Observation regarding financing a used car

I was talking with a banker over the weekend about financing cars. Currently financing a new car is easy and it seems the preference of lenders. On the face of it, it makes sense as the depreciation is fairly predictable and with a new car warranty the chance of a lender repossessing a worthless heap is low.

Financing a used car however can be more problematic. We went through this when we traded our ML500 over the weekend (132,000 miles). The dealer said that because of its mileage it would be a cash vehicle. "People that want that car have to finance it because they don't have the money, and people that have the money do not want that car." No real issues with the logic, it makes sense for lenders of normal used cars that will approach a value of zero as it ages. So the industry standard is a car has to have less than 100,000 miles and be 7 years old or less.

But from a risk (for the lender) standpoint, what about depreciated exotic cars?

Just for example let us take a 355 or TR. Both would be older than 7 years, and most likely have far fewer than 100,000 miles. Both can be purchased for $50k or so today. For sake of argument a person finances 100% of the car. Now compare this to buying a Yukon Denali new, also $50k with the same 100% financing.

The question is from a lender's perspective, which car would you rather repossess with half the note unpaid, a 355 or a Denali? The lender would have a much better chance of recovering his remaining balance from selling the Ferrari than just another used GMC that is a few years old. Even if it needed a major service the car wouldn't go lower than say, $40k. In three years the Denali might be worth $20k.

This really isn't a gripe, more of just an observation. You can obviously get a loan or lease on an older car, but the interest rates are higher. It seems it should really depend on the car. I could get a $50k loan all day for 4% on a new Denali, but would be lucky to get twice that rate on a 355. From a lender's perspective, it seems it should be the other way around.

 

I think it's more a liquidity/known commodity issue.

A Ferrari 355 can bury anyone with repair bills exceeding the car's worth. Ditto the TR. Basically a $40K-$50K car that can need a $30K differential repair on short notice. It's pretty easy to walk away from a car like that and stick the lender.

Plus, relatively few buyers are ready to take on Ferrari service costs, so a 355 requires a used car buyer with the finances to do the deal. That's not the most common combination, as you point out -- wealthy people often buy new cars. Not an easy car to value or resell if you repossess it.

That said, I agree with you, the Denali will depreciate like a rock.

 

The leasing companies I used to deal with, and now deal with after the initial credit crunch scare subsided, all wanted and still want 1/3 down on an exotic or high end car for 2 reasons. Maintenance costs, and the possibility of accident damage.

However since you asked, if the LTV ratio covered the debt, I'd rather repo the Denali......it will easily sell at auction "tomorrow" whereas the F-car will be harder to dispose of.

 

I understand you could sell a Denali much quicker, and if the car wasn't upside-down would be preferrable. One point of my post was that which car would be more likely to be upside-down? In the scenario I laid out with a high LTV the new car would depreciate much faster and more likely to be upside-down.

The point about catastrophic mechanical failure is well taken also. This assumes that the owner would not still honor his agreement and continue to pay for the car even though it might be out of service for some time until it could be repaired. Even still, I would think a TR with a blown transaxle would still be worth a decent amount of money, a buyer at auction could easily make it a parts car.

If you use a lower initial LTV of 80% and finance $40k for either scenario, it obviously is less risky for the lender in both cases. But the initially expensive, used, depreciated vehicle that will never be worth zero would still be at least as safe from their perspective. I think so, anyway.

 

Probably true, but banks don't get into that part of the value chain.

As Kds suggested, it's a function of how easy it is to sell and recover your money. The scrapyard/recycler route isn't lucrative in the short term. Banks don't track the value of TR power window switches, pistons, etc.

 

I just financed an 87 944 turbo with 105k mi on it at 3.25% for 4 years. Could have paid cash, but with that low an interest rate, I figured why not? That was at my local credit union.