Here’s Why Used Car Loan Rates Are Higher

If you’re considering buying a used car, you’re not alone. Nearly 36 million certified preowned vehicles were sold in 2014, according to Edmunds.com. As you shop around for a car, however, you might encounter an unpleasant reality: Interest rates tend be higher for used cars. A higher interest rate can cost you over the life of your loan. Here are four reasons why used cars typically come with higher interest rates.

Related: 30 Biggest Dos and Don’ts When Buying a Car

4 Reasons Used Car Loan Rates are Higher

1. Used Car Values are Harder to Estimate.

While new cars lose value quickly, their depreciation is relatively straightforward. In contrast, a used car’s value can be harder to calculate, as there is a greater chance the car has mechanical problems and unreported accidents, or other issues. For a lender who might need to repossess your car someday, not knowing your car’s value can make for a risky investment.

Lenders also have to account for the fact that cars they repossess might be underwater. With a higher interest rate, your lender mitigates risk by profiting from the loan up front.

2. Manufacturers Incentivize New Car Purchases.

Many major auto manufacturers are in the business of financing new cars. While auto manufacturers’ financing companies might offer discounts and other deals to boost new car sales, these companies typically do not finance or offer incentives for used cars.

Dealerships, meanwhile, can profit from new car sales through dealer holdbacks. A holdback is money a manufacturer pays a dealer for selling a new car. Holdbacks incentivize dealerships to focus on new car sales.

3. Used Car Borrowers Default More Often.

Used car buyers tend to have poor credit scores, according to Experian. Lenders make up for the inherent risk in lending to subprime borrowers by charging higher interest rates. By charging a higher rate, a lender can mitigate the cost of a defaulted loan.

4. Used Cars Require Prep Work for Resale.

When a dealership acquires a used car, they have to invest time and money into the vehicle to prepare it for resale. Whether the car needs a quick repair or minor maintenance, dealerships will try to recoup expenses with higher rates.

Should You Buy New or Used?

While rates for used cars tend to run higher, you might save more on the total cost of a used car. On average, a new car loses 11 percent of its value the moment you drive off the lot, according to Edmunds.com. As the car ages, it depreciates more slowly.

Used cars can be purchased for less, too. So while you might pay a higher rate on a used car, because your vehicle does not depreciate as quickly as a new car, you lose less money over time on your investment.

As you consider vehicles in San Jose, review maintenance records and ask about any previous accidents. If you are in touch with the previous owner of the vehicle, inquire about any problems they encountered. Finding a used car in good mechanical condition can help you save money, so take time to research.

This article originally appeared on GOBankingRates.com: Here’s Why Used Car Loan Rates Are Higher

This article by Kristy Welsh first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.