New vs. Used Auto Loans: The Complete Guide for First-Time Car Buyers

Did you know that more than 74 million vehicles are sold around the world each year? A significant percentage of these cars are sold in the United States.

Since 2019, used vehicle sales have increased twofold compared to new cars. For many, buying a used vehicle is the more affordable and convenient option, but is it right for you?

Learn the differences between new vs. used auto loans before you start car shopping.

New Car Loans

New car loans come with lower interest rates and APRs compared to used vehicles. However, financing periods are generally longer for new car loans.

On certain models of vehicles, automakers often offer incentives such as zero or low APRs. Often, the rates are non-negotiable as they depend on the credit score of the consumer among other requirements.

When special financing is not in the picture, the rates tend to be negotiable for new and used cars.

If you don’t get a special rate, you might receive bonus cash. This cash comes off of a new car sticker price.

In your search for a new car, look to buy it during the end of the year or holiday sales events. One of the best times to find a good deal is from Black Friday up until the new year.

Used Car Loans

Financing a used car is the more affordable option for many because the loans are smaller amounts. You can also benefit from a slower depreciation rate.

New cars lose value within the first year but buying a car used means someone else already went through that loss. Because of this, a used car can lessen the risk of becoming an upside-down loan, aka owing more than the car is worth.

Yet, other factors contribute to this including:

  • Whether or not you made a down payment
  • Whether or not you traded in a vehicle
  • Whether or not your loan rolled over

Along with smaller loan amounts, used car loans have shorter terms. Although they might have higher APRs compared to new cars, you’ll benefit from a shorter path to being free of car payments.

Most find it easier to finance a new car instead of a used one. The main reason for this is that it is not as difficult for a lender to determine the value of a new car versus a used one.

When a lender arranges a financing plan, they must consider the value of the vehicle.

When comparing loan prices, you should take into account how much your down payment is. Some dealers will allow you to choose your own down payment while others expect a minimum.

For used car financing, you can get away with making a lower down payment. This puts less strain on your pockets when you are in the beginning process of buying a car.

It’s also possible that the lower cost of a used car could allow you to afford to make a higher down payment. This will cover more of the car’s value and result in even lower monthly payments.

New car loans are mainly secured by those with good credit. In contrast, a used auto loan is available to consumers with all credit types.

New vs. Used Auto Loans by Credit Score

The new vs. used auto loans that you receive heavily depend on your credit score. In fact, those with higher credit scores might receive better loan terms and conditions.

On average, the credit scores for buyers of new cars remain in the low 700s. The average credit scores for used cars ranged from the low to high 600s.

There’s no clear answer on what is a good credit score and what the lowest possible credit score you can have is. The specifics will depend on the car loan provider you work with.

In general, the better your credit score is, the better your approval rate will be. Yet, no set cut-off point between credit scores will force a lender to deny your loan application.

It is also important to note that credit score ranges vary depending on the scoring model, type of loan, and the lender.

Things to Consider Before Financing a Car

There is much to consider when looking at car loan options and the list grows if you have poor credit. Along with comparing loan prices, you’ll need to take other factors into account such as:

  • Interest rate
  • Loan terms (ranging from 24 to 84 months)
  • Credit pull
  • Rate shopping
  • Lenders and the dealerships they work with
  • Down payment
  • Gap insurance
  • Funding

Credit pulls are one of the biggest factors to consider because a hard pull will take points off of your credit score. A financing agent, during the pre-approval process, will do a soft pull that does not affect your credit.

When you apply for the loan, the hard pull is completed. Even if you are financially stable, the goal is to pay the lowest amount possible overtime when you buy a new or used car.

Refinancing a Car Loan

If you can’t afford to shop around for a car or you have bad credit, you might be forced to buy a car with a high-interest rate loan. You can refinance your loan down the line if your income and credit score improves.

Refinancing options can help you gain a shorter loan term, lower your interest rate, and sometimes both. Asking around at your local bank or credit union is a good option. If you can’t find anything, check for the options online.

No matter who you go with to refinance your auto loan, your credit score and payment history will factor into the deal you get.

Budgeting Monthly Payments

Before you visit any car dealers, it is smart to calculate our monthly budget. Learn how much can go into your car payment without affecting necessities like food, housing, and emergency funds.

Figuring out this number includes understanding how much of a down payment you can afford, budgeting car note payments, and car insurance payments.

Most states require a specific amount of car insurance coverage to register your vehicle. The more expensive the car that you buy is, the higher the insurance rates will be.

Trading in an Old Car

Even if the car you currently have isn’t in great shape or does not function as it should, you can trade it in to help lower your overall cost. In some cases, there is a tax benefit when you trade in an old vehicle.

In most states, you will only pay taxes on the difference between the trade-in value and the value of the car that you buy. If you sell your old car instead, you will only pay taxes on the proceeds.

It is recommended to check how much your car is worth before trading it in. A dealer might conclude that your trade-in value is less than the amount you would receive from selling your car. Don’t lose money on a trade-in.

Get a Copy of Your Credit Report and Score

Before you start looking for any loan, you should get a copy of your credit report and score. Several online sites will provide you with this copy for free.

It’s possible that the score won’t be the same as the one the lender uses, but it will be close enough. Each year, the three credit bureaus, Experian, TransUnion, and Equifax, are required to provide one free credit report.

After receiving the credit report, check for any errors, false information, or outdated information. Dispute these errors right away to improve your credit score and gain a better car loan interest rate.

Another way to boost your credit score is by lowering your credit utilization. This is the ratio of your credit card balance to the available credit you have. The less credit you use, the better your score will be.

Most lenders prefer that credit utilization is below 30%. If you can afford it, pay off more than the minimum balance owed each month.

Should You Buy a New or Used Car?

There are advantages to both buying a new and used vehicle. Understanding the benefits of the two will allow you to make an informed decision when you apply for a car loan.

Let’s break it down. These are the major advantages of buying a used car:

  • No new-car depreciation
  • Lower costs
  • Less stress
  • Nicer car
  • High resale value

If you prefer to buy a new car, these are the benefits you can expect:

  • More choice
  • Financing deals
  • Peace of mind
  • Convenience
  • Latest technology

The decision to buy a new or used car is ultimately up to you and what you can afford at the moment.

Hit the Dealership for Your Next Ride!

Looking for a brand new ride is not ideal for every customer. Used cars can cover some, if not all, of the same needs that a new vehicle can.

Now that you know the difference between new vs. used auto loans, you can figure out which option is best for you. Before heading to the dealership, map out your current finances and get a copy of your credit report.

For more advice on the auto and motor industry, check out the other posts on our blog.