Used car finance is very similar to new car finance with a couple of exceptions: you usually can’t lease a used car and the terms of the loan can vary with year and mileage of the vehicle in addition to your credit score. Let me explain:
When you purchase a new car, the lender looks at your credit history and your credit score. Then, based upon an analysis of this information, the lender will issue an approval that lists the interest rate tier that you qualify for. This tier will qualify you for a sliding rate scale – usually the shorter the loan term, the lower the interest rate. As an example, if you qualify for the “A” tier at Lender A, this could mean that the 24 month interest rate is 5.5%, the 36 month rate is 6.2%, and the 48 month rate is 6.7% and so on – you get the picture.
Used car finance has its similarities. The bank issues an approval and qualifies you for a tier. The longer the loan term, the higher the interest rate charged. It’s here, however, that the similarities end for most lenders. In addition to the tiered rate system, the bank also issues a separate tier for each vehicle year beginning with the current “new” year. If a new car is, say, a 2008, the used car finance vehicle tier system starts at 2008 and moves backwards. For each year older than the current vehicle, a new tier is set up. There will be a separate tier for 1-year-old used cars, 2-year-old used cars and 3-year-old used cars and so on.
This means that if the used car is a 2006 model year vehicle, it will find itself in the third tier. As you might expect, as the tiers age, the interest rates rise. This means that a 2006 model with a 48 month loan term will have a lower used car finance rate than a 2004 model with a 48 month loan term.
It’s time to take a deep breath because we’re almost finished. There is one other thing that banks consider in a used car finance loan and that’s the mileage of the car. The banks set certain mileage parameters for a car based on the model year. Newer model years have a lower mileage limit while older vehicles have higher mileage limits, based upon how old they are compared to the current model year. As the model years age, the mileage limits increase. If a vehicle exceeds the limit, the bank can either refuse to make the loan, adjust the interest rate upward, or reduce the loan term. The opposite is true if the vehicle has particularly low miles: the bank may either extend the term (usually) or reduce the interest rate (not often).
That, in a nutshell, is the used car finance rate system.
Tags: Car Credit