Posted: 7/31/2010 12:29:46 PM EDT
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Why are used car financing rates higher than new car financing rates,even if the same amount is borrowed?
If I spend 15k on a better quality used car (that used to cost $25k new), vs $15k for a really crappy new car, how does the new car loan have less risk when the new car will depreciate faster than the used car? Also, I've never figured out why a bank would be less willing to lend $5k for a person to buy a small used car,but more willing to lend $30k to a person who may never finish making their payments on a new car,leaving the bank with a fast depreciating asset to auction. It seems that default risk is just completely ignored or minimalized in these calculations. I'm further boggled why debit/income ratios seem to be ignored these days,in favor of credit ratings,which may crash and burn at any time. Can anyone explain why? |
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Quoted:
Why are used car financing rates higher than new car financing rates,even if the same amount is borrowed? If I spend 15k on a better quality used car (that used to cost $25k new), vs $15k for a really crappy new car, how does the new car loan have less risk when the new car will depreciate faster than the used car? Also, I've never figured out why a bank would be less willing to lend $5k for a person to buy a small used car,but more willing to lend $30k to a person who may never finish making their payments on a new car,leaving the bank with a fast depreciating asset to auction. It seems that default risk is just completely ignored or minimalized in these calculations. I'm further boggled why debit/income ratios seem to be ignored these days,in favor of credit ratings,which may crash and burn at any time. Can anyone explain why? 1. collateral value 2. income and credit bureau is enough info |
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Here's the parts I don't get:
1. From the bank's perspective, take $30k in loans. The $30k can be lent for a new car,which promptly depreciates at a rapid rate being driven off of the lot,and continues to have rapid depreciation for about 1-2 years. The bank's asset is a fast declining one. The other option: $30k is split amongst 3 different loans of $10k each for 3 different used cars. Since those three used cars are already farther into their depreciation schedules ,the bank effectively retains more collateral in those three cars than in the one new car. Drive all three off of the used car lot,and they're still worth the Kelly value they were when they were on the lot. Very little depreciation loss to the collateral occurs. Given equal wager earners for all 4 autos (we'll assume equal credit numbers), aren't the 3 with smaller payments/smaller loans less of a collective risk to the bank, than the single person with the new car? The only issues I can see here against the used car: - if the presumed costs of auctioning any defaults exceeds the possible depreciation savings gained by financing the 3 used cars rather than the 1 new car. -if the loan servicing costs for 3 loans exceeds the depreciation savings of financing the 3 used cars rather than the 1 new car. 2. Credit scores still amaze me. I have a fantastic score,but as a single wage earner,I'm one firing away from the possibility of default. They seem to take too few criterion into account to be really effective. I guess the real world accuracy of predicting defaults under the credit ratings vs older methods would be the determining factor,and we don't see anyone scurrying back to the old methods. |
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now I don't know from beans why, but here is what I think.
They guy with the credit to by the 30k car is less likely to default then the guy just scraping buy trying to pick up a 5k beater. Some of this isn't an apples to apples comparason. you speak as if it makes sense that they will eat the loan on a 30k but not a 5k car credit ratings being the same, but that isn't how the real world stacks up. There are more people going to default on the cheaper car because they can't afford a car or the expensive car to begin with. So based on that, the rates are higher in general for used vs new cars. The people that can afford a 30k new car will not necessarily get a better interest rate either. Soley based on credit score will determine if they get that 0 percent or whatever rate they show on tv. Read the fine print. Only certain people will qualify. Plus if the dealer undersigns the loans, not a regular bank, they have a bigger profit margin on the new cars. If you look, you have to pay sticker for the 0 percent, but can negotiate on a loan with as little as 2 percent interest. not a whole lot of play room on a used car. So they have to get their money in the interest. |
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I was thinking more about bank financed person to person purchases as far as the profit angle. I can see of course how a dealer does much better with a new car. When I'm talking used car,I'm generally talking about a P2P sale,and I'm thinking more about how the 3rd party bank does on the deal.
Regarding the angle about poor guys buying used cars..... This is what burns me: Why does this apply to me. I could easily afford a nice 2010 Honda Accord,or something of that nature. I have awesome credit. I just don't want to,because it takes money that I could otherwise spend on other appreciating assets (investments,my kids,my house,etc). But if I go in to get a used car loan,it doesn't matter. I still pay the higher rate for that used car, even if I have great credit. I could have the 3/4 of the value of that car stacked up in cash in a savings account,but it just doesn't matter because their risk matrix, based on credit scores only, doesn't take my cash savings into account. It's purely based on my credit score,which fails to include a massive quantity of pertinent data about the security of my employment, my cash and other asset reserves, my debt to income ratios,etc. None of these pertinent items figure into my credit,just my ability to pay in the past matters. What's the old caveat found on your various mutual funds "past results do not guarantee future returns".... I suppose in summary,it's amazing to me that credit scores as they are currently figured, are an adequate measure of the ability to make payments. I'd love to be able to quiz someone who knows the ins and outs of modern credit scores and their statistical capacity to predict the ability to pay. |
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um, that is what the credit score is.
the statistical number on how likely they are to pay, pay on time, and so forth. It checks every account you have, total amount of credit avaible, used, and money coming in. If your credit score sucks, then you either haven't always paid on time, paid only the min, or have too much credit for your income. |
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Quoted:
um, that is what the credit score is. the statistical number on how likely they are to pay, pay on time, and so forth. It checks every account you have, total amount of credit avaible, used, and money coming in. If your credit score sucks, then you either haven't always paid on time, paid only the min, or have too much credit for your income. Nope-the credit score only checks what credit you have,and your past history in paying it. It has no idea what your income is,how stable your job is, and it doesn't track any cash flow,except past paid debt. It's missing the other half of the "can you pay it" equation: your income,employability and your liquid and non-liquid assets. |
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Quoted:
I was thinking more about bank financed person to person purchases as far as the profit angle. I can see of course how a dealer does much better with a new car. When I'm talking used car,I'm generally talking about a P2P sale,and I'm thinking more about how the 3rd party bank does on the deal. Regarding the angle about poor guys buying used cars..... This is what burns me: Why does this apply to me. I could easily afford a nice 2010 Honda Accord,or something of that nature. I have awesome credit. I just don't want to,because it takes money that I could otherwise spend on other appreciating assets (investments,my kids,my house,etc). But if I go in to get a used car loan,it doesn't matter. I still pay the higher rate for that used car, even if I have great credit. I could have the 3/4 of the value of that car stacked up in cash in a savings account (your savings account is not the collateral, and cash secured loans do have lower rates),but it just doesn't matter because their risk matrix, based on credit scores only, doesn't take my cash savings into account. It's purely based on my credit score,which fails to include a massive quantity of pertinent data about the security of my employment, my cash and other asset reserves, my debt to income ratios,etc. None of these pertinent items figure into my credit (score),just my ability to pay in the past matters (for consumer loans for homes/cars). What's the old caveat found on your various mutual funds "past results do not guarantee future returns".... I suppose in summary,it's amazing to me that credit scores as they are currently figured, are an adequate measure of the ability to make payments. I'd love to be able to quiz someone who knows the ins and outs of modern credit scores and their statistical capacity to predict the ability to pay. |
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I believe it also has to do with the longevity of the car.
Statistics would probably show that a car that craps out on someone who can't/won't fix it is less likely to have the entire loan balance repaid than not. Newer cars tend to have more warranties, etc., and so on and so forth. |