Used car finance, why rates so high ?

[WindsorRob]

Browsing at some new car PCP deals seem to be circa 6%. E.g. Land Rover, Audi. However, buying an approved used version on a PCP seems to be circa 10 to 11%. Why such a difference ? Given BOE rate is so low, surely there must be finance companies that would be glad to get 5% on a used deal. Given the loans are secured on the vehicle generally, I can't see that it's the risk factor that drives it up to these rates, so I don't quite get it. I'd be far more inclined to purchase a higher value used car on a decent PCP rate, I'm certainly not going to pay 10% which seems to surprise dealers.

So any idea why used dealer finance is so high?

[Mattt]

Because they can, mainly.

Used car finance has a bit of wiggle room often on AUC so never pay headline rate.

[Wilmslowboy]

New car finance is normally direct with the manufacture, as you can imagine the likes of BMW, Merc, Audi, GM etc can raise huge amounts through corporate bonds often at tiny rates rates.

Manufactures make money by selling new cars and therefore are happy to support/subside the rate, they don’t really make money on used cars (dealers do)....therefore the finance (often) for used cars comes from the typical 3rd party lenders, who need to make a profit, hence a much higher rate.

With “dealer support” on deposits, lower rates and higher GFVs, you can get crazy situations where it is actually cheaper to buy a new car on finance over 3-4 years than the same car used over the same period.

[supersport]

Or you could go to a bank and get 3.3%

[p1stonhead]

BMW offered me finance at 8% when I bought my latest car. Told them I didnt need it and even if I did, my bank was doing 3%. They didnt have an answer when I asked why anyone would choose them instead...

[DonkeyApple]

WindsorRob said:

Browsing at some new car PCP deals seem to be circa 6%. E.g. Land Rover, Audi. However, buying an approved used version on a PCP seems to be circa 10 to 11%. Why such a difference ? Given BOE rate is so low, surely there must be finance companies that would be glad to get 5% on a used deal. Given the loans are secured on the vehicle generally, I can't see that it's the risk factor that drives it up to these rates, so I don't quite get it. I'd be far more inclined to purchase a higher value used car on a decent PCP rate, I'm certainly not going to pay 10% which seems to surprise dealers.

So any idea why used dealer finance is so high?

It's hard to compare the two rates as the market values of new cars are skewed to capitalise on the profits from finance and the increased turnover it creates.

For example, a lower rate on something can transpire to be more expensive than a higher rate if the enticement of that lower rate allows the underlying price to be higher than it otherwise would be.

So, as around 90% of car purchases are financed then how the finance is sold is extremely important. It is what drives the trade and is the key sales tool after the hook of the brand image.

My first guess is that they deflate finance rates in new cars to benefit from those buyers who will look at the 10% rate and assume 6% is cheaper so spend more due to taking out a larger loan plus paying a premium for add ons/options.

[WindsorRob]

Thanks for the replies, all very logical. I suppose it just strikes me that in these days of generally low investment returns, there doesn't seem to be the profit in this market to attract some large funds to get competitive finance in place at a dealer level. I can only assume that the risk / costs are higher than I think, as there are some smart people in the funds market that would otherwise have exploited this area.

[bad company]

When I worked in motor finance many years ago the used finance rates were high because the dealers took hefty commissions from the finance company.

I imagine that is still the case so negotiate.

Edited by bad company on Tuesday 20th September 10:06