How Used Auto And New Auto Loans Differ

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January 27, 2012

Car loan rates on a used auto loan can be drastically different from rates on a new car loan. There are several reasons why the two loans differ, and why someone who may be able to get a used car loan might not be approved for a new car loan.

Loan Amounts

Because new cars tend to cost more than used cars, new car loans are usually for a larger amount of money. There are situations where the loan could be smaller than one for a used car, though. If the borrower has a large down payment, for instance, the amount could be smaller. The size of the loan itself can make a difference, depending on how much debt you have even if you have good credit. If you have a large amount of debt or even a large amount of credit already granted to you in other loans and credit cards, it can be harder to get a larger loan.

Interest Rates

New car loans might usually be for larger amounts of money, but the interest rate is usually much lower than on a used car loan. This is in part because the amount of money the car loan lender gives out is so much higher, and in part because the loan is seen as less of a risk than a used car loan. Someone with poor credit who needs a car might see that interest rate rise dramatically if they can get the loan at all. If they can, they'll probably still get a lower interest rate with a new car loan than a used car loan.

Used car loans have higher interest rate because it's a smaller loan and the fact that the person is buying a used car makes the transaction seem much riskier to the dealer. The lender may adjust the interest rate in fear that the value of the car will dip below the value of the loan. In a case like that, if the borrower defaults on the loan the dealer can have a hard time recouping his money.

Special Offers

A used auto loan will rarely have the perks and offers that a new car loan does. New car loans frequently come with incentives like 0% financing for 6 months or another time period, cash back rebates and other marketing methods to draw people in and sell them cars.

Value

For some people, the choice between a new car and a used car is decided by their credit rating and their ability to get a loan. For others, a used auto loan seems like a better deal because the loan amount and the cost of the car is less. But savvy shoppers should sit down and figure up how much the loan will actually cost to be paid back with interest over time.

Really consider the value of the car and compare that to the price of the loan. A used car might seem like a bargain, but with a built-in higher interest rate it could turn out that you're paying almost as much for that used auto loan on a car that's not worth much by the time it's paid off as you would be if you got a new car loan with lower interest.

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