Are Loan Rates Higher For Used Cars?

Are you in the market for a new vehicle in Olathe? If you live near Kansas City, Lenexa, Lawrence, Shawnee, or Overland Park, Olathe Kia is a top choice for a new car. A used car dealership in Olathe is also one of the best places to pick up a bargain, as you’ll be paying less for your vehicle while getting almost all of the features of this year’s model.

When you check for a ‘used car dealership near me’, you’ll likely come up with a few options around Olathe and Kansas City. Even when purchasing a used car, most people don’t have the money to purchase the vehicle outright. Instead, they use a car loan to cover the cost of the vehicle and make repayments over a number of months or years until the loan is repaid.

When you repay a car auto loan, you’re not just paying the price of the vehicle. You also have to pay additional interest on top of the price. The higher the interest rate of the loan, the higher the percentage of additional interest you need to pay.

What Affects the Amount of Interest I’ll Pay?

2020 kia soul A number of things affect the interest rate and the total amount of interest you will pay. Of course, the amount that you borrow will be the main determining factor. If you are able to pay more of a down payment upfront, the size of the loan will be smaller, so you won’t need to pay so much back and there will be less interest.

Your credit rating can affect the interest rate you pay. If you have a good credit rating, the bank or lending organization will consider you a low risk and are therefore able to offer more competitive interest rates. If you don’t have a long credit history or your credit rating is relatively poor, you’ll be offered higher interest rates that cover the additional risk of lending to you.

Another thing that affects how much interest you pay is how long it takes you to pay back the loan. Because the interest you pay ‘compounds’, it stacks up to make a longer repayment period much more expensive than a shorter one. Whenever possible, you should choose a shorter repayment period that you’ll definitely be able to make the payments on monthly.

Are the Loan Interest Rates on Pre-Owned Vehicles Higher Than New Cars?

Although a bit counterintuitive, loan interest rates are indeed usually higher for used models than new models. Why is this? Terms for used vehicles are usually shorter, so lenders don’t make as much money on them. To compensate, they increase interest rates.

Used car interest rates can also include the costs of sourcing, purchasing, cleaning, marketing, and selling the vehicle. New models don’t have this overhead as they’re delivered spanking new to the dealership.

Should I Buy New or Used?

Despite interest rates often being slightly higher for a pre-owned car, in almost all cases it makes financial sense to buy a used vehicle. There is a big difference in prices between a new vehicle and one that is a mere one or two years old. After three years, a car can lose up to 60% of its value.

This depreciation is the biggest cost of ownership of a vehicle, particularly if you buy new. After the first 5 years or so, the depreciation rate slows a lot, so you’re more protected from the loss of value year-on-year.

Others will say that there are benefits to buying new, and there certainly are. With a new vehicle, you’ll get a long manufacturer warranty so you have extra peace of mind. You’ll get the very latest technology in the vehicle, and the most up-to-date styling. If this year’s model is a complete all-new refresh, the car can be markedly different from last year’s model and previous models. It’s also possible you can save some money simply because of the better efficiency of new cars, but the difference in efficiency between this year’s model and last year’s model won’t be massive.

All of these things are true, but from a financial perspective, that new car smell is an unwarranted expensive. Consider a used car if you’re looking for the best value.

How Can I Lower the Interest I Pay?

Most car loans allow you to pay them off early, which is the number one way to ensure you don’t accumulate any more interest. Even if you can’t pay off the entire loan in one go, paying off a part of the loan will reduce the amount left that can have interest applied to it.

You may have to pay a fee for paying off a loan early. It pays to check these details BEFORE you take out the loan and choose a more flexible loan option if it’s on the table.

Another way to get lower interest is to shop around or let the used car dealership do it for you. When the used car dealership has a dedicated financing department, they’re able to check with multiple banks and lenders at the same time to find the best loan options for you. Performing this yourself can be laborious as you typically need to go to the banks in person to fill out forms and prove you are able to repay the loan.

Even if you do have an offer from your own bank, there’s no harm in seeing the offer the used car dealership can find for you. If it’s not better, you can stick with your bank’s loan offer.

For future purchases, you can try and improve your credit score by making a plan to improve it. Making all of your payments on time goes a long way to improve your credit score, so the next time you come to buy a vehicle with an auto loan you should be offered a better interest rate and ultimately pay less interest. You’ll also have your current vehicle to trade-in, so the amount you’ll need to borrow should be less.