How a Recession Can Affect Used Car Loan Interest Rates

Used car loan rates are usually higher than new car loan rates, and they are especially high in a recession. A recession results in less liquidity, or access to cash, in the market. Whenever there is less cash in the loan market, loans are harder to come by. Lenders may still be issuing loans. There are some types of loans, though, that will be particularly hard to secure at a good interest rate. Used car loans are a good example of this.

Prices Drop on Trade In

One of the top factors in whether you can secure a loan at a good interest rate is the value of your down payment. Most people use a vehicle trade in for the bulk of their down payment, and many use it as their entire down payment. You may have expected your car would trade in at $7,000 to $10,000 in a good economy. When you are facing a recession, though, the price of high-end goods tends to fall. This means your car will be worth a smaller sum, maybe $5,000 to $7,000. This may reduce the size of your down payment by 5 to 10% of the total purchase price.

A smaller down payment means you will have to finance a larger amount. Your principal loan, therefore, will be much higher. Financing a larger amount often leads to a higher interest rate. Furthermore, lenders like to see you can provide a good down payment as a sign you are financially stable. Your interest rates will go up as your down payment goes down. 

Slow Market for Cars

During a recession, people stop making large purchases such as vehicle purchases. The auto market and the housing market are usually two industries that suffer greatly during a down economy. When you seek a car loan, one way to reduce your interest rate is to secure the loan against the car you are purchasing. This means the lender will hold onto the title of the car until the loan has been paid off in full. 

The lender likes to know they can trade in the car title and receive immediate cash if you default on the loan. When the car market is very slow, they are less certain of the value of your car and whether it can be sold at auction. Because the lender is therefore assuming more risk, they will charge you more for the loan in interest.

Less High Risk Loans Available

High risk loans are those loans extended to an individual with sub-par credit. Proportionally, more used car loans are high risk than new car loans. This is because those individuals with less stable finances typically have lower credit scores. They also are more likely to buy a used car for a lower price. 

A recession makes banks and lenders less likely to accept risk. They will not be apt to extend high risk loans, and you must have an excellent application to be approved. If you have bad credit, you will likely have to approach a high risk lender. These lenders specialize in risky loans, but they charge you a lot in interest rate as a result. 

 


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