Why Do Used Cars Have Higher Interest Rates?

Buying a used car is often more affordable than purchasing a new one, but when it comes to financing, used car loans tend to have higher interest rates. If you’ve ever wondered why lenders charge more for used vehicles, the answer lies in several factors—including depreciation, loan risk, borrower credit score, and lender policies.

In this guide, we’ll cover:

  • How Used Car Loan Rates Are Determined
  • Comparing Used vs. New Car Loans
  • Why Lenders Charge Higher Interest Rates on Used Cars
  • When It Makes Sense to Buy a New Car Instead
  • The Benefits of Buying a Used Car Despite Higher Interest Rates
  • Current Average Used Car Loan Interest Rates (March 2025)

How Are Used Car Loan Rates Determined?

Lenders assess multiple factors before approving a used car loan and setting the interest rate:

1. Vehicle Depreciation & Age

Used cars depreciate slower than new ones, but they are already worth significantly less. If a borrower defaults, a used car has less resale value, making it a higher risk for lenders.

2. Loan Term

Shorter loan terms usually have lower rates, whereas longer terms (60+ months) come with higher rates to account for increased risk.

3. Credit Score & Financial History

Your credit score is the biggest factor affecting your loan rate. Lenders use it to measure your ability to repay the loan on time. Borrowers with subprime (below 600) or deep subprime (below 500) credit scores get the highest interest rates.

4. Lender Type

  • Banks & Credit Unions: Typically offer lower rates than dealerships.
  • Dealership Financing: Interest rates may be higher, especially for older cars.

5. Market Conditions & Federal Reserve Rates

If the Federal Reserve raises interest rates, auto loan APRs go up across the board—including for used cars.

Used Car Loan vs. New Car Loan: Key Differences

Factor New Car Loan Used Car Loan
Interest Rate
Lower (5.25% – 15.77%)
Higher (7.13% – 21.55%)
Loan Term
60 – 72 months
36 – 60 months
Lender Risk
Lower
Higher
Down Payment
Lower or $0 (incentives available)
Usually required
Depreciation Rate
High (loses ~30% value in first 3 years)
Slower depreciation
Warranty Coverage
Typically included
Limited or expired

Why New Car Loans Are Cheaper

  • New cars come with incentives (cash rebates, 0% financing offers).
  • Lenders prefer financing new cars since they have higher resale value.
  • Buyers of new cars often have better credit scores, leading to lower rates.

Why Lenders Charge Higher Interest Rates on Used Cars

1] Higher Risk of Loan Default – Many subprime and deep subprime borrowers buy used cars, leading to more loan defaults.

2] Depreciation & Resale Value – If a borrower defaults, lenders recover less money from reselling a used car.

3] Lack of Manufacturer Incentives – New car buyers enjoy cashback, discounts, and 0% APR offers, but these don’t exist for used cars.

4] Shorter Loan Terms – Used car loans often range from 36-60 months, leading to higher monthly payments and greater lender risk.

When Does It Make Sense to Buy a New Car Instead of a Used One?

  • You Qualify for 0% or Low-Interest Financing – Many manufacturers offer 0% APR deals on new vehicles.
  • You Plan to Keep the Car for 5+ Years – New cars last longer with fewer repair costs.
  • You Have an Excellent Credit Score – Prime borrowers (661+) often get better loan terms on new vehicles than subprime borrowers get on used ones.

The Benefits of Buying a Used Car (Despite Higher Interest Rates)

Even with higher APRs, buying used can be a smart choice because:

  • Lower Purchase Price – The upfront cost is significantly cheaper than new cars.
  • Lower Insurance Costs – Used cars typically have lower premiums.
  • Slower Depreciation – A 3-year-old car has already taken the biggest depreciation hit.

Tip: If you’re financing a used car, shop around for the best interest rates and consider putting down a larger down payment to lower your total loan amount.

Average Used Car Loan Interest Rates in March 2025

According to LendEDU & Experian【9】, here are the latest used auto loan rates based on credit score ranges:

Credit Score Range Average Used Car Loan Rate (APR)
Super Prime
781 – 850
7.13%
Prime
661 – 780
9.36%
Near Prime
601 – 660
13.92%
Subprime
501 – 600
18.86%
Deep Subprime
300 – 500
21.55%

Understanding Used Car Loan APRs by Credit Score

  • Super Prime (781-850) → 7.13% APR: Lowest rates, ideal for excellent credit borrowers.
  • Prime (661-780) → 9.36% APR: Competitive rates, good for solid credit.
  • Near Prime (601-660) → 13.92% APR: Higher rates, but financing is still accessible.
  • Subprime (501-600) → 18.86% APR: Expect higher monthly payments.
  • Deep Subprime (300-500) → 21.55% APR: Most expensive financing, lenders may require a large down payment.

How to Secure a Lower Used Car Loan Rate

  • Compare Lenders – Don’t settle for dealership financing. Check banks, credit unions, and online lenders for better rates.
  • Improve Your Credit Score – Paying down debt, reducing credit utilization, and making on-time payments can help lower your interest rate.
  • Make a Bigger Down Payment – A larger down payment reduces your loan amount, leading to lower monthly payments and interest charges.
  • Choose a Shorter Loan Term – Opting for 36-48 months instead of 60+ months can significantly reduce your total loan cost.

Conclusion

Used cars may come with higher loan interest rates, but with the right financial strategy, you can minimize costs and make a smart purchase.

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