Is It More Expensive To Finance A Used Car Than A New Car?

Used cars are not getting any cheaper, partly because financing a used car can cost more than a new one. This mostly comes down to interest rates, which are higher for used cars because they're harder to value and pose greater risk. Old vehicles are more likely to break down, which makes them riskier collateral.

In Q3 2023, for example, the average interest rate for new car loans in the U.S. was 7.03%, compared to 11.35% for used cars. Even though used cars are cheaper upfront, the extra cost from a higher interest rate can erode those savings over time, especially if the loan term stretches out. You'll likely have a smaller monthly payment on a used vehicle, but if the interest rates are higher and the loan term is longer, the total cost might not be much lower than financing a new car. This is why you should always consider the annual percentage rate (APR) to judge how much a car will cost in the long term.

On top of that, used car loans often come with shorter terms. That means quicker repayment, but that's not always better if you're on a tight budget.

Lenders don't just give better interest rates on new car loans out of generosity; they're protecting themselves. When you finance a new car, the vehicle's condition and warranty coverage are all clear-cut. Lenders know exactly what the car is worth and can assume it won't break down too drastically early in the loan term. That's why new cars qualify for lower-risk, longer-term loans.

Used cars are a whole other story. The vehicle could have been in an accident, poorly maintained, or simply worn down. Even if you have a great credit score, lenders see a used car as a higher-risk asset. They build that risk into the rate they offer.

The car's resale value also comes into play. If you stop paying and the lender has to repossess the vehicle, they want to know that it'll fetch a decent price at auction. Used cars might not.

Whether you're financing new or used, the amount you pay comes down to more than just the car. Your credit score, loan term, and down payment play huge roles. If you have a great credit score, you'll likely qualify for better rates, even on used cars. If it's low or average, a new car might come with more favorable financing.

Always get pre-qualified through multiple lenders before you head to the dealership. It gives you leverage to negotiate and helps you avoid inflated dealer-arranged financing. Look for online lenders, credit unions, or banks that specialize in auto loans. 

If you have cash, consider placing a larger down payment. Lenders are more likely to approve better rates when more risk is covered upfront. And while longer loan terms mean lower monthly payments, they also increase your total interest. A shorter loan might cost more each month, but you'll save in the long run.

For used cars, don't forget about extra costs like inspections and higher maintenance down the road. Those add up. But you can still come out ahead if you get a good deal on a well-maintained car and secure a decent rate. Just make sure the math works for your budget, not just your monthly payment. Also, make sure to follow these 6 steps after you buy a used car.