The Impact of Car Age on Financing Terms

Buying a used car can be a cost-effective option for many UK consumers. However, it is important to note that cars that are more than 5 years old are generally subject to higher interest rates when financed. In this article, we’ll discuss the reasons behind this practice and how it affects British consumers.

Depreciation of vehicle value

One of the main factors that influence interest rates for used cars is the depreciation of the vehicle’s value over time. As a car ages, its value decreases due to natural wear and tear, accumulated mileage and technological advances. Lenders view older cars as riskier assets, which leads to higher interest rates to offset potential devaluation.

Increased likelihood of mechanical problems

Older cars are more likely to have mechanical problems and require more frequent maintenance and repairs. This increases the risk for creditors, as a vehicle with mechanical problems can become a financial burden on the owner, compromising his ability to make payments. To mitigate this additional risk, financial institutions often impose higher interest rates on older car loans.

Loan duration

Another factor that affects interest rates for used cars is the length of the loan. Typically, loans for older cars have shorter terms compared to new cars. This is because lenders prefer to limit the amount of time they are exposed to potential risks associated with older vehicles. With shorter terms, monthly payments tend to be higher, which results in higher interest rates.

Lower resale value

In addition to vehicle value depreciation, older cars have a generally lower resale value compared to newer ones. This implies that, in the event of default by the car owner, the amount that the creditor can recover by selling the used vehicle is less. To offset this risk, lenders apply higher interest rates to older cars.

What factors impact interest rates for vehicle financing?

Average interest rates for car finance depend on several elements. Some of them are the type of financing chosen, whether the vehicle is new or used, the individual’s credit score, the amount requested and the payment term. Before signing any financing agreement, it is advisable to know the average rates in order to be able to properly plan the budget.

While looking for the best financing option, it is impossible to know exactly what the interest rate will be charged by the lender. Financing companies disclose their annual rates, but it’s important to remember that these are only representative APRs. This means that the actual APR can vary for each specific borrower.

Average financing rates for used vehicles in 2022
Knowing the representative APR and average used vehicle finance rates is a useful starting point when looking for the most suitable finance. Below are the average rates for used car finance, according to credit score:

300 to 500 – 20.99%
501 to 600 – 17.29%
601 to 660 – 10.48%
661 to 780 – 5.58%
781 to 850 – 3.71%

It is observed that the higher the credit score, the lower the average interest rate for used vehicle financing. The credit score can influence the interest rate offered by the lender, as it is an indicator of the creditworthiness of the individual. If someone with an excellent credit score applies for financing for a used vehicle, the finance company will perceive him as someone who is financially responsible, reliable to make timely payments.

How to calculate the cost of financing a vehicle

To calculate the cost of financing a used vehicle based on the interest rates provided, it is not necessary to do manual calculations. Instead, you can visit the websites of car finance companies and use their finance calculators. This is the easiest and fastest way to get estimates and properly prepare for a used vehicle loan. A quick search online using the term ‘UK car finance calculator’ will yield a range of results. It is possible to explore these options and hopefully find the best deal.

What’s the best way to finance a used vehicle?

Personal Purchase Agreement (PCP)

With vehicle finance used through PCP, it is usually necessary to pay an advance deposit, which is at least 10% of the vehicle’s value. Then, monthly payments are made for a certain number of months, depending on the term of the agreement with the financing company. At the end of the contract, there is the option of buying the vehicle paying a final installment, returning it without additional obligations or using the remaining value of the vehicle for a new PCP contract.

Vehicle financing through PCP is a good choice for those who want to change vehicles every two years. Monthly payments are also usually lower compared to the purchase, since you do not pay the full value of the vehicle, but the estimated depreciation during the contract period. If you’re still unsure about owning a vehicle, but want to enjoy the convenience of owning one, financing a used vehicle through PCP may be an option to consider.

Purchase with installment payment (HP)

HP vehicle finance is very similar to PCP in that it also involves an initial deposit and monthly payments. The main difference is that, at the end of the HP contract and after making all payments, the vehicle becomes the property of the individual. The amount of monthly payments is generally higher than with PCP, but this is because an additional final payment is not required to purchase the vehicle.

HP vehicle finance is the best option for anyone who is sure they want to own a vehicle. Some advantages of this type of financing include no mileage limits, guaranteed ownership of the vehicle at the end of the lease, and a generally larger selection of used vehicles available for HP financing.

Although it is common to think that a new vehicle is the best choice, when considering practicality, it is often more advantageous to finance a used vehicle. It is a more affordable option, making it possible to obtain better models with improvements, for the same price as a new model. In addition, there are many used vehicles in very good condition, especially if you opt for lightly used demo models.