New vs. Used Car Loans [A Guide]
Factors To Consider When Deciding New vs. Used Car
In addition to the type of car you want, you need to consider your interest rate, how much you need to borrow, vehicle depreciation, and your preferred repayment time frame.
Keep reading to learn about the differences between a new vs. used car loan and how to make a decision when you’re on the fence about what’s best for your financing needs.
Factor #1: Interest Rate
One of the primary differences between a new vs. used car loan is the interest rate. While your credit history will have a significant impact on the interest rate you qualify for, so will the age of your vehicle.
New cars carry lower interest rates for two reasons. One, manufacturers and dealers are trying to sell their new vehicles fast. To incentivize buyers to purchase their cars, they offer low rates to consumers. Two, new cars are equipped with warranties and are more reliable. Therefore, they carry less of a risk to the lender.
Used cars carry higher interest rates. This is mostly because used car loans are riskier to the lender. Therefore, the company tries to recoup as much money upfront as possible through interest payments.
Decision Time: If you want to save on interest, opt for a new car. However, you still have to consider the cost of the vehicle because as factor number 2 will explain, new vehicles are more costly than used cars.
Factor #2: Car Loan Amount
Along with how interest rates vary, the amount you borrow is determined based on whether the vehicle is new or used. In general, new cars are more expensive. Their value quickly depreciates, which means their value decreases, even if they’re only a few years old.
Decision Time: When making this decision, consider your budget. Often, you can save thousands of dollars by purchasing a couple of model years older. If a new vehicle easily fits your price point, then you can take advantage of the lower interest rates of a new car, which can help to balance out the higher price point.
Factor #3: Depreciation
Speaking of depreciation, you have to determine whether knowing that your vehicle will rapidly lose value bothers you enough to avoid purchasing a brand new car.
As stated, new vehicles depreciate a lot in a short period, usually about 20% in the first year alone. That means if your car has a value of $20,000, after only 12 months, the value will decrease by over $4,000 to just $16,000.
When you purchase a used vehicle, someone else has already experienced that depreciation. You reap the benefits by buying a car, even if slightly used, at a significant discount. Also, used vehicles depreciate slower. That means you’re less likely to go upside down on your auto loan by owing more than the vehicle is worth. This is more likely to happen when you buy a brand new car.
Decision Time: If you want to save by purchasing a used vehicle that has already experienced a lot of depreciation, you can opt for a used car loan. If this doesn’t bother you, then a new vehicle is fine.
Factor #4: Repayment Time Frame
Your decision between a new vs. used car loan also impacts the repayment time frame. New car loans usually allow for more extended repayment time frames. This is because they are more expensive and more likely to continue operating throughout the loan term.
Used cars, on the other hand, usually have a shorter repayment time frame since they’re less expensive, and lenders take on more of a risk when they extend the loan of an older vehicle.
Keep in mind that the shorter your loan term, the more your monthly payment will be, but the more you’ll save in interest. Whereas, if you have a longer loan term, you will pay less each month, but more in interest over time.
Decision Time: If you prefer a longer loan term, you might want to opt for a newer vehicle, but if you don’t have a preference, you can select either.
New vs. Used Car Loans: What’s Your Preference?
Ultimately, when it’s time to decide between a new vs. used car loan, it comes down to your preferences. You should consider the type of vehicle you want, your credit history, your budget, and all of the factors listed above when determining the type of auto loan that will best fit both your wants and needs.
Before you make a decision, you will want to know how much you’d be approved for when getting an auto loan.
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