Auto loan industry doesn't like used cars

[Travis]

I'm looking at buying a vehicle this summer and will mostly likely buy with cash (if with a dealer I'll see if I can get some credit card miles), but as a backup plan I looked into used auto loans (I might spend up to $9k and I have $7k set aside as of today).  I checked out USAA and if I were to buy a brand new vehicle they'd give me a 2% loan.  If I were to buy a 2007 or older that costs less than $15k the loan rate jumps to 7.75%.  Wells Fargo offers loans starting at 3.32% assuming your car will cost at least $22k.  My credit union offers 2.5% so the system isn't a complete joke,  but is this some financial conspiracy with the auto manufacturers or is there a logical reason they don't like used car loans?

[Syonyk]

Poor people buy used cars.

Poor people don't pay back loans as reliably.

And a used car is far less valuable an asset than a barely used car.

So interest rates are higher.

At least you're not playing in the "25% interest, get a few months payments out before they stop paying, repo it, sell again, repeat" market that exists...

[Retired To Win]

There's an interplay between car manufacturers and car lenders.  Car lending is subsidized in various ways by the manufacturers in order to promote sales.  That, of course, only applies to new cars.

[The_path_less_taken]

Hopefully you can just shop and get a better price.

I hope you have enough to just buy outright, unless you have Costco, and aren't that great at being a cutthroat negotiator: then use the Costco discount. Because you can use it on used cars but they have to be "Certified", which means they have an extended, in some cases 100k mile warranty.

BUT, if you've ever held your own and felt you got 'your' price in a back alley craft shop in Mexico...fight. Because you can sometimes beat the Costco price. It'll piss them off, but you could even do both:  at the end suddenly remember "oh yeah I forgot: I need to talk to the Costco rep". That way you'll know you're getting the best deal, as they're legally obligated to show you the Costco price.

As far as loans go...I know it's anti-MMM but with the new car rebates and the 0% financing, a new car versus a car with 60k miles on it sometimes end up being $300 off. Which makes the new car a better deal, better warranty, better trade in value, etc. (Carfax judges cars on how many owners, etc.)

So...bring your calculator and don't just 'believe' anything you're told in a dealership: make 'em show you.

That said...if you're even halfway savvy you'd be better off not going through a dealer.

Good luck!

[MoneyCat]

Even 2% interest is too much to pay for a car because it's a depreciating asset.  Just save up how much you need and buy it outright and save yourself some money.

[Syonyk]

Even 2% interest is too much to pay for a car because it's a depreciating asset.  Just save up how much you need and buy it outright and save yourself some money.

If you're going to go new, you can often times get a better price with a loan than paying cash.  Cash is not king, when loan companies offer dealerships significant kickbacks for originating loans with them.  Just make sure you don't have any prepayment penalties.  Then pay the car off in a month or something.

Though Lending Club is currently getting me radically better returns than 2%...

And right now, lightly used cars sell for almost as much as new cars, and heavily used cars tend to be money pits unless you do your own work.  In my experience.

I used to joke, "I don't make car payments.  I make parts payments." :/

[Travis]

I don't even really plan on getting a loan, it was more of a thought exercise.  I'm looking for a fuel efficient hatchback with some cargo room and I keep coming around to a Prius.  I've been looking on Craigslist for the last month and I haven't seen many on the personal-sale market.  The ones I do see either are out of my price point or too many miles for what I'm looking to pay.  There are a few more options on the dealership side, but that costs a little more and might have maintenance risks.

[captainawesome]

Poor people buy new cars everyday - it isnt just "wealthy." Truly wealthy people don't finance cars and don't ask about interest rates.  In fact I would say the mindset of car payments is what keeps most Americans behind the curve.


The math behind new and used cars - Taking out a loan at $15000 with a 4% interest rate over a 5 year period nets $1574.87 in interest. A $30000 loan at a 1.9% interest rate over 5 years nets $1471.29 in interest. So if a finance company isn't getting a kick back from the Car Manufacturer, of course they need to up the finance charges enough to make a profit and keep it similar to if they sold a brand new car.  Add to the fact that the used car market isn't what it once was, and while you can certainly find deals, cars are holding their values longer, which is driving car manufacturers to come up with ways to attract new buyers.

[Syonyk]

Cars are "holding value longer" because Cash for Clunkers destroyed about a generation's worth of cheap used cars...

[RexualChocolate]

The nominal interest rate is actually immaterial to this discussion.
What you need to consider is the real (to you) cash flows. You pay 2X for a new car or X for a used car, but receive identical economic benefit. With a higher interest rate lets say you pay 2X for the new car, and 1.1X for the used car.

Doesn't even come close to making sense to buy new from a cost-benefit analysis standpoint anymore. It actually did for a bit during the recession due to the discounting and massive inventory buildups.

As an aside, the rate you're given at a dealership is not a transparent reflection of the risk associated to the lender at all for a new car. You're paying for the financing with the inflated initial price one way or the other. IE, when I bought my truck, GM offered 2000 off or 0% financing, meaning you really need to just amortize that 2000 as interest cost. I also got it brand new at the height of 2009 deep discounting when they couldn't give trucks away  (self pat on back).

[jmusic]

If you're going to go new, you can often times get a better price with a loan than paying cash.  Cash is not king, when loan companies offer dealerships significant kickbacks for originating loans with them.  Just make sure you don't have any prepayment penalties.  Then pay the car off in a month or something.

That's possibly true, because the dealer sometimes subsidizes a loss on the vehicle price with profit in the loan or the trade in, or an extended warranty. 

I suppose if one wanted to really stick it to a dealer, you could tell them that you're mainly concerned with the price and let the dealer think they're winning on financing and warranty (don't bring a trade in!).  Sign the warranty paperwork, etc.  Then go back a few days later and cancel the warranty and pay off the note.

It's a lot of extra work though...