When financing a used car, the interest rate is one of the most important factors to consider. Used car interest rates are typically higher than those for new vehicles, and various factors influence the rate you may receive.

Why are used car interest rates higher?

Used car financing typically has higher interest rates when compared to new cars due to several reasons:

• Increased lender risk – Lenders view used cars as riskier investments because they’re more likely to have mechanical issues and depreciation concerns.
• Loan-to-value ratio (LTV) – Used cars tend to have lower resale values, which affects how much lenders are willing to finance compared to the vehicle’s worth.
• Credit score impact – While credit scores influence rates for both new and used cars, their effect is often more significant in used car financing.

Factors that affect used car interest rates

Credit score

The interest rate you receive is largely — but not entirely — determined by your credit score. Borrowers with excellent credit often qualify for better rates than those with lower scores. On average, Experian reports borrowers financing a used car have a credit score of 689, whereas new car buyers typically have a higher score of 753.

Financing duration

Shorter financing periods often have lower interest rates, while longer ones increase the total cost of borrowing. Either way, the typical finance period is around 68 months long.

Down payment size

According to Experian, buyers of new cars tend to finance higher amounts, with an average of $40,927 compared to $26,248 for used vehicles. This difference also translates to monthly payments: new car buyers pay around $734 per month, while those financing used cars have an average monthly payment of $525.

Reducing the amount borrowed with a large down payment decreases the lender’s risk, which may lead to better financing terms. Most lenders recommend at least 10% down for a used car and 5-10% down for a new car.

Tips for securing the best used-car interest rates

Even with higher interest rates for used cars, there are ways to secure better financing terms:

• Check and improve your credit score – Paying down debt and maintaining on-time payments can help boost your score before applying
• Get pre-qualified – Securing pre-qualification before visiting a dealership gives you an idea of what you may be approved for
• Make a larger down payment – Putting more money down reduces the needed amount and can help you negotiate a lower rate
• Keep the repayment period short – While longer periods lower monthly payments, they increase the total cost of borrowing. Opt for the shortest period you can comfortably afford.

Get a sense of what you might pay

Used car interest rates are generally higher than those for new cars due to increased lender risk and vehicle depreciation. However, you can secure financing that can fit your budget by understanding what influences rates and taking proactive steps to improve your financial standing.

For an idea of what you might be able to finance — and for how much — Credit Acceptance offers online pre-qualification. In addition, use our monthly payment calculator to help inform your monthly budget for a car payment.