Auto Loans: New Cars vs. Used Cars

How Do New Car Loan Rates and Used Car Loan Rates Differ?

When it comes to auto loan rates, the debate is ongoing on whether purchasing a used car or a new car will affect your rates differently. Most agree that the rates for a new car loan are lower than loans for used cars. The average interest rate for used car loans is about one percent higher than that of new car loans. The commonly agreed upon knowledge is that the interest rate on an auto loan gets higher along with the car's age. Another benefit of purchasing a new car over a used vehicle is that you can only get zero percent financing for new cars.

Apply for your auto loan today >>

Why Are Used Car Loan Rates Higher?

There are many possible reasons why new car loan rates are lower than used car loan rates. There is more risk to buying a used car, and perhaps risk takers are viewed as higher risks for lenders. Another more likely reason is that used cars are not run by supply and demand and are not a commodity market. Lenders can't get money over sticker price. They have to make their money on interest rates.

For example, if you buy a brand new Prowler, the car is in such high demand that you will pay so much over the sticker price that it is safe for the lender to assume that you will take quite a long time to pay back the loan. Interest rates can be lower because the life of the loan is longer (and at a higher principal), so they'll still make quite a bit of money.

If you buy a used Honda, you will be able to negotiate for a price that’s lower than the sticker price. It won't take you long at all to pay it off. So if the lender is going to make money, it has to be made quickly through high interest rates.

Request a car loan in your area today >>

How Do You Decide?

It depends on your financial situation. If you can negotiate a good price for your used car, you will absorb the extra percentage point in interest in savings. But if you are the type to trade in your new car for the latest model every few years—or would like to be that type—then the lower interest rate will serve you well.

Apply for a car loan online >>