Why are New Car Loans Easier Than Used Ones
Arranging a new car loan is easier than financing the purchase of a used car because there is a more concrete valuation on a new car versus an old car. Car financing is always arranged based on the value of the vehicle you are purchasing. The lender will hold the title to the car until the loan is paid off, essentially using the car itself as collateral. If the lender cannot determine the actual cash value of the vehicle, it is very difficult for that lender to mitigate the risk of the loan.
Determining the Value of the Vehicle
There are a number of ways a dealer or lender determines the value of a used car. First, they must consider the vehicle's condition and history. These factors are used in conjunction with the market valuation for a car of its exact make, model and year. This valuation is traditionally determined one of two sources: the Kelly Blue Book and the National Auto Dealers Association. The KBB is a consumer pricing index that estimates the value of many consumer good across industries. Dealers often prefer to use the NADA value. This value is determined by what the car is actually selling for at current auctions in the past few weeks or months. These factors are never certain, and the two may vary tremendously. Sticker tags of a new car at a dealer, however, are much more certain.
A second reason why loans are easier to get for new cars is the option for financing straight from the dealer. Organizations such as the Nissan Motor Acceptance Corporation or General Motors Acceptance Corporation extend fixed-rate loans for those who purchase their vehicles. You can arrange financing directly at the dealer you are using for your purchase. Trade-in values on your old car will be applied to your financing. The dealer may offer incentives on the loan, such as a reduced interest rate, if you purchase the car from them. You should be wary of some downsides of dealership loans, however. While their interest rates are competitive, they often have a number of high fees or penalties if you choose to pay off the loan early, refinance or consolidate. You may not plan on modifying the loan at the time you purchase the car, but circumstances do change. You may want the option in the future.
Alternatives to Dealer Financing
Never accept a dealership's loan offer without shopping around for alternatives. You may find the dealer is giving you the best new car loan rate, but you must consider all of the factors involved. Look at monthly payments, whether the rate will adjust, penalties and fees and the total length of the loan. The auto loan rate is just a portion of the picture over all. Banks and dedicated lenders work with both new and used car loans, but you will likely find it easier to secure financing on a new car. Calculate the expense of various options over time before making a decision on which contract to sign.