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When you are looking at loan rates for used cars, you might become confused at all the numbers and options. At Phil Long Dealerships, we want you to understand how used car loans work and how to maximize your savings. We've put together a quick guide explaining used car loan rates and what you need to know.

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Are Interest Rates Higher on Used Cars?

Yes and no. Yes, on average interest rates are higher for used cars; No, interest rates on used cars are not always higher than new car interest rates. There are several reasons that the loan rates for used cars can be higher than loan rates on new cars. The first reason is due to the resale value. On a new vehicle, resale value is easier to predict, so the bank knows what they will receive in return on interest or on repossession. 

Furthermore, lenders want you to buy a new car, so they lower the interest rate as an incentive to buy new. The third reason is due to credit scores. Most of the time, people with good credit tend to purchase new cars, while people with lower credit scores opt to buy used instead. New car interest rates are not always lower than used car interest rates. In some cases where credit score plays a heavy role in your interest rate, you could see a higher interest rate on a new car versus a used car if you didn't qualify for certain incentives or new car financing bonuses that would normally lower your interest rate because your credit score wasn't high enough.

Used Car Loan Rates vs. New Car Loan Rates

When you are looking at loan rates for used cars, it's helpful to compare them against new car rates. With new-car financing, you can pay as little as 0% APR for a certain number of months at the beginning of the loan with manufacturer incentives and the help of banks. With this help, you will see new car loan rates at lower interest than those offered in used car auto loans. Used-car funding, on the other hand, doesn't come with these incentives. Currently, the U.S. national average auto loan interest rates for new cars sit around 4.7 percent while the average interest rates on used cars sit at about 5.35 percent.

Auto Loan Interest Rate Factors

The interest rates on auto loans vary person to person by a set of determinant factors. The factors that affect the interest rates on used cars and new cars include:

  1. Credit Score - The higher your FICO credit score, the lower the interest rate you can expect to receive on your auto loan.
  2. Amount Financed - The more liability or risk a bank, lender, or dealership has to assess affects your interest rates. 
  3. Trade-In - The value of a trade-in lowers the amount you need to finance thus affecting your overall interest rate.
  4. Deposit - Similar to the trade-in factor, you can lower the amount of money that needs to be financed by putting money down which also reduces financial liability.
  5. Auto Loan Term Length - Even though longer terms typically offer up lower monthly payments, longer loan terms increase the liability the bank or lender faces.
  6. Vehicle Age - If the car breaks down, the bank might not get paid. This increases liability affecting your interest rates. 
  7. Dealer In-House Financing vs Banks (Outside Lenders) - Most dealerships don't, or can't, offer the same interest rates as a local bank or credit union. However, dealerships may offer certain incentives that outside lenders can't.

What is a Good Interest Rate for a Used Car?

As you evaluate the loan rates for used cars, you will find a wide variety being offered, based on the above factors. Generally speaking, a good interest rate right now would be under 4.21% on 60-month (5-yr) loans.

Used Car Loan Rates by Credit Score: Why Higher Scores Help Rates

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Out-of-Pocket Cost per FICO Score

Higher credit scores help you get lower interest rates, which helps you save money, because there is less financial liability and risk for a lender to loan you money. Banks want to make sure they get a good return on their investment, credit scores help them determine if they are taking a risk loaning you money. With a high credit score, there is essentially no risk so lenders are comfortable with lower interest rates because they are confident they will make their money back. More risk means higher interest rates. Let's evaluate what would happen to a used car loan based on multiple credit score ranges. For this comparison of loan rates for used cars, we will use a $10,000 used car.

Auto Loan Rates for Used Cars by Credit Score

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