Differences Between Financing a New vs. Used Car

From interest rates to lender options, loan options for used cars and new cars can vary.

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Whether you're eyeing a new or used car, paying for it upfront could be out of the question. Luckily, having access to vehicle financing can help make the buying process more attainable.

While it's possible to finance both new and used cars, each option comes with its own set of circumstances that will be important for you to consider before pursuing a loan. Understanding these differences could help you to better plan your budget and consider the impact of your overall car-buying decision.

Variable Interest Rates in Vehicle Financing

One key difference in new-car versus used-car financing is the interest rate a lender may offer you. Since used cars are often considered higher-risk investments, due to their likelihood to break down, lenders may require a higher interest rate on your loan.

New cars, on the other hand, are more likely to have lower interest rates. This means even though you may pay more for the sticker price, you could ultimately end up paying less in interest due to a lower accumulation of interest over time.

For example, if you have a used-car loan for $30,000 at 9.33% for 48 months, you'll pay $6,060 in interest over the course of your loan. Compare this to a $40,000 new-car loan at 6.88% for 48 months, which will only accumulate $5,869 in interest. While you may pay more in total due to a higher sticker price, you will save on overall interest.

Understanding Your Lending Options

New-car loans are typically more widely offered by a variety of lenders than used-car loans. However, as the average age of vehicles goes up, some lenders are adjusting their policies to capture more opportunities to provide financing for older cars.

Your ability to secure a used-car loan could depend on the mileage and age of your desired vehicle. If you are buying a used car through a dealership, that dealership could also offer vehicle financing. While this may seem like a convenient option, you should still compare your dealership's rates with those of private lenders to ensure you're getting the best deal you can.

The Possibility of Becoming Upside Down on a Loan

While financing a new car can be easier, new vehicles are typically more expensive than used models. They also have a higher degree of depreciation at the beginning of their lifespan. When combined with a small down payment, those factors form the key reason why new-car loan borrowers have a higher chance of becoming upside down on their loans over time.

That’s because loans become upside down when the remaining amount owed on a loan is greater than the perceived current value of the car.

Factoring Repair Costs into Your Used-Car Budget

If you're looking for used-car financing through a lender, it can be difficult to determine your budget. Not only do you have to estimate the current value of the car you're purchasing, but you also have to factor in potential repairs.

Since used cars are, generally speaking, more likely to break down sooner than new cars, your vehicle financing should be affordable enough so that you are able to pay for any necessary repairs in addition to your monthly loan payments. Getting a used vehicle inspected before you finance it may help you get a clearer picture of the full investment you're committing to and help you build a more accurate auto budget.

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Elliot Rieth
Elliot Rieth is a writer who was born and raised in Michigan, the center of the American automotive industry. With a background in the industry that spans from sales to digital marketing, Elliot has years of experience working directly with dealers and OEMs to create digital content and educate potential customers. When Elliot isn’t writing about horsepower or EVs, he can be found with his two greyhounds enjoying a new book or record.