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One of the most significant financial decisions of your life is buying a car, and selecting a new car loan against a used car loan can significantly swing your budget. While a new car brings all the latest and best features and the warranty, the used car is more affordable and takes much less time to depreciate. But what about financing? Which option is truly better?
In this guide, we’ll compare used car loans vs. new car loans in terms of interest rates, loan terms, down payments, depreciation, and overall cost savings—so you can make the best decision for your financial situation.
Understanding Used Car Loans and New Car Loans
Before we get into the comparisons, let’s define both types of loans:
What Is a New Car Loan?
A new car loan is financing provided just to the purchases of brand-new cars from dealerships. Generally speaking, such loans have lower interest rates but the same amount of loans can be higher because new cars are more costly than used ones.
What Is a Used Car Loan?
A used car loan is a financing for the acquisition of a used vehicle. Though interest rates can be a tad higher, loan amounts are mostly lower because pre-owned vehicles cost less than the new ones.
Let’s consider the key aspects to compare the two and ascertain which one will be more helpful.
- Interest Rates: New vs. Used Car Loans
Interest rate is one factor that plays an important role in the total amount of a car loan.
New Car Loan Interest Rates
New cars have a lower interest rate, usually between 2% and 6% APR, depending on credit score.
Some manufacturers offer 0% APR financing for well-qualified buyers.
Used Car Loan Interest Rates
Used cars have higher interest rates, typically between 4% and 10% APR (or more for older cars).
Lenders view used cars as higher-risk loans, so they charge higher rates.
Loan Type\tAverage Interest Rate
New Car Loan\t2% – 6% APR
Used Car Loan 4% – 10% APR
✅ Winner: New car loans have lower interest rates, saving you money on financing costs.
- Loan Terms: New vs. Used Car Loans
The length of your loan affects both monthly payments and total interest paid.
New Car Loan Terms
Lenders offer longer loan terms (up to 72-84 months).
Longer terms mean lower monthly payments but more interest over time.
Used Car Loan Terms
Lenders generally cap used car loans at 48-60 months due to depreciation and greater risk.
Loans for a shorter term have higher monthly payments but lower total interest.
✅ Winner: New car loans offer more flexibility with longer terms, but a shorter term for a used car loan can actually save on interest in the long run.
- Down Payment Requirements
New Car Loan Down Payments
Some dealerships allow $0 down payment on new cars.
A bigger down payment is still advisable to reduce payments and prevent negative equity.
Used Car Down Payments
Used cars usually need a more significant down payment (10 percent–20 percent) so that the interest will be lower.
More cash upfront may be demanded by lenders when financing an older vehicle to minimize their risks.
✅ Winner: New Car Loans
A new car loan typically has smaller down payments so that the buyer with limited funds can have the car. - Depreciation: How Fast Do Cars Lose Their Value?
Depreciation impacts your car’s resale value and your loan’s equity.
New Car Depreciation
A new car loses 20%-30% of its value in the first year.
After 5 years, a new car loses around 50%-60% of its original value.
Used Car Depreciation
Used cars depreciate slower since the previous owner absorbed the highest depreciation.
A 3-year-old car loses only around 10% to 15% a year, making it a better investment in terms of resale value.
✅ Winner: Used cars depreciate slower, avoiding negative equity and maximize resale value.
- Monthly Payments: Which Loan Is More Affordable?
The monthly payments rely on the loan amount, term, and interest rate.
New Car Loan Monthly Payments
Loan amounts are more significant, while interest rates are lower for new cars.
Monthly payments are also higher, mainly on shorter-term loans.
Used Car Loan Monthly Payments
Lower loan balances equate to lower monthly payments.
Used cars will generally have cheaper month payments even with slightly higher interest rates.
Type of Loan\tExample Monthly Payment (Based on a $30,000 Loan)
New Car Loan (5% APR, 60 months)\t~$566/month
Used Car Loan (7% APR, 60 months)\t~$594/month
Used Car Loan (7% APR, 48 months)\t~$718/month
NEW VEHICLE WINNER Typically the borrower receives lower monthly payments; which is important to budget-conscious buyers. - Which Loans Saves More? Total Cost Over Time
Both depreciation and interest compounded in totals. Let’s compare. NEW VEHICLE LOAN TOTAL COST
A $30,000 new vehicle loan on 5% APR for 60 months
Total Interest Paid: ~$3,968
Depreciation after 5 years ~$15,000 lost
Total Cost Over 5 Years: ~$18,968
USED VEHICLE LOAN TOTAL COST
A $20,000 used car loan at 7% APR for 48 months:
Total Interest Paid: ~$2,984
Depreciation After 5 Years: ~$6,000 lost
Total Cost Over 5 Years: ~$8,984
✅ Winner: Used car loans save a tremendous amount of money over a long period of time. Compare that in terms of interest and depreciation.
Which Car Loan is Right for You?
A new car loan is best if:
✔ You can secure 0% or low-interest financing
✔ You prefer a longer loan term with much lower interest
✔ You want the latest technology and warranty coverage
A Used Car Loan Is Best If:
✔ You want lower monthly payments and less depreciation
✔ You prefer a shorter loan term to save on interest
✔ You don’t mind buying a pre-owned vehicle with a solid maintenance history
Conclusion: Used Car Loans Are More Beneficial for Most Buyers
While new car loans offer lower interest rates and better loan terms, used car loans provide greater overall savings due to lower purchase prices, slower depreciation, and smaller total costs over time.
Unless you’re getting a 0% APR financing deal on a new car, a used car loan is the better financial choice for most buyers.
FAQs
- Are used car loans harder to get than new car loans?
Yes, some lenders consider used cars to be higher risk and charge higher interest rates and tighter loan approval conditions. - Can I get a 0% APR loan on a used car?
This is unlikely. 0% financing is mainly offered on new cars as a manufacturer promotion. - Do used cars have shorter loan terms?
Yes, most lenders only allow used car loans to last 48-60 months, as the vehicles depreciate in value so rapidly. - Should I finance a used car through a dealership or a bank?
The interest rates on used car loans at banks and credit unions tend to be better than those from dealerships. - Can I refinance a used car loan later?
Yes, refinancing your used car loan may lower payments if interest rates drop or your credit improves.
