Breaking Down New and Used Car Financing

Breaking Down New and Used Car Financing

When most people gear up to buy a car, they often begin by deciding whether to purchase a new or used vehicle. Taking the time to consider the updated entertainment, design, and safety features of a brand new vehicle compared to the potential purchase price and slower depreciation of a used vehicle is wise, but so is understanding the differences in financing a new vs. used car. There are variances in the auto loans offered for new and used vehicles that should be weighed just as heavily as the look, feel, and price of your next car. Here’s what you need to know.

Available Interest Rates for New vs. Used Cars

In most cases, buying a new vehicle will allow you more attractive financing offers, because the latest models are often eligible for manufacturer-supported interest rates. These are the zero to one percent interest rate auto loans you see on TV and online. Third party lenders also tend to offer lower interest rates for the newest vehicles, because the purchase represents a lower risk to the financing company.

On the other hand, if you’re in the market for a slightly used vehicle, don’t worry. There are a handful of special financing rates for Certified Pre-Owned cars, trucks, and SUVs as well. Plus, buying a recent year’s model (within one to two years of the latest new car inventory) can also help you achieve a lower interest rate on your new-to-you auto loan. Just remember that with more risk comes higher costs, so lenders will charge slightly more on older vehicle financing to help offset that risk.

Auto Loan Terms for New vs. Used Cars

In addition to interest rate differences, vehicle financing varies for new vs. used cars when it comes to the repayment term. Many lenders are willing to offer lengthier terms on brand new vehicles—sometimes up to 75 or 84 months—which means a lower monthly payment for you. These longer repayment terms are offered because the purchase price of new vehicles is higher than a comparable used car, not to mention the fact that there is, again, less risk taken on by the lender with a new set of wheels.

Used car financing is generally made available with a shorter repayment term, typically maxed at 72 months (six years). Even though you may have stellar credit and a steady income, both of which can qualify you for the best financing terms, lenders are less willing to take on a long-term risk of a six- or seven-year repayment term for older vehicles. There is a silver lining in a shorter repayment term, however: you ultimately save on interest charges over the life of the loan, and you’ll own your vehicle outright sooner.

Should I Buy a New or Used Car?

Buying a vehicle is a personal choice, and the decision to buy a new vs. used car should be one you feel comfortable with for the long term. Be sure to consider more than features and appearance in your purchasing decision by understanding the differences in new and used vehicle financing before you head to the dealership. This is a critical part of knowing what you can afford to purchase. Each of these financial factors has an impact not only on the total cost you pay over the life of your auto loan but also on your bank account each month, so take the time to make the decision that’s right for you before getting swept up in the excitement of buying a new or used vehicle.