Competing for customers, financial institutions now offer loans whose value even exceeds the price of the purchased vehicle. Banks wanting to minimize their risk will, however, finance new cars that are simply safer for them. In order to compensate for the credit risk, which is much higher in the case of used cars, they may apply increased interest rates for their financing.
Car loan – is it worth it?
Generally, it can be assumed that the interest rate imposed by banks on the amount borrowed increases in proportion to the increase in the age of the financed car. This principle is perfectly illustrated by the example of a car loan offered by Good Finance Bank.
In his table of fees and commissions, he uses five age ranges of cars to which particular interest rates are assigned. It is, of course, the smallest for new cars and amounts to 7.90%, while it increases by 1% in every age range. It is respectively: 8.90%, 9.90%, 10.90% and 11.90% for cars aged 1-3 years, 4-5 years, 6-8 years and finally in the range from 9 to 10 years – see table.
Car loan costs and car age
However, the examples in the table show that financial institutions also use different methods to rank the interest rate. The most general solution was decided by Good Credit Bank, which assumes that the interest rate on Good Credit Auto will not be less than 7.51%.
E-Money Bank applies a similar assumption, with the difference that it assumes an interest rate of 7.49% and 8.49% for new cars and an increased ratio for used cars – from 9.09% in life insurance and from 10.09% without this insurance.
Differences in interest rates between proposals for new and used cars are also visible in the case of two offers of Toyota Bank: Eco Hit – A unique offer for new cars and Dollar Hit – A special loan for used cars. However, Toyota Bank decided to set minimum interest rates in relation to the length of the loan period – the number of installments.
The car loan and the maximum age of the car
When considering the decision to use any financing under a car loan, you should also take into account the fact that, unfortunately, but not all cars will be able to be subject to it. In addition to the maximum length of the loan period, banks also set the age limit for cars for which we will obtain financing.
It is also worth noting that the amount of accepted maximum age of the car varies significantly in the offers of individual banks. It can be, for example, 8 years, as in the case of the Good Credit Auto loan, or even 4 years longer, as illustrated by the credit proposal developed by E-Money Bank.
To sum up, when choosing a car and its car loan, let us consider the relationship between loan terms and the age of the car. Taking a new car loan, let’s check where the financing offer will be the most advantageous for us in terms of the interest rate. When buying a used car, we also check the total cost of the loan. It may turn out that at the same price we will be able to buy not a six-year, but two years younger copy of the dream model.