The average vehicle lifespan is over 12 years, according to the Bureau of Transportation Statistics. The average car also loses half of its value in the first three years. So when you purchase a three-year-old car, generally, you’re paying only half of its original price for way more than half of its remaining lifespan.
But there are other factors to consider if you’re trying to choose between buying new or used. For example, buying a new car means you can have that vehicle for its whole life, and you’re in control of its maintenance the whole time.
When it comes time to buy a new vehicle, one of the biggest decisions you’ll need to make is whether to get a new or used car. And that decision often comes down to whether you want to take out a new car loan or a used car loan. Both options have their pros and cons, so let’s take a detailed look at how new car loans and used car loans compare.
New Car Loans
A new car loan is needed if you want to purchase a brand new vehicle straight from a dealership lot, Here are some of the key things to know about new car loans
Higher Loan Amounts
New cars have higher price tags, so new car loans typically have higher principal balances The average new car transaction was $47,077 in 2021, so expect new car loan amounts to be in this ballpark. If your budget doesn’t allow for payments this large, a used car may be the better option
Lower Interest Rates
Interest rates are generally lower for new car loans versus used car loans. In Q1 2022 the average interest rate for a new car loan was 4.87% compared to 8.62% for a used car loan. This gap in rates exists because lenders view new cars as less risky collateral.
Longer Loan Terms
To help keep payments manageable given the higher balances, new car loans tend to have longer terms. The most common term for a new car loan is 60 months, though 72-84 months are not uncommon. This spreads the cost out over more time.
Full Warranties
One of the best perks of buying new is getting the full manufacturer’s warranty, typically at least 3 years/36,000 miles of bumper-to-bumper coverage. This protects against expensive repairs during the first few years of ownership. Used cars have expired warranties.
Lower Insurance Costs
Insurance is generally cheaper for new cars versus used cars of the same model. That’s because new cars have the latest safety features and cost more to repair or replace. Expect at least 15-20% lower insurance rates for a new car.
Higher Resale Value
New cars obviously have no previous owners or wear and tear. This allows them to maintain more of their value over the first several years. Used cars have already taken the big initial depreciation hit that happens as soon as a new car is driven off the lot.
Newest Features
Today’s new cars are rolling off assembly lines with cutting-edge tech features like Wi-Fi hotspots, touchscreens, lane keep assist, parking assist, and more. These modern amenities may be worth paying extra for. Used cars lag by a model year or two.
Custom Ordering
Ordering a new car allows you to get the exact color, options, and packages you want. Used cars come as-is with a prior owner’s choices. If customization is important, only a new car will let you build the perfect vehicle.
Used Car Loans
A used car loan is needed when purchasing a pre-owned rather than brand new vehicle. Here are some key facts about used car loans:
Lower Loan Amounts
Since used cars are cheaper than new cars, used car loan amounts tend to be lower too. In 2021, the average used car selling price was $28,205, translating to smaller loan balances. This makes it easier to get approved for a used car loan if your budget or credit score is limited.
Higher Interest Rates
Lenders view used cars as riskier collateral, so interest rates are higher on used car loans. In Q1 2022, the average used car loan rate was 8.62% versus just 4.87% for new. But if your credit is very good, you can still find competitive used car loan rates.
Shorter Terms
To limit their risk exposure, lenders usually cap used car loan terms at 60 months or less. New car loans regularly go to 72 or 84 months. A shorter term does mean you’ll pay the loan off faster to limit your total interest cost.
No Warranty
Except for certified pre-owned models, used cars do not come with any factory warranty coverage. Repairs and maintenance come straight out of your pocket. Look into third-party extended warranty options if this is a concern.
Higher Insurance
Expect to pay 15-20% more for insurance on a used car of the same make/model versus the new version. More wear, higher repair costs, and fewer safety features mean insurers view used cars as riskier to cover. Ask your agent for a quote on any used cars you’re considering.
Faster Depreciation
Used cars have already taken the big initial depreciation after being driven off the dealer lot. But they’ll continue shedding value faster than an equivalently aged new car would, due to having more miles and wear. Plan to sell a used car once it’s 5-8 years for optimal value retention.
Dated Features
While used cars provide big savings upfront, you miss out on having the newest tech features like surround view cameras, phone integration, etc. Test drive the used car thoroughly to ensure you can live without certain amenities only found in newer models.
Limitations
Used cars are sold as-is, meaning you’re limited to whichever features, colors, packages the previous owner chose. It takes patience to find a used car that checks all your boxes for the right price. Otherwise, you’ll have to compromise somewhere.
Unknown History
Unlike a new car’s clean history, you can’t be sure what happened to a used car before you bought it. It hopefully was well maintained, but there’s always the chance of a prior accident or hidden issues. Have a mechanic inspect any used car before purchasing.
