When you apply for any type of secured loan, your lender has the right to take ownership of the collateral if you default on the loan. The more valuable the collateral, the less risk the lender assumes. The lender has a better chance of recouping its money if it seizes valuable collateral rather than collateral with minimal worth. Because cars lose value over time, older cars are generally harder to finance.
Depreciating Value
Most vehicles have some kind of warranty that protects both the car owner and the lender against financial loss stemming from mechanical problems that may emerge with the car. Warranties often expire after three or four years; thereafter car owners must pay for repairs out of their own pocket. High maintenance costs sometimes leave car owners with insufficient funds to cover their loan payments. Therefore, this exposes the lender to greater level of risk. Additionally, if the lender stretches out a loan term over a long period of time, the borrower's payments may not pay down the car fast enough to ensure the loan balance does not exceed the vehicle's falling value. This means the lender may not recoup its losses if it has to repossess an old car with a long loan term.
Loan Term
Due to falling values, most lenders only finance cars that are a certain number of years old. If you buy a brand new car, you can normally finance it over five or six years. Lenders typically reduce the maximum loan term on a year-for-year basis by taking into account the age of the car. Therefore, if your lender finances cars up to six-years-old, then if you buy a four-year-old car, your loan term cannot exceed two years. This means many people are unable to obtain financing from major lenders to purchase older used vehicles.
Payment
If you stretch out your car payments over a five- or six-year period, your monthly payments are much smaller than if you paid off the same loan amount within just two years. If you buy a four-year-old luxury car, you must contend with very high monthly payments. Your lender examines your income level and your current debt obligations to determine whether you can afford such a payment. Consequently, many people who are not high earners cannot qualify for short-term loans on used cars. It usually works out cheaper to buy a brand-new but more basic type of car.
Exceptions
While cars generally lose value over time, some cars actually grow in value. Vintage cars and special edition models often become collector's items. These cars have high maintenance costs and are expensive to run but some continue to grow in value over the decades. Lenders are more willing to finance vintage cars because, in the event the borrower defaults on the loan, the lender has a very good chance of recouping its losses by selling the vintage car to a collector.
Some lenders do offer loans on older non-vintage vehicles but charge very high interest rates which make these loans very expensive.
0 comments:
Post a Comment