less security for the lender. |
| Character | New car applicants generally have 1 address and 1 job for the past 5 years | Used car applicants are more transient, with several places of residence and employment in a 5 year period. |
Remember lenders look at the applicant more than what the loan is for. The greater the risk to a lender, the higher the interest rate will be.
An application for a used car by someone that is strong in all the criteria will be offered the lowest interest rate compared to someone that does not score as high.
Using Houston Finance saves you time and helps to protect your credit rating because we have a good understanding of what each lender’s lending criteria is, so can direct your application to the ‘lender of best fit’, increasing your chances of a car loan approval with a lower interest rate.