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What is the Difference Between Used Car and New Car Loans?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 15 November 2018
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The primary difference between loans for new and used cars is that new car loans tend to come at a lower interest rate. This may be an important factor for people with poor credit, as the jump in interest rate could make a used car substantially more expensive, but for people with good credit, the difference in interest rate may not make a huge difference. In either case, people should be very careful when shopping for a car loan to ensure that they get the best loan for their needs.

New car loans tend to be large, because new cars are more expensive than used cars, but the interest rate tends to be several points lower than that for a used car. It is also possible to obtain things like cash rebates or no money down financing with new car loans, as an incentive from dealers who want customers to buy their cars. Taking out a loan will add to the cost of the car over time, because people will be paying interest in addition to the principal balance, but for people who cannot afford cash for a new car, new car loans can be an option.

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Used car loans are smaller, because of the reduced cost of the car, but they carry some extra risk from the eyes of the lender, which is why they tend to have a higher interest rate. Interest rates typically increase in tiers, so they may jump at two, four, six, and ten years of age, or in any other increment imaginable. The lender's concern is that the value of the car may go below the value of the loan before the loan is fully paid, and if a borrower defaults, the lender may have trouble recovering the full amount of the loan. Hence, a high interest rate is charged to make the loan less dangerous for the lender.

Borrowers may also be obliged to put more down on the loan, or risk paying a higher interest rate. Car financing is also typically not offered for cars over a certain age, with 10 years being a common cutoff for many lenders. Beyond this point, the loan is too risky for the lender to consider. Hard bargainers may also want to be aware that a substantial decrease from the Blue Book or Manufacturer's Suggested Retail Price (MSRP) may cause concern at a lender's offices with both used and new car loans.

Getting a used car can be substantially less expensive than buying new, because new cars depreciate quickly, unlike good used cars. Some used cars may also still have warranty coverage, or be offered through certified pre-owned programs which come with assurances from the manufacturers, including an additional warranty. It is a good idea to look at the terms of a loan to determine how much will be paid over time, to determine whether or not the loan is a good deal when balanced against the value of the car.

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