What Is the Difference Between Financing a New Car Vs. a Used Car?
When a lender looks at the overall risk of an automobile loan, he is concerned with the value and age of the car. If the car is used, he tends to limit the term (or length) of the loan to ensure that the borrower is not paying on the car for longer than the life of the vehicle.
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Significance
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In most cases, the interest rate on a new car loan is lower than the interest rate on a used car loan. This is the due to the fact that most borrowers will keep the new car longer than a used one.
Function
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Both new and used car loans allow a borrower to purchase a car worth more than his cash on hand, although used car loans tend to be lower in value than new car loans.
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Types
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Most car loans are fixed-rate installment loans with a set term and payment. Rarely are car loans adjustable-rate or interest-only loans.
Considerations
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While a used car may be cheaper price-wise, a new car is often a better option if the borrower has to use a loan to finance the purchase, due to the difference in interest rates.
Misconceptions
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While a lower monthly payment may seem attractive in the beginning, a shorter-term car loan is actually better for the borrower in the long run. The sooner the car is paid off, the less interest paid, and the less likely that the borrower will still owe on the car once he trades it in for another vehicle.
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References
- Photo Credit yellow car, a honda japanese sport car model image by alma_sacra from Fotolia.com