Pros of New Car Loans
- Lower interest rates (average 4.87% in Q1 2022)
- Longer loan terms up to 72-84 months
- Full warranty coverage for repairs
- Lower insurance costs than used cars
- Higher resale value over first 5 years
- Ability to customize features and packages
- Peace of mind with known history
Cons of New Car Loans
- Much higher loan amounts ($47,077 average in 2021)
- Large down payment often required
- Monthly payments can be unaffordable for some
- Newest tech features add to the price
- Depreciation hits hardest in the first year
Pros of Used Car Loans
- Significantly lower purchase and loan amount
- Easier to get approved if budget or credit is limited
- Shorter loan terms help pay off principal faster
- Certified pre-owned models still have some warranty
- At 5+ years old, depreciation has slowed
Cons of Used Car Loans
- Interest rates often much higher (8.62% on average)
- No ability to customize features or color
- Out of warranty repairs come straight out of pocket
- Missing newer tech and safety features
- Unknown history and prior damage risks
Which Loan is Better for You?
Determining whether to get a new car loan or used car loan depends on your specific circumstances:
Your budget – How much can you afford for a monthly payment? Used cars provide big savings.
Interest rates – A used car loan will likely have a higher rate. Check with lenders.
Loan term – New cars allow longer terms, but shorter terms limit interest costs.
Repair costs – New cars have warranties and may be cheaper to insure.
Tech features – Do you require the newest amenities like Wi-Fi and parking assist?
Customization – Ordering new allows you to tailor features to your wishes.
Driving habits – Used cars work well if you drive lots of miles annually.
Credit score – Used loans are easier to get but have higher rates.
Do the math carefully based on loan rates, monthly payments, insurance, anticipated repair costs, and expected depreciation. This will clarify which option truly fits your budget and needs.
Be sure to get pre-approved for financing from multiple lenders as well. Comparing loan rates and terms will help you identify the most affordable new or used car loan for your situation.
How to Get the Best Car Loan
Here are some final tips on scoring the optimal new or used car loan:
- Check your credit reports and scores so you know where you stand with lenders
- Get pre-approved for financing from several lenders to compare
- Look for offers that don’t penalize you for early payoff if you plan to pay the loan off early
- Opt for the shortest loan term you’re comfortable with to save on interest
- Make a sizable down payment of 15-20% if possible to reduce the amount borrowed
- Double check that any optional add-ons like extended warranties are worth the extra monthly costs
- Read all loan documents carefully before signing to be sure you understand the full terms
Finding the right auto loan takes some work upfront. But taking the time will pay off exponentially by saving you money over the life of your car purchase. Be sure to weigh the pros and cons carefully between new and used car loans. And educate yourself on all the options to make the financing choice that best fits your financial situation.
Compare new vs. used cars
Once you use an auto payment calculator and have a budget in mind, compare new and used cars. The traditional, sage advice is to get a used car of a high trim. For example, if you can afford a new vehicle that doesn’t have many bells and whistles, you could instead buy a used one with all the bells and whistles.
Start by figuring out what’s important to you. Maybe you prize that new-car smell over a panoramic moonroof, or perhaps a large, used model is better than a smaller new one.
On average, the monthly payment for a new car in 2022 is $667; the average used-car monthly payment is $515, according to Experian’s State of the Automotive Finance Market report. If you want to research specific cars, Kelley Blue Book provides a more complete picture with their 5-year cost-to-own estimates.
Pros and cons of buying used
Lower costs. Not only will you pay a lower upfront cost for a used car, but you’ll likely borrow less money, have lower insurance costs and pay lower registration fees. Of course, dealer fees still apply.
Less depreciation, higher resale value. Since the car already took its biggest hit in depreciation during the first year, its value is more stable. Its resale price will be closer to what you paid for it and you shouldn’t have to offer a tremendous down payment to keep it above water.
More affordable features. Since you aren’t spending your money on depreciation, you may be able to afford amenities like leather seats and a premium sound system.
Less cosmetic stress. Because the car is used, you aren’t likely to shed tears the first time a shopping cart nicks the paint job or a cup of coffee spills on the carpet.
How Much Can You ACTUALLY Finance on a New or Used Car? (Former Dealer Explains)
FAQ
Is it better to finance a new car or used?
What is the difference in loan rates between new and used cars?
What is the biggest disadvantage of buying a new car vs buying a used car?
Why is the interest rate lower on a new car than a used car?
What is the difference between a new and used car loan?
The biggest difference between new and used car loans is price. New cars are almost always more expensive than used cars. A higher sticker price will be reflected in the size of your loan’s principal, or the amount you owe before interest and other fees.
Should I get a new car loan or a used car loan?
It depends on your financial situation and how the risks and benefits discussed in this article relate to getting a new car loan or a used car loan. Even if you have the money to pay outright for a car, if it means not paying other bills or taking money out of your emergency or retirement account, financing is a better decision.
Is a used car better than a new car?
On the other hand, used cars are cheaper and tend to have smaller principles and, therefore, shorter loan terms than a new car. However, used cars may have higher interest rates than you would find on a new car loan. This is because it’s harder for lenders to accurately value a used car compared to a new one.
Can a car loan outlive the car?
It’s important not to let the car loan last longer than the life of the car. Consider the shortest loan term you can afford. In 2023, the average new car loan was $41,665, with a $700 average monthly payment. The average used car loan was $28,506, with a $525 monthly payment.