Ever shopped for a car on Carvana only to be shocked by the interest rate they offered? You’re not the only one. Even customers with stellar credit scores often find themselves staring at double-digit APRs that seem completely out of line with what they’d expect. But there’s more to these high rates than meets the eye.
Carvana’s Subprime Lending Focus
Carvana has deliberately positioned itself as a lender that serves customers across the entire credit spectrum—with a heavy emphasis on subprime borrowers.
About 40% of Carvana’s loan portfolio consists of subprime borrowers with FICO scores between 567 and 584. These aren’t just occasional customers—they’re a core part of Carvana’s business strategy.
The company’s lending requirements are notably lenient:
- Minimum annual income of just $5,100
- No active bankruptcies
- Must be at least 18 years old
Former employees have confirmed they “approved 100% of applicants” who weren’t declined for compliance reasons. This near-universal approval approach means Carvana takes on significantly more risk than traditional lenders—and they price their loans accordingly.
The Hidden Markup in Your Car Loan
When you finance through Carvana, you’re not just getting a loan—you’re getting a marked-up loan. Like traditional dealerships, Carvana adds what’s called a “dealer reserve” or “finance reserve” to the base interest rate they receive from their lending partners.
This practice isn’t unique to Carvana, but the size of their markups appears to be exceptionally high. While typical dealer markups range from 1-2.5 percentage points, evidence suggests Carvana’s can be much steeper.
Consider these real-world examples:
- Reddit users with 750+ credit scores report receiving APR offers of 9-11% from Carvana
- Similar credit profiles at traditional lenders would qualify for rates between 5.18-6.82%
- This represents a premium of 2-4 percentage points above market rates
This markup isn’t just for high-risk borrowers—it applies across all credit tiers, including those with excellent credit.
Selling Your Loan Before You Make Your First Payment
One of the least understood aspects of Carvana’s business model is how they immediately sell most of their loans to third-party investors through a process called securitization.
Over a recent nine-month period, Carvana sold $6.15 billion in loans to third parties, generating $541 million in profits from these sales alone. These loan sales represented:
- 26% of Carvana’s gross profit
- 2.2 times their net income during this period
This business practice means Carvana has strong incentives to maximize the interest rates they charge customers—higher rates mean bigger profits when they sell your loan.
To make these loans attractive to investors, Carvana must offer higher yields, especially since nearly 44% of these loan packages consist of non-prime borrowers with FICO scores below 580. Those higher yields come directly from the elevated APRs charged to customers.
How Carvana’s Rates Compare to Alternatives
The difference between Carvana’s rates and other options is stark when you look at the numbers:
| Credit Category | Carvana Typical APR | Industry Average APR | Credit Union Average APR |
|---|---|---|---|
| Super Prime (780+) | 8-10% | 6.82% | 4-5% |
| Prime (660-780) | 10-15% | 7.93% | 5-7% |
| Subprime (550-660) | 15-20% | 15.72% | 9-14% |
| Deep Subprime (<550) | 20-27.95% | 21.58% | 15-18% |
These differences add up to thousands of dollars over the life of a loan. For example, on a $25,000 loan with a 60-month term:
- At 5% APR (credit union): Total interest paid = $3,307
- At 10% APR (Carvana): Total interest paid = $6,874
- Difference: $3,567 in additional interest
Carvana’s official APR range spans from 7.95% to 27.95%, with former employees reporting that deals above 25% APR on expensive vehicles were a daily occurrence.
The Convenience Factor That Costs You
Carvana has successfully monetized convenience. Many customers choose their financing simply because it’s easier than shopping around, even when significantly better rates are available elsewhere.
The company’s integrated purchase and financing process creates a seamless experience that makes it psychologically harder to step outside their ecosystem to secure external financing. By the time customers realize how much their APR differs from market rates, they’ve often already completed their purchase.
Many Carvana customers end up refinancing shortly after purchase:
- Reddit forums are filled with stories of customers securing refinancing through credit unions at 3-5% below their Carvana rate
- Some report savings of $100+ per month through refinancing
- Credit unions are the most common refinancing destination due to their consistently lower rates
The Deteriorating Loan Portfolio Problem
Recent data indicates Carvana’s loan performance is worsening, which may be driving further rate increases to compensate for higher expected losses.
Loan extensions in Carvana’s subprime securitization deals have more than doubled over the past year, increasing from 1.97% to 4.18%. This represents the largest increase among all 23 auto loan issuers tracked by credit rating agency S&P.
Rising delinquencies suggest Carvana’s underwriting standards may be too lenient even for their subprime focus. To maintain profitability while absorbing higher loss rates, the company likely increases APRs across all credit tiers to ensure adequate returns.
Related Party Transactions Adding to Costs
Carvana’s relationship with Bridgecrest, a subsidiary of DriveTime owned by CEO Ernest Garcia III’s father, creates additional complexity in their pricing structure.
Bridgecrest serves as Carvana’s loan servicer and handles extended warranty sales, generating $145 million in “other revenue” from related parties in 2023. These arrangements, which Carvana acknowledges are “not always negotiated at arm’s length,” contribute to the overall cost structure that consumers ultimately bear through higher APRs.
How to Avoid Carvana’s High APRs
If you’re set on buying from Carvana but don’t want to pay their premium rates, you have options:
- Secure pre-approval from a credit union or bank first
Credit unions typically offer the lowest rates, often 3-5 percentage points below Carvana’s offerings. - Compare multiple lenders before deciding
Online lenders, banks, and credit unions all compete for your business. - Consider refinancing immediately after purchase
If you’ve already bought with Carvana financing, you can refinance as soon as the title work is completed (usually within 30 days). - Negotiate a larger down payment
Reducing the loan-to-value ratio can sometimes help secure a better rate.
The Business Strategy Behind the High Rates
Carvana’s high APRs aren’t an accident—they’re a deliberate business strategy that prioritizes profit maximization over competitive pricing.
The company has positioned itself as a lender of last resort by maintaining extremely lenient approval criteria. Their marketing strategy reinforces this focus on subprime customers—a former Carvana marketing executive revealed that some of their most expensive but highest ROI search engine marketing keywords included terms like “low credit” and “bad credit” auto loans.
Despite projecting a mainstream image in their general advertising, Carvana actively targets borrowers with compromised credit histories who have few alternatives and are less likely to shop around for better rates.
The Future of Carvana’s Lending Practices
Carvana’s reliance on high-interest loans may face challenges as more consumers become aware of the significant rate disparity and as regulators take a closer look at auto lending practices.
The company’s heavy dependence on Ally Financial as a loan purchaser has created additional vulnerabilities. Ally’s share of Carvana’s loan purchases dropped from 60% in 2023 to 35% by mid-2024, forcing Carvana to find alternative buyers who may demand even higher yields.
This dynamic pressure keeps APRs elevated as Carvana must ensure their loan packages remain attractive to increasingly selective investors in a tightening credit environment.
Final Thoughts on Carvana’s Financing Model
Carvana’s high APR rates stem from a combination of factors: their focus on subprime borrowers, substantial dealer reserve markups, securitization requirements, and a business model that prioritizes convenience over competitive pricing.
While Carvana offers accessibility for borrowers with limited options, consumers with good credit can typically save thousands of dollars by avoiding Carvana’s financing altogether. The company’s rate structure reflects its position as a subprime-focused lender rather than a competitive mainstream financing option.
For customers, the key takeaway is simple: understand that Carvana’s convenience comes at a significant price premium, and always shop for financing separately from your vehicle purchase to ensure you’re getting the best possible rate.
